##### 



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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 JULY 4, 2003
|                                                   
|OR                                                 
|                                                   
|[  ]                                                |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|                                                   
|                                                    |  | FOR THE TRANSITION PERIOD FROM _________ TO _________                                   
|                                                   
|COMMISSION FILE NUMBER 333-89756                   



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ALION SCIENCE AND TECHNOLOGY CORPORATION

(Exact Name of Registrant as Specified in Its Charter)


|                                                                        |  |                                                                  
|----------------------------------------------------------------------- |  | -----------------------------------------------------------------
|DELAWARE
(State or Other Jurisdiction of
Incorporation or Organization) |  | 54-2061691
(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)



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(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 July 4, 2003, was:

|             |  |  |           | 
|------------ |  |  | --------- | 
|Common Stock |  |  | 2,731,842 | 



---

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##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
FORM 10-Q INDEX
FOR QUARTERLY PERIOD ENDED JULY 4, 2003

|                               |  |                                                                                       |    |  |    | 
|------------------------------ |  | ------------------------------------------------------------------------------------- | -- |  | -- | 
|PART I  FINANCIAL INFORMATION |  |                                                                                       | 1  | 
|                              
|Item 1.                        |  | Financial Statements                                                                  |    |  | 1  | 
|                               |  | Consolidated Balance Sheets                                                           |    |  | 1  | 
|                               |  | Consolidated Statements of Operations                                                 |    |  | 2  | 
|                               |  | Pro Forma Consolidated Statements of Operations                                       |    |  | 3  | 
|                               |  | Consolidated Statements of Shareholders Equity (Deficit)                             |    |  | 4  | 
|                               |  | Consolidated Statements of Cash Flows                                                 |    |  | 5  | 
|                               |  | Notes to Consolidated Financial Statements                                            |    |  | 6  | 
|                              
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition
And Results of Operations |    |  | 15 | 
|                              
|Items 3.                       |  | Quantitative and Qualitative Disclosures About
Market Risk                            |    |  | 32 | 
|                              
|Item 4.                        |  | Controls and Procedures                                                               |    |  | 33 | 
|                              
|PART II  OTHER INFORMATION    |  |                                                                                       | 33 | 
|                              
|Item 1.                        |  | Legal Proceedings                                                                     |    |  | 33 | 
|                              
|Item 2.                        |  | Changes in Securities and Use of Proceeds                                             |    |  | 35 | 
|                              
|Item 3.                        |  | Defaults Upon Senior Securities                                                       |    |  | 35 | 
|                              
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                   |    |  | 35 | 
|                              
|Item 5                         |  | Other Information                                                                     |    |  | 35 | 
|                              
|Item 6.                        |  | Exhibits and Reports on Form 8-K                                                      |    |  | 35 | 





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##### 



PART I  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALION SCIENCE AND TECHNOLOGY
CORPORATION
Consolidated Balance Sheets
As of July 4, 2003 (unaudited) and September 30, 2002
(In thousands, except share information)

|                                               |              |                                                                                                                                                                                                                                  |                                            |         |             |         |               |   |     |     |  
|---------------------------------------------- | ------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ----------- | ------- | ------------- | - | --- | --- | -
|                                               |              |                                                                                                                                                                                                                                  |                                            |         | July 4,     |         | September 30,
|                                               |              |                                                                                                                                                                                                                                  |                                            |         | 2003        |         | 2002         
|                                               |              |                                                                                                                                                                                                                                  |                                            |         |             |         |              
|                                               |              |                                                                                                                                                                                                                                  |                                            |         | (unaudited) |         |               |   |    
|Assets                                        
|Current assets:                                |              |                                                                                                                                                                                                                                  |                                            |         |             |         |               |  
|                                               |              | Cash                                                                                                                                                                                                                             |                                            | $       | 1,714       |         |               | $ | 6   |    
|                                               |              | Restricted cash                                                                                                                                                                                                                  |                                            |         | 5           |         |               |   |    |    
|                                               |              | Accounts receivable, less allowance of $2,691 in 2003                                                                                                                                                                            |                                            |         | 38,478      |         |               |   |    |    
|                                               |              | Note receivable from Trust                                                                                                                                                                                                       |                                            |         | 1           |         |               |   | 1   |    
|                                               |              | Other current assets                                                                                                                                                                                                             |                                            |         | 2,986       |         |               |   |    |    
|                                               |              |                                                                                                                                                                                                                                  |                                            |         |             |         |               |  
|                                               |              | Total current assets                                                                                                                                                                                                             |                                            |         | 43,184      |         |               |   | 7   |    
|Fixed assets, net                              |              |                                                                                                                                                                                                                                  | 8,977                                      |         |             |         |              |  
|Intangible assets, net                         |              |                                                                                                                                                                                                                                  | 25,145                                     |         |             |         |              |  
|Goodwill                                       |              |                                                                                                                                                                                                                                  | 62,960                                     |         |             |         |              |  
|Other assets                                   |              |                                                                                                                                                                                                                                  | 245                                        |         |             |         |              |  
|                                               |              |                                                                                                                                                                                                                                  |                                            |         |             |         |               |  
|                                               | Total assets |                                                                                                                                                                                                                                  | $                                          | 140,511 |             |         | $             | 7 |    
|                                               |              |                                                                                                                                                                                                                                  |                                            |         |             |         |               |  
|Liabilities and Shareholders Equity          
|Current liabilities:                           |              |                                                                                                                                                                                                                                  |                                            |         |             |         |               |  
|                                               |              | Note payable to bank                                                                                                                                                                                                             |                                            | $       |            |         |               | $ | 10  |    
|                                               |              | Note payable to officer                                                                                                                                                                                                          |                                            |         | 1           |         |               |   | 1   |    
|                                               |              | Current portion of senior note payable                                                                                                                                                                                           |                                            |         | 6,250       |         |               |   |    |    
|                                               |              | Trade accounts payable and accrued liabilities                                                                                                                                                                                   |                                            |         | 8,202       |         |               |   |    |    
|                                               |              | Accrued payroll and related liabilities                                                                                                                                                                                          |                                            |         | 12,010      |         |               |   | 86  |    
|                                               |              | Advance payments                                                                                                                                                                                                                 |                                            |         | 5           |         |               |   |    |    
|                                               |              | ESOP liabilities                                                                                                                                                                                                                 |                                            |         | 1,238       |         |               |   |    |    
|                                               |              | Billings in excess of costs and estimated earnings
on uncompleted contracts                                                                                                                                                      |                                            |         | 426         |         |               |   |    |    
|                                               |              |                                                                                                                                                                                                                                  |                                            |         |             |         |               |  
|                                               |              |                                                                                                                                                                                                                                  | Total current liabilities                  |         |             | 28,132  |               |   |     | 97  |  
|Long-term debt, excluding current portion      |              |                                                                                                                                                                                                                                  | 1,244                                      |         |             |         |              |  
|Senior note payable, excluding current portion |              |                                                                                                                                                                                                                                  | 25,447                                     |         |             |         |              |  
|Mezzanine note payable                         |              |                                                                                                                                                                                                                                  | 17,517                                     |         |             |         |              |  
|Subordinated note payable                      |              |                                                                                                                                                                                                                                  | 33,254                                     |         |             |         |              |  
|Agreement with officer                         |              |                                                                                                                                                                                                                                  | 738                                        |         |             |         |              |  
|Accrued post retirement benefit obligation     |              |                                                                                                                                                                                                                                  | 2,604                                      |         |             |         |              |  
|Redeemable common stock warrants               |              |                                                                                                                                                                                                                                  | 10,042                                     |         |             |         |              |  
|                                               |              |                                                                                                                                                                                                                                  |                                            |         |             |         |               |  
|                                               |              |                                                                                                                                                                                                                                  | Total liabilities                          |         |             | 118,978 |               |   |     | 97  |  
|Shareholders equity:                          |              |                                                                                                                                                                                                                                  |                                            |         |             |         |               |  
|                                               |              | Common
          stock, $0.01 par value, 15,000,000 shares authorized, 2,737,090 shares and
          100 shares issued and 2,731,842 and 100 shares outstanding at
          July 4, 2003, and September 30, 2002, respectively |                                            |         | 27          |         |               |   |    |    
|                                               |              | Additional paid-in capital                                                                                                                                                                                                       |                                            |         | 27,464      |         |               |   | 1   |    
|                                               |              | Treasury stock, 5,248 shares, at cost                                                                                                                                                                                            |                                            |         | (58         | )       |               |   |    |    
|                                               |              | Accumulated deficit                                                                                                                                                                                                              |                                            |         | (5,900      | )       |               |   | (91 | )  
|                                               |              |                                                                                                                                                                                                                                  |                                            |         |             |         |               |  
|                                               |              |                                                                                                                                                                                                                                  | Total shareholders equity (deficit)       |         |             | 21,533  |               |   |     | (90 | )
|                                               |              |                                                                                                                                                                                                                                  |                                            |         |             |         |               |  
|                                               |              |                                                                                                                                                                                                                                  | Total liabilities and shareholders equity |         | $           | 140,511 |               |   | $   | 7   |  
|                                               |              |                                                                                                                                                                                                                                  |                                            |         |             |         |               |  

See accompanying notes to consolidated financial statements.

1



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##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
Consolidated Statements of Operations
For the 16-Week and 40-Week Periods Ended July 4, 2003 and July 5, 2002
  (In thousands, except share and per share information)
(Unaudited)

|                                                             |                                     |                          |           |                        |        |                        |    |              |     |              |         |        |        |   |    |    |     |  
|------------------------------------------------------------ | ----------------------------------- | ------------------------ | --------- | ---------------------- | ------ | ---------------------- | -- | ------------ | --- | ------------ | ------- | ------ | ------ | - | -- | -- | --- | -
|                                                             |                                     |                          |           | For the 16-Week Period |        | For the 40-Week Period
|                                                             |                                     |                          |           |                        |        |                       
|                                                             |                                     |                          |           | Ended                  |        | Ended                  |    | Ended        |     | Ended       
|                                                             |                                     |                          |           | July 4, 2003           |        | July 5, 2002           |    | July 4, 2003 |     | July 5, 2002
|                                                             |                                     |                          |           |                        |        |                        |    |              |     |             
|Contract revenue                                             |                                     | $                        | 65,134    |                        |        | $                      |   |              |     | $            | 114,139 |        |        | $ |   |   
|Direct contract expense                                      |                                     |                          | 47,459    |                        |        |                        |   |              |     |              | 83,490  |        |        |   |   |   
|                                                             |                                     |                          |           |                        |        |                        |    |              |     |              |         |        |        |   |    |   
|                                                             |                                     | Gross profit             |           |                        | 17,675 |                        |    |              |    |              |         |        | 30,649 |   |    |    |    |  
|                                                             |                                     |                          |           |                        |        |                        |    |              |     |              |         |        |        |   |    |   
|Operating expenses:                                          |                                     |                          |           |                        |        |                        |    |              |     |              |         |        |        |   |    |   
|                                                             | Indirect contract expense           |                          |           | 3,588                  |        |                        |    |             |     |              |         | 6,436  |        |   |    |   |    
|                                                             | Research and development            |                          |           | 50                     |        |                        |    |             |     |              |         | 69     |        |   |    |   |    
|                                                             | General and administrative          |                          |           | 8,046                  |        |                        |    | 38           |     |              |         | 13,355 |        |   |    | 38 |    
|                                                             | Non
 recurring transaction expense |                          |           | 174                    |        |                        |    |             |     |              |         | 726    |        |   |    |   |    
|                                                             | Rental and occupancy expense        |                          |           | 2,541                  |        |                        |    |             |     |              |         | 4,634  |        |   |    |   |    
|                                                             | Depreciation and amortization       |                          |           | 3,797                  |        |                        |    |             |     |              |         | 6,616  |        |   |    |   |    
|                                                             | Bad debt expense (recovery)         |                          |           | (700                   | )      |                        |    |             |     |              |         | (545   | )      |   |    |   |    
|                                                             |                                     |                          |           |                        |        |                        |    |              |     |              |         |        |        |   |    |   
|Total operating expenses                                     |                                     |                          | 17,496    |                        |        |                        | 38 |              |     |              | 31,291  |        |        |   | 38 |   
|                                                             |                                     |                          |           |                        |        |                        |    |              |     |              |         |        |        |   |    |   
|                                                             |                                     | Operating income (loss)  |           |                        | 179    |                        |    |              | (38 | )            |         |        | (642   | ) |    |    | (38 | )
|Other income (expense):                                      |                                     |                          |           |                        |        |                        |    |              |     |              |         |        |        |   |    |   
|                                                             | Interest income                     |                          |           | 9                      |        |                        |    |             |     |              |         | 12     |        |   |    |   |    
|                                                             | Interest expense                    |                          |           | (2,603                 | )      |                        |    |             |     |              |         | (4,826 | )      |   |    |   |    
|                                                             | Other                               |                          |           | (278                   | )      |                        |    |             |     |              |         | (353   | )      |   |    |   |    
|                                                             |                                     |                          |           |                        |        |                        |    |              |     |              |         |        |        |   |    |   
|                                                             |                                     | Loss before income taxes |           |                        | (2,693 | )                      |    |              | (38 | )            |         |        | (5,809 | ) |    |    | (38 | )
|                                                             | Income tax expense                  |                          |           |                       |        |                        |    |             |     |              |         |       |        |   |    |   |    
|                                                             |                                     |                          |           |                        |        |                        |    |              |     |              |         |        |        |   |    |   
|                                                             |                                     | Net loss                 |           | $                      | (2,693 | )                      |    | $            | (38 | )            |         | $      | (5,809 | ) |    | $  | (38 | )
|                                                             |                                     |                          |           |                        |        |                        |    |              |     |              |         |        |        |   |    |   
|Basic and diluted loss per share                             |                                     | $                        | (1.00     | )                      |        |                        |    |              |     |              |         |        |        |   |    |   
|                                                             |                                     |                          |           |                        |        |                        |    |              |     |              |         |        |        |   |    |   
|Basic and diluted weighted
average common shares
outstanding |                                     |                          | 2,693,056 |                        |        |                        |    |              |     |              |         |        |        |   |    |   
|                                                             |                                     |                          |           |                        |        |                        |    |              |     |              |         |        |        |   |    |   

See accompanying notes to consolidated financial statements.

2



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##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
Pro Forma Consolidated Statements of Operations
For the 16-Week and 40-Week Periods Ended July 4, 2003 and July 5, 2002
  (In thousands, except share and per share information)
(Unaudited)

|                                                                                 |                                             |                                    |           |                                |        |                                |           |              |        |              |           |        |         |   |           |        |         |  
|-------------------------------------------------------------------------------- | ------------------------------------------- | ---------------------------------- | --------- | ------------------------------ | ------ | ------------------------------ | --------- | ------------ | ------ | ------------ | --------- | ------ | ------- | - | --------- | ------ | ------- | -
|                                                                                 |                                             |                                    |           | Pro Forma                      |        | Pro Forma                     
|                                                                                 |                                             |                                    |           | For the 16-week
        Period |        | For the 40-week
        Period
|                                                                                 |                                             |                                    |           |                                |        |                               
|                                                                                 |                                             |                                    |           | Ended                          |        | Ended                          |           | Ended        |        | Ended       
|                                                                                 |                                             |                                    |           | July 4, 2003                   |        | July 5, 2002                   |           | July 4, 2003 |        | July 5, 2002
|                                                                                 |                                             |                                    |           |                                |        |                                |           |              |        |             
|Contract
          revenue                                                       |                                             | $                                  | 65,134    |                                |        | $                              | 64,485    |              |        | $            | 161,404   |        |         | $ | 153,039   |       
|Direct contract expense                                                          |                                             |                                    | 47,459    |                                |        |                                | 46,967    |              |        |              | 118,145   |        |         |   | 111,890   |       
|                                                                                 |                                             |                                    |           |                                |        |                                |           |              |        |              |           |        |         |   |           |       
|                                                                                 |                                             | Gross
          profit             |           |                                | 17,675 |                                |           |              | 17,518 |              |           |        | 43,259  |   |           |        | 41,149  |  
|                                                                                 |                                             |                                    |           |                                |        |                                |           |              |        |              |           |        |         |   |           |       
|Operating
          expenses:                                                    |                                             |                                    |           |                                |        |                                |           |              |        |              |           |        |         |   |           |       
|                                                                                 | Indirect
          contract expense         |                                    |           | 3,588                          |        |                                |           | 3,534        |        |              |           | 9,004  |         |   |           | 8,328  |        
|                                                                                 | Research
          and development          |                                    |           | 50                             |        |                                |           | 196          |        |              |           | 105    |         |   |           | 401    |        
|                                                                                 | General
          and administrative        |                                    |           | 8,046                          |        |                                |           | 5,999        |        |              |           | 18,240 |         |   |           | 15,372 |        
|                                                                                 | Nonrecurring
          transaction expense |                                    |           | 174                            |        |                                |           | 2,122        |        |              |           | 6,562  |         |   |           | 3,200  |        
|                                                                                 | Rental
          and occupancy expense      |                                    |           | 2,541                          |        |                                |           | 2,612        |        |              |           | 6,835  |         |   |           | 6,458  |        
|                                                                                 | Depreciation
          and amortization     |                                    |           | 3,797                          |        |                                |           | 3,910        |        |              |           | 9,499  |         |   |           | 9,458  |        
|                                                                                 | Bad
          debt expense (recovery)       |                                    |           | (700                           | )      |                                |           | 90           |        |              |           | (425   | )       |   |           | 99     |        
|                                                                                 |                                             |                                    |           |                                |        |                                |           |              |        |              |           |        |         |   |           |       
|Total
          operating expense                                                |                                             |                                    | 17,496    |                                |        |                                | 18,463    |              |        |              | 49,820    |        |         |   | 43,316    |       
|                                                                                 |                                             |                                    |           |                                |        |                                |           |              |        |              |           |        |         |   |           |       
|                                                                                 |                                             | Operating
          income (loss)  |           |                                | 179    |                                |           |              | (945   | )            |           |        | (6,561  | ) |           |        | (2,167  | )
|Other
          income (expense):                                                |                                             |                                    |           |                                |        |                                |           |              |        |              |           |        |         |   |           |       
|                                                                                 | Interest
          income                   |                                    |           | 9                              |        |                                |           | 9            |        |              |           | 34     |         |   |           | 24     |        
|                                                                                 | Interest
          expense                  |                                    |           | (2,603                         | )      |                                |           | (3,071       | )      |              |           | (6,980 | )       |   |           | (7,406 | )      
|                                                                                 | Other                                       |                                    |           | (278                           | )      |                                |           | (96          | )      |              |           | (374   | )       |   |           | (152   | )      
|                                                                                 |                                             |                                    |           |                                |        |                                |           |              |        |              |           |        |         |   |           |       
|                                                                                 |                                             | Loss
          before income taxes |           |                                | (2,693 | )                              |           |              | (4,103 | )            |           |        | (13,881 | ) |           |        | (9,701  | )
|                                                                                 | Income
          tax expense                |                                    |           |                               |        |                                |           | (168         | )      |              |           | (27    | )       |   |           | (534   | )      
|                                                                                 |                                             |                                    |           |                                |        |                                |           |              |        |              |           |        |         |   |           |        |         |  
|                                                                                 |                                             | Net
          loss                 |           | $                              | (2,693 | )                              |           | $            | (4,271 | )            |           | $      | (13,908 | ) |           | $      | (10,235 | )
|                                                                                 |                                             |                                    |           |                                |        |                                |           |              |        |              |           |        |         |   |           |       
|Pro
          forma basic and diluted loss per share                             |                                             | $                                  | (1.00     | )                              |        | $                              | (1.66     | )            |        | $            | (5.30     | )      |         | $ | (3.97     | )     
|                                                                                 |                                             |                                    |           |                                |        |                                |           |              |        |              |           |        |         |   |           |       
|Pro
          forma basic and diluted weighted average common shares outstanding |                                             |                                    | 2,693,056 |                                |        |                                | 2,575,508 |              |        |              | 2,622,527 |        |         |   | 2,575,508 |       
|                                                                                 |                                             |                                    |           |                                |        |                                |           |              |        |              |           |        |         |   |           |       

See accompanying notes to consolidated financial statements.

3



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##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
Consolidated Statement of Shareholders Equity (Deficit)
For the 40-Week Period Ended July 4, 2003
(In thousands, except share information)
(Unaudited)

|                                                                                     |  |        |           |        |  |         |    |  |          |            |        |  |             |  |       |  |  |  |  |  |  |  |  |   |     |   |  |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------ |  | ------ | --------- | ------ |  | ------- | -- |  | -------- | ---------- | ------ |  | ----------- |  | ----- |  |  |  |  |  |  |  |  | - | --- | - |  |  | - | ------ | - |  | - | ------ | -
|                                                                                     |  |        |           |        |  |         |    |  |          | Additional |        |  |             |  |       |  |  |  |  |  |  |  |  |   |     |   |  |  |   |        |   |  |  
|                                                                                     |  | Common |           | Common |  | Paid-in |    |  | Treasury | Treasury   |        |  | Accumulated |  |       |  | 
|                                                                                     |  | Shares |           | Stock  |  | Capital |    |  | Shares   | Stock      |        |  | Deficit     |  | Total
|                                                                                     |  |        |           |        |  |         |    |  |          |            |        |  |             |  |       | 
|Balances
          at September 30, 2002                                             |  |        | 100       |        |  | $       |   |  |          | $          | 1      |  |             |  |      |  |  |  |  |  |  |  |  | $ |    |   |  |  | $ | (91    | ) |  | $ | (90    | )
|Issuance
          of common stock to KSOP Trust at December 20, 2002                |  |        | 2,575,408 |        |  |         | 26 |  |          |            | 25,728 |  |             |  |      |  |  |  |  |  |  |  |  |   |    |   |  |  |   |       |   |  |   | 25,754 |  
|Issuance
          of common stock to KSOP Trust at March 31 and May 31, 2003        |  |        | 161,582   |        |  |         | 1  |  |          |            | 1,735  |  |             |  |      |  |  |  |  |  |  |  |  |   |    |   |  |  |   |       |   |  |   | 1,736  |  
|Purchases
          of 5,248 shares of common stock from KSOP Trust at June 25, 2003 |  |        |          |        |  |         |   |  |          |            |       |  |             |  | 5,248 |  |  |  |  |  |  |  |  |   | (58 | ) |  |  |   |       |   |  |   | (58    | )
|Net
          loss, 40-week period ended July 4, 2003                                |  |        |          |        |  |         |   |  |          |            |       |  |             |  |      |  |  |  |  |  |  |  |  |   |     |   |  |  |   | (5,809 | ) |  |   | (5,809 | )
|                                                                                     |  |        |           |        |  |         |    |  |          |            |        |  |             |  |       |  |  |  |  |  |  |  |  |   |     |   |  |  |   |        |   |  |   |        |  
|Balances
          at July 4, 2003                                                   |  |        | 2,737,090 |        |  | $       | 27 |  |          | $          | 27,464 |  |             |  | 5,248 |  |  |  |  |  |  |  |  | $ | (58 | ) |  |  | $ | (5,900 | ) |  | $ | 21,533 |  
|                                                                                     |  |        |           |        |  |         |    |  |          |            |        |  |             |  |       |  |  |  |  |  |  |  |  |   |     |   |  |  |   |        |   |  |   |        |  

See accompanying notes to consolidated financial statements.

4



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##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
Consolidated Statements of Cash Flows
For the 40-Week Periods Ended July 4, 2003 and July 5, 2002
(In thousands)
(unaudited)

|                                                                                          |                                                                                                                           |   |                                |        |              |   |   |     |  
|----------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------- | - | ------------------------------ | ------ | ------------ | - | - | --- | -
|                                                                                          |                                                                                                                           |   | For the 40-Week
        Period
|                                                                                          |                                                                                                                           |   |                               
|                                                                                          |                                                                                                                           |   | Ended                          |        | Ended       
|                                                                                          |                                                                                                                           |   | July 4, 2003                   |        | July 5, 2002
|                                                                                          |                                                                                                                           |   |                                |        |             
|Cash
          flows from operating activities                                            |                                                                                                                           |   |                                |        |              |   |   |    
|                                                                                          | Net
          loss                                                                                                        |   | $                              | (5,809 | )            |   | $ | (38 | )
|Adjustments
          to reconcile net loss to net cash provided by operating activities: |                                                                                                                           |   |                                |        |              |   |   |    
|                                                                                          | Depreciation
          and amortization                                                                                   |   |                                | 6,616  |              |   |   |    |  
|                                                                                          | Accretion of debt to face value                                                                                           |   |                                | 718    |              |   |   |    |  
|                                                                                          | Amortization
          of debt issuance costs                                                                             |   |                                | 247    |              |   |   |    |  
|                                                                                          | Change
          in fair value of redeemable common stock warrants                                                        |   |                                | (266   | )            |   |   |    |  
|                                                                                          | (Gain)
          loss on investments                                                                                      |   |                                | (71    | )            |   |   |    |  
|Changes
          in assets and liabilities, net of effect of acquisition:                |                                                                                                                           |   |                                |        |              |   |   |    
|                                                                                          | Accounts
          receivable, net                                                                                        |   |                                | 8,822  |              |   |   |    |  
|                                                                                          | Other
          assets                                                                                                    |   |                                | 798    |              |   |   | 1   |  
|                                                                                          | Trade
          accounts payable and accruals                                                                             |   |                                | 1,121  |              |   |   |    |  
|                                                                                          | Other
          liabilities                                                                                               |   |                                | (822   | )            |   |   | 37  |  
|                                                                                          |                                                                                                                           |   |                                |        |              |   |   |    
|Net
          cash provided by operating activities                                       |                                                                                                                           |   | 11,354                         |        |              |   |  |    
|Cash
          flows from investing activities:                                           |                                                                                                                           |   |                                |        |              |   |   |    
|Cash
          paid for acquisition, net of cash acquired                                 |                                                                                                                           |   | (59,944                        | )      |              |   |  |    
|Capital
          expenditures                                                            |                                                                                                                           |   | (998                           | )      |              |   |  |    
|                                                                                          |                                                                                                                           |   |                                |        |              |   |   |    
|Net
          cash used in investing activities                                           |                                                                                                                           |   | (60,942                        | )      |              |   |  |    
|Cash
          flows from financing activities:                                           |                                                                                                                           |   |                                |        |              |   |   |    
|                                                                                          | Proceeds
          from senior note payable                                                                               |   |                                | 35,000 |              |   |   |    |  
|                                                                                          | Payment
          of debt issuance costs                                                                                  |   |                                | (1,700 | )            |   |   |    |  
|                                                                                          | Repayment
          of senior note payable                                                                                |   |                                | (1,850 | )            |   |   |    |  
|                                                                                          | Proceeds
          from note due to officer                                                                               |   |                                |       |              |   |   | 1   |  
|                                                                                          | Loan
          to Trust                                                                                                   |   |                                |       |              |   |   | (1  | )
|                                                                                          | Repayments
          under IITRI revolving credit agreement                                                               |   |                                | (6,185 | )            |   |   |    |  
|                                                                                          | Purchase
          of interest rate cap agreement                                                                         |   |                                | (245   | )            |   |   |    |  
|                                                                                          | Cash
          paid for Daedalic acquisition earn out                                                                     |   |                                | (155   | )            |   |   |    |  
|                                                                                          | Stock
          redemption                                                                                                |   |                                | (58    | )            |   |   |    |  
|                                                                                          | Issuance
          of common stock to Trust                                                                               |   |                                | 26,489 |              |   |   | 1   |  
|                                                                                          |                                                                                                                           |   |                                |        |              |   |   |    
|Net
          cash provided by financing activities                                       |                                                                                                                           |   | 51,296                         |        |              |   | 1 |    
|Net
          increase in cash                                                            |                                                                                                                           |   | 1,708                          |        |              |   | 1 |    
|Cash
          at beginning of period                                                     |                                                                                                                           |   | 6                              |        |              |   |  |    
|                                                                                          |                                                                                                                           |   |                                |        |              |   |   |    
|Cash
          at end of period                                                           |                                                                                                                           | $ | 1,714                          |        |              | $ | 1 |    
|                                                                                          |                                                                                                                           |   |                                |        |              |   |   |    
|Supplemental
          disclosure of cash flow information:                               |                                                                                                                           |   |                                |        |              |   |   |    
|                                                                                          | Cash
          paid for interest                                                                                          |   | $                              | 2,564  |              |   | $ |    |  
|                                                                                         
|Non-cash
          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 |              |   |   |    |  
|                                                                                          | Bank
          debt assumed in connection with the acquisition of selected operations
          of IITRI                  |   |                                | 6,185  |              |   |   |    |  
|                                                                                          | IITRI
          transaction costs assumed in connection with the acquisition of selected
          operations of IITRI    |   |                                | 783    |              |   |   |    |  
|                                                                                          | Additional
          non-cash consideration paid in connection with acquisition of selected
          operations of IITRI |   |                                | 1,798  |              |   |   |    |  
|                                                                                          | Deferred
          compensation arrangement with officer                                                                  |   |                                | 857    |              |   |   |    |  
|Common Stock issued to ESOP Trust in satisfaction of employer contribution liability      |                                                                                                                           |   | 1,001                          |        |              |   |   |    
|                                                                                          |                                                                                                                           |   |                                |        |              |   |   |    

See accompanying notes to consolidated financial statements.

5



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ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Interim periods ended July 4, 2003 and July 5, 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 services primarily to agencies of the federal
government and, to a much 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 assuming certain of the
liabilities of IIT Research Institute (IITRI), a not-for-profit membership
corporation.

On December 20, 2002, Alion completed the acquisition of substantially all
of IITRIs assets and the assumption of certain of its liabilities (the Transaction) for an
aggregate cost of approximately $127.9 million. The purchase price included
cash and notes issued to IITRI aggregating $119.4 million, the assumption of
$6.2 million of IITRI bank debt and reimbursement of $2.3 million of IITRIs
transaction costs included in the liabilities assumed by Alion in the
Transaction. See Note 12.



|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 40-week
interim period ended July 4, 2003 are not necessarily indicative of the results
that may be expected for the fiscal year ending September 30, 2003. For
further information, refer to the consolidated financial statements and notes
thereto included in Post-Effective Amendment No. 3 to the Companys
registration statement on Form S-1 filed with the SEC on March 24, 2003.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make

6



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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
|-- |  | ------------------------------------------

Fiscal and Interim Periods

The Companys fiscal year ends on September 30. The Company operates 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.
Accordingly, comparisons between interim periods will need to consider the
differing lengths of the third and fourth interim periods.

Revenue Recognition

Alions revenue results from research and support services under a variety
of contracts, some of which provide for reimbursement of costs plus fees and
others of which are fixed-price or time-and-material type contracts.
The company generally recognizes revenue when a contract has been executed, the contract
price is fixed and determinable, delivery of the services or products has
occurred and collectibility of the contract price is considered probable.

Revenue on cost-plus contracts is recognized as costs are incurred plus a
proportionate share of the fees earned. The Company uses the percentage of
completion method to recognize revenue on fixed-price contracts based on costs
incurred in relation to total estimated costs. Revenue on time-and-material contracts is recognized
at contractually billable rates as labor hours and direct expenses are
incurred. From time to time, facts
develop that require Alion to revise its estimated total costs or expected
revenue. The cumulative effect of the revised estimates is recorded in the
period in which the facts requiring revision become known. The full amount of
anticipated losses on any type of contract are recognized in the period in
which they become known.

Restricted Cash

Restricted cash represents short-term restricted cash received from a
customer as an advance payment on a contract. This short-term restricted cash
is utilized as work is performed in accordance with the contract.

7



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Property, Plant and Equipment

Leasehold improvements, software and equipment are recorded at cost.
Expenditures for maintenance and repairs are charged to current operations.
Software and equipment are depreciated over their estimated useful lives (3 to
15 years for the various classes of software and equipment) generally using the
straight-line method. Leasehold improvements are amortized on a straight-line
basis over the life of the lease. Upon sale or retirement of an asset, cost
and related accumulated depreciation are deducted from the accounts, and any
attendant gain or loss is recognized in the consolidated statement of
operations.

Income Taxes

Under Subchapter S of the Internal Revenue Code, the stockholder of the
Company will include the Companys income in its own income for Federal and
most state income tax purposes. Accordingly, the Company is not subject to
Federal and most state income taxes.

Recently Issued Accounting Pronouncements

In November 2002,
  the Financial Accounting Standards Board (FASB) released FASB Interpretation
  No. 45 (FIN 45), Guarantors Accounting and Disclosure Requirements
  for Guarantees, Including Indirect Guarantees of Indebtedness of Others.FIN
  45 requires that a guarantor recognize a liability for the fair value of an
  obligation assumed under a guarantee. This interpretation also discusses additional
  disclosures to be made in the interim and annual financial statements of the
  guarantor about obligations under certain guarantees. The initial measurement
  and recognition requirements of FIN 45 are effective prospectively for guarantees
  issued or modified after December 31, 2002. The disclosure requirements
  are effective for the Company in its consolidated financial statements for interim
  periods during fiscal 2003. The adoption of FIN 45 did not have a material effect
  on the Companys financial position, results of operations, or cash flows.

In April 2003, the
  FASB issued Statement of Financial Accounting Standards (SFAS) No. 149, Amendment
  of Statement 133 on Derivative Instruments and Hedging Activities.SFAS
  No. 149 amends and clarifies accounting for derivative instruments, including
  certain derivative instruments embedded in other contracts, and for hedging
  activities under SFAS No. 133. In particular, SFAS No. 149 clarifies
  under what circumstances a contract with an initial net investment meets the
  characteristics of a derivative and when a derivative contains a financing component
  that warrants special reporting in the statement of cash flows. SFAS No. 149
  is generally effective for contracts entered into or modified after June 30,
  2003 and is not expected to have a material impact on the Companys financial
  position or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 establishes standards for how an issuer classifies and measures in
its statement of financial position certain financial instruments with
characteristics of both liabilities and equity. It requires

8



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##### 



that an issuer classify a financial instrument having characteristics of
both liabilities and equity as a liability (or an asset in some circumstances)
because that financial instrument embodies an obligation of the issuer. SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. This statement is not expected to have a
significant impact on the Companys financial position or results of
operations.

Reclassifications

Certain reclassifications have been made to previously reported balances
to conform with the current-period presentation.



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

Pro
forma earnings (loss) per share have been computed as though the 2,575,408
shares 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 pro forma
periods 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 capital structure.



|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 and at least an annual
review for impairment. The Company has elected to perform this review at the
end of each fiscal year. The accompanying pro forma statements of operations
exclude historical goodwill amortization expense.

As a result of the Transaction described in Note 1, the Company recorded
goodwill of approximately $63.0 million, which will be subject to an annual
impairment review. The Company also recorded intangible assets of
approximately $30.6 million, comprised primarily of purchased contracts that
have an estimated useful life of three years and are 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 the notes. The Warrants have
an exercise price of $10.00 per share and are exercisable until the sixth
anniversary of the issue date for the warrants associated with the Mezzanine
Note and the Deferred Compensation Agreement and until the eighth anniversary
of the issue date for the warrants associated with the Subordinated Note.

9



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##### 



The holders are able 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. The Warrants are classified as debt instruments in accordance with
Emerging Issues Task Force 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 was recorded as a discount to the face
value of the notes issued and as a liability in the accompanying consolidated
balance sheet. The Warrants are re-measured each reporting period and the
subsequent reduction in fair value of approximately $0.3 million was recorded through the
consolidated statements of operations for the 40-week period ended July 4,
2003.



|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 credit
agreement 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 Alions current and future tangible and intangible property.

Principal repayments under the term loan are payable in quarterly
installments, yielding annual repayments in the following amounts:

|       |  |              |  | 
|------ |  | ------------ |  | 
|Year 1 |  | $5.0 million
|Year 2 |  | $5.0 million
|Year 3 |  | $7.5 million
|Year 4 |  | $8.5 million
|Year 5 |  | $9.0 million

For the
periods until the lenders receive the compliance certificate and
audited financial statements for the fiscal year ended September 30, 2003,
Alions borrowings under the senior credit facility will bear 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 (base rate) plus 200 basis points. After the lenders receive the
Companys audited financial statements for the fiscal year ending September 30,
2003, the interest rate will equal the Eurodollar rate or the prime rate plus
varying margins based on the Companys leverage ratio.

Effective February 14, 2003, the Company exercised its right to elect that
the term note bear interest at a Eurodollar rate. This election does not
affect the interest rate applicable to amounts borrowed under the revolving
line of credit. As a result, interest under the term note is payable at the
LaSalle Bank prime rate plus 200 basis points up through February 14, 2003. Thereafter and
until the lenders receive the Companys audited financial statements for the
fiscal year ending September 30, 2003, the term note bears interest at the
Eurodollar rate plus 350 basis points.

10



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##### 



The Company
and one of its senior lenders entered into an interest rate cap agreement effective as of
February 3, 2003. Under this
agreement, the Companys maximum effective rate of interest payable on the
first $25 million of principal under its term note will not exceed six percent.
The senior lender counterparty to the cap agreement will semiannually
calculate and reimburse the Company for all interest payments in
excess of this six percent ceiling. This cap agreement expires February 3, 2007.
The Company records changes in the fair value of the interest rate cap in the
consolidated statements of operations. The fair value of the cap was
approximately $0.2 million as
of July 4, 2003.

On
December 20, 2002, the Company issued a mezzanine note to IITRI
with a face value of approximately $20.3 million. The mezzanine note served as part of the
consideration for the IITRI acquisition. It 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 must pay interest on the mezzanine note, in cash, at a
rate of 12 percent per year, based on a 360-day year of twelve 30-day months.

Also on December 20, 2002, the Company issued a seller note to IITRI (the
subordinated note), with a face value of $39.9 million as part of the purchase
price for the IITRI acquisition. The subordinated note bears interest at a
rate of six percent 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
have the effect of compounding any interest on these payment obligations.
Commencing December 2008, the subordinated note will bear interest at 16% per
year payable quarterly in cash until repayment in full of the subordinated
note. 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. Bahman Atefi, an officer and director of the
Company. The payment terms of the deferred compensation agreement are
substantially equivalent to
those of the mezzanine note.

Under the terms of the senior credit facility and the 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. The Company was in compliance with the covenants
as of July 4, 2003.



|8. |  | Stock Appreciation Rights
|-- |  | -------------------------

Alions board of directors adopted a Stock Appreciation Rights (SAR) Plan
in November 2002. The SAR plan has a term of ten years. Awards may be granted
under the plan to directors, officers, and employees. Outstanding SAR awards
cannot exceed the equivalent of ten percent of the Companys outstanding shares
of common stock on a fully

11



---



##### 



diluted basis. A grantee has the right to receive payment upon exercise
equal to any appreciation in the fair market value of a share of Alion common stock from
the grant date to the exercise date based on the most recent valuation of the
shares of common stock held by the ESOP. Awards vest at 20% per year for
employees. Awards to members of the Companys board of
directors, other than Dr. Atefi, vest ratably over each members
then-current term of office. SARs may be exercised at any time after grant to the extent they
have vested. As of July 4, 2003, the Company had issued 96,950 SARs with an exercise
price of $10.00 per share. All grants were effective December 23, 2002 except for
1,000 SARs issued on February 11, 2003. The Company recognized
approximately $0.05 million in compensation expense through July 4, 2003 related to this plan
representing the estimated fair value of the SARs.



|9. |  | Phantom Stock Program
|-- |  | ---------------------

In February 2003, the compensation committee of Alions board of directors
approved the Companys phantom stock plan which was subsequently adopted by the
full board of directors. Phantom stock refers to hypothetical shares of Alion
common stock. Upon vesting, recipients are entitled to receive an amount
of money equal to the product of the number of hypothetical shares vested and
the then-current value of Alion common stock, based on the most recent
valuation of the shares of common stock held by the ESOP.

The phantom stock plan has a term of ten years. The board of directors
and the compensation committee may each grant key management employees awards
of phantom stock. Phantom stock awards vest according to the following
schedule:

|                            |  |               |     | 
|--------------------------- |  | ------------- | --- | 
|Anniversary from Grant Date |  | Vested Amount
|                            |  |              
|3rd                         |  |               | 1/2 | 
|4th                         |  |               | 1/4 | 
|5th                         |  |               | 1/4 | 

Vesting of awards may be accelerated for events, such as a change in
control (as defined in the plan) or if an employee becomes disabled or dies.
Acceleration may entitle the affected employee to vest immediately in 100% of
all phantom stock that has been awarded.

As of July 4, 2003 the Company had issued an aggregate of 171,000 shares
of phantom stock. No voting or other rights are associated with phantom stock.
Through July 4, 2003, the Company recorded approximately $0.2 million in compensation
expense representing the estimated fair value of phantom stock..



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

At the closing of Alions acquisition of IITRIs assets, the Company
assumed responsibility for and acquired all claims related to the following
litigation relating to IITRIs purchase of AB Technologies, Inc.

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.

12



---



##### 



The lawsuit seeks 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 seeks declaratory judgment that it is entitled to
a downward adjustment to the purchase price of approximately $1.1 million 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. Discovery
is in process; the arbitrator is attempting to schedule a final
hearing of this matter for
October 2003.

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 is
seeking exemplary damages and an injunction barring the defendants from using
the Companys trade secrets related to a mobile rescue device named the
Emergency Personal Isolation and Containment Pod. Discovery is proceeding in

this case. A detailed discussion of this matter can be found in Part II 
Other Information, Item 1, Legal Proceedings, of this document.

Other than the foregoing, the Company is not involved in any legal
proceeding other than routine legal proceedings occurring in the ordinary
course of business. The Company believes that these routine legal proceedings,
in the aggregate, are not material to its financial condition and results of
operations.

As a government contractor, the Company may be subject from time to time
to federal government inquiries relating to its operations as well as audits by
the Defense Contract Audit Agency. Contractors 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 contracting with the federal
government 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 it. The
Company is not aware of any such pending federal government claims or investigations.



|11. |  | 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. Even an office or division within
an agency or department may use the Companys services as a separate customer
directly, or through a prime contractor, so long as that office or division has
independent decision-making and contracting authority within its organization.

13



---



##### 



Revenue from services provided to various agencies of the U.S. Government
by the Company represented $158.5 million or approximately 98%, and $150.3
million or approximately 98%, of revenue for the pro forma 40-week interim
periods ended July 4, 2003 and July 5, 2002, respectively. Contract
receivables from agencies of the U.S. Government represented approximately
$38.0 million, or approximately 92%, of accounts receivable at
July 4, 2003.

During the pro forma 40-week interim period ended July 4, 2003, there were
no sales by the Company to any customer within any other country other than the
United States, where such sales accounted for 10% or more of contract 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
interim period ended July 4, 2003.



|12. |  | Acquisition and Pro Forma Information
|--- |  | -------------------------------------

On December 20, 2002, Alion acquired substantially all of the assets and
assumed certain of the liabilities of IITRI, excluding the assets and
liabilities of IITRIs Life Sciences Operation, for approximately $127.9
million. The price included cash and notes issued to IITRI aggregating $119.4
million, the assumption of $6.2 million of IITRI bank debt and reimbursement of
$2.3 million of IITRIs transaction costs included in the liabilities assumed
by Alion in the Transaction. The Company formed the Alion Employee Ownership,
Savings and Investment Plan containing an ESOP component to facilitate the
Transaction. The Company funded the Transaction by the sale of common stock to
the ESOP and with proceeds from the debt instruments described in Note 7. The
ESOP trustee, State Street Bank and Trust Company, used $25.8 million in
proceeds from Alion employee rollovers into the ESOP to acquire 100% of the
Companys outstanding common stock (approximately 2.58 million shares). The
Company used the purchase method to account for the acquisition. The
acquisition occurred on the last day of the Companys twelve-week interim
period ended December 20, 2002. Accordingly, the accompanying consolidated
statements of operations include the results of operations of the acquired
business subsequent to December 20, 2002. The Company allocated the purchase
price to the assets acquired and liabilities assumed based on their estimated
fair values at the date of acquisition. The purchase price allocation is
preliminary and subject to change. The Company is currently completing its
analysis of intangible assets acquired and estimated fair values of certain
fixed assets acquired.

The pro forma consolidated statements of operations for the 16-week and
40-week interim periods ended July 4, 2003, and the 16-week and 40-week interim
periods ended July 5, 2002 have been prepared by giving effect to the following
transactions as if those transactions had been consummated on October 1, 2002
and 2001, respectively:



| |  |  | The incurrence of debt with detachable warrants to purchase common
stock as described in Notes 6 and 7;
| | - |  | -------------------------------------------------------------------------------------------------------

14



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##### 





| |  |  | The consummation of the Transaction, accounted for using the
purchase method; and
| | - |  | ---------------------------------------------------------------------------------
|
| |  |  | The purchase of common stock by the ESOP.                                        

The pro forma consolidated statements of operations include pro forma
adjustments to:



| |  |  | Reverse historical amortization expense related to pre-Transaction
goodwill and deferred gain on sale of property, 
| | - |  | -------------------------------------------------------------------------------------------------------------------
|
| |  |  | Record the depreciation expense of acquired assets,                                                                
|
| |  |  | Record the amortization of identifiable intangible assets,                                                         
|
| |  |  | Record interest expense on debt issued to finance the Transaction,                                                 
|
| |  |  | Record the amortization of debt issuance costs, and                                                                
|
| |  |  | 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 Transaction had
occurred on the dates indicated or the results of operations that will be
reported in the future.



|13. |  | Related Party Transactions
|--- |  | --------------------------

On March 28, 2003, an officer of the Company purchased a portion of the
Companys mezzanine notes owned by IITRI for $750, their face value, along with
warrants to purchase 19,327 shares of Alions common stock at an exercise price
of $10.00 per share.



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

The following discussion of the Companys 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 the Companys 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.

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;

15



---



##### 





| |  |  | 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 contract
termination risks;                                                                                                                                                         
|
| |  |  | Competitive factors such as pricing pressures;                                                                                                                                                                                                
|
| |  |  | Competition to hire and retain employees;                                                                                                                                                                                                     
|
| |  |  | Results of current and/or future
legal proceedings;                                                                                                                                                                                           
|
| |  |  | Results of government agency proceedings which could arise out of
the Companys operations (including the Companys 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; and                                                                                                                                                           
|
| |  |  | Other risk factors discussed in Post-Effective Amendment No. 3 to
the Companys registration statement on Form S-1 filed with the SEC on
March 24, 2003.                                                                                      

Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect managements view only as of July 4, 2003. 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.

Critical Accounting Estimates and Policies

The Companys significant accounting policies are described in Note 3 to
the consolidated financial statements for the interim period ended July 4,
2003, included herein and in the Notes to the Consolidated Financial Statements
of Selected Operations of IITRI, the business the Company acquired, included in
Post-Effective Amendment No. 3 to the Companys registration statement on Form
S-1 (No. 333-89756) filed with the SEC on March 24, 2003.

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

16



---



##### 



The Companys critical accounting policies are set forth below:

Revenue Recognition, Cost Estimation and Payment

The Company recognizes revenue when persuasive evidence of an arrangement
exists, services have been rendered, the contract price is fixed or
determinable, and collectibility is reasonably assured. The Company has a
standard internal process that it uses to determine whether all required
criteria for revenue recognition have been met. This process includes a
monthly review of contract revenues and expenses by several levels of
management that 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.

The Companys revenues consist primarily of payments for the work of its
employees, and to a lesser extent, related costs for materials and subcontract
efforts under contracts with its 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 derives the majority of its revenue from cost-plus-fixed-fee,
cost-plus-award-fee, time-and-material, or firm-fixed price contracts. Absent
evidence to the contrary, the Company recognizes revenue as follows. Under
cost-plus-fixed-fee and cost-plus-award-fee contracts, the Company recognizes
revenue as costs are incurred including an estimate of applicable fees earned.
For time-and-material contracts, the Company calculates revenue by
multiplying the number of direct labor-hours expended in the performance of the
contract by contract billing rates plus other billable direct costs. For
firm-fixed-price contracts, the Company uses the percentage of completion
method to estimate revenue on the basis of costs incurred compared to
estimated total costs, or as appropriate, upon delivery of specific products or
services. Performance incentives are incorporated in certain contracts which
yield increased or decreased revenue based on actual performance compared to
established targets. Incentives based upon cost performance are recorded when
earned. Other incentives and awards are recorded when the amounts are earned
and reasonably determined, or are awarded. In certain circumstances, revenues
are recognized when contract amendments have not been finalized. Prior to
agreeing to commence work directed by a customer and before receipt of a
written modification or amendment to an existing contract, the Company requires
documentation assessing the probability of a modification being timely executed
and its ability to subsequently collect payment from that customer.

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 the
Companys progress towards completing the contract. From time to time facts
develop that require the Company to revise its estimated

17



---



##### 



total costs or revenues. In most cases, these revisions relate to changes in
the contractual scope of the Companys work. To the extent that a revised
estimate affects contract profit or revenue previously recognized, the Company
records the cumulative effect of the revision in the period in which the facts
requiring the revision become known. The Company recognizes anticipated losses in the
accounting period in which they are first determined.

For the 40-week interim period ended July 4, 2003, the Company derived
approximately 64%, 20% and 16% of its revenue from cost-plus,
time-and-material and fixed-price contracts, respectively. For the pro-forma
40-week interim period ended July 5, 2002, the Company derived approximately
60%, 22% and 18%, of its revenue from cost-plus, time and material, and
fixed-price contracts, respectively.

The Companys most significant expense is its cost of services, which
consists primarily of direct labor costs for program personnel and direct
expenses incurred to complete contracts, including materials and subcontract
efforts. The Companys ability to accurately predict personnel requirements,
salaries and other costs, as well as to manage personnel levels and
successfully re-deploy personnel, can have a significant impact on the
Companys 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 the Companys direct contract activities.
General and administrative expenses consist primarily of costs associated with
the Companys management, finance and administrative groups; personnel
training; sales and marketing expenses including bid and proposal efforts; and
certain occupancy, travel and other corporate costs.

The Company earns the majority of its revenue under contracts with various
departments and agencies, or prime contractors, of the federal government.
Certain revenues and payments the Company receives are based on provisional
billings and payments subject to adjustment under audit. Federal government
agencies and departments have the right to challenge the Companys cost
estimates and allocation methods with respect to government contracts.
Contracts with such agencies are subject to audit and possible adjustment for
unallowable costs under cost-type contracts or other regulatory requirements
affecting both cost-type and fixed-price contracts.

Goodwill and Identifiable Intangible Assets

Goodwill represents the excess of cost over the fair value of net tangible
and identifiable intangible assets of acquired companies. As a result of the
acquisition of substantially all of the assets and certain of the liabilities
of IITRI on December 20, 2002, the Company recorded
approximately $63.0 million
of goodwill and approximately $30.6 million of intangible assets. In
accordance with the provisions of SFAS No. 142, the Company no longer amortizes
goodwill. However, goodwill must be reviewed at least annually for impairment.
The Company has elected to perform its annual review at the end of each fiscal
year. If the carrying value of the Companys goodwill were to exceed the fair
value at some time in the future, the Company would be required to report
goodwill impairment charges as an operating expense in its statement of
operations. Whenever events or changes in circumstances indicate that the
carrying value of goodwill may not be

18



---



##### 



recoverable, the Company must conduct an impairment assessment of its goodwill
and identifiable intangible assets. Factors that could trigger an impairment
review include:



| |  |  | 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 appears that the carrying value of intangibles or goodwill might
not be recoverable based on one or more of the above criteria, management will
use projected discounted cash flow, independent valuation or other means to
measure any impairment.

Pro Forma Comparisons of Results of Operations

Alion completed the acquisition of substantially all of the assets and
certain of the liabilities of IITRI on December 20, 2002, the last day of the
Companys first interim period. The following discussion and analysis of
results of operations relates to pro forma results of operations for the
periods described, assuming that the acquisition had been consummated on the
first day of each fiscal year (i.e. October 1, 2001 and October 1, 2002,
respectively). Results for the 16-week period ended July 4, 2003, included in
the following discussions, represent actual results of operations as the
acquisition occurred prior to the first day of the interim period.

The following table sets forth, for each period indicated, the percentage of
the Companys revenue derived from each of its major types of customers.

|                           |       |  |                              |       |              |  |      |       |  
|-------------------------- | ----- |  | ---------------------------- | ----- | ------------ |  | ---- | ----- | -
|                           |       |  | Pro Forma                   
|                           |       |  | For the 40-week period ended
|                           |       |  |                             
|                           |       |  | July 4, 2003                 |       | July 5, 2002
|                           |       |  |                              |       |             
|Department of Defense      |       |  | 93.6                         | %     |              |  | 90.0 | %    
|Federal Civilian Agencies  |       |  | 4.6                          |       |              |  | 8.2  |      
|Commercial / State / Local |       |  | 1.8                          |       |              |  | 1.8  |      
|                           |       |  |                              |       |              |  |      |      
|                           | Total |  |                              | 100.0 | %            |  |      | 100.0 | %
|                           |       |  |                              |       |              |  |      |      

19



---



##### 



Results of Operations

For the 16-Week Interim Period Ended July 4, 2003 Compared to the Pro Forma 16-Week
Interim Period Ended July 5, 2002

Revenue.Revenue increased $0.6 million, or approximately 1.0%, to $65.1
million for the interim period ended July 4, 2003, from $64.5 million for the
interim period ended July 5, 2002. During the period, the
Company experienced difficulty hiring enough highly qualified
personnel to meet customer demands. The net increase is attributable primarily
to additional work performed under contracts that were in existence during the
prior year. As a percentage of revenue, material and subcontract revenue
accounted for approximately 22.6% of the Companys revenue for the interim
period ended July 4, 2003, compared with 24.9% for the interim period ended
July 5, 2002 representing a decrease in revenue of approximately $1.4 million.

The
following activities involved sizeable revenue increases during the period:

|                                                                                                                          |  |                      
|------------------------------------------------------------------------------------------------------------------------- |  | ---------------------
|Demilitarization support services to the U.S. Armys Newport
Chemical Agent Disposal Facility                             |  | $2.3 million increase
|                                                                                                                         
|Additional services under the Modeling and Simulation
Information Analysis Center contract with the Department of
Defense |  | $1.7 million increase
|                                                                                                                         
|Support to the Joint Spectrum Center of the Department of
Defense                                                         |  | $1.4 million increase

The
following activity involved a sizeable revenue decrease during the period:

|                                                                                         |  |                      
|---------------------------------------------------------------------------------------- |  | ---------------------
|Decline in support to the Internal Revenue Service on various
contracts and subcontracts |  | $2.1 million decrease
|                                                                                        

Direct Contract Expense.Direct contract expense increased approximately
$0.5 million, or 1.1%, to approximately $47.5 million for the interim period
ended July 4, 2003, from $47.0 million for the interim period ended July 5,
2002. Direct contract expense as a percentage of revenue was approximately
72.9% for the interim period ended July 4, 2003 and approximately 72.8% for the
interim period ended July 5, 2002. Direct labor costs for the interim period
ended July 4, 2003, increased by approximately 8.7% or $2.6 million when
compared to the interim period ended July 5, 2002 due to an increase in
personnel, primarily to support the contracts discussed above. Other direct
contract costs decreased by approximately 21.0% or $0.5 million when compared
to the interim period ended July 5, 2002 as a result of varying contract
requirements. Material and subcontract

20



---



##### 



costs decreased approximately
$1.6 million, or approximately 11.0%, to
$12.9 million for the interim period ended July 4, 2003, compared to
approximately $14.5 million for the interim period ended July 5, 2002.

Gross Profit.Gross profit increased approximately $0.2 million, or 1.1%,
to approximately $17.7 million for the interim period ended July 4, 2003, from
approximately $17.5 million for the period ended July 5, 2002. Gross profit
margin as a percentage of revenue remained constant at 27.2% for the interim
periods ended July 4, 2003 and July 5, 2002.

Operating Expense.Operating expense, net of depreciation and amortization
expense, and non-recurring Transaction-related expense increased approximately
$1.1 million, or approximately 8.9%, to approximately $13.5 million for the
interim period ended July 4, 2003, from approximately $12.4 million for the
interim period ended July 5, 2002. As a component of operating expense,
general and administrative expense increased approximately $2.0 million, or
approximately 33.3%, to $8.0 million for the interim period ended July 4, 2003,
compared to approximately $6.0 million for the interim period ended July 5,
2002. This increase includes costs for regulatory compliance, legal support,
and financial reporting to support the Companys growth and the increased
complexity of its business. As a percentage of revenue, general and
administrative expense increased to approximately 12.4% for the interim period
ended July 4, 2003, compared to 9.3% for the interim period ended July 5, 2002.
Bad debt expense decreased approximately $0.8 million. Approximately $0.5
million of the change was due to the resolution of a contractual dispute during
the period; the balance of the change was attributable to a significant
improvement in collecting accounts receivable. Research and development
expenses decreased to approximately $0.05 million for the period ended July 4,
2003, from $0.2 million for the period ended July 5, 2002.

Non-recurring
Transaction-Related Expense. Non-recurring Transaction-related
expense (e.g. third party legal, accounting, and finance) was
approximately $0.2 million and $2.1 million for the interim periods
ended July 4, 2003 and July 5, 2002, respectively.

Depreciation and Amortization.Depreciation and amortization expense
decreased approximately $0.1 million to approximately $3.8 million for the
interim period ended July 4, 2003 from approximately $3.9 million for the
interim period ended July 5, 2002. In each respective interim period,
approximately $3.1 million of amortization expense was related to purchased
customer contracts and $0.1 million of depreciation expense was related to the
fair market value assigned to the purchased assets. Remaining depreciation
expense was associated with capital assets the Company uses in its current
business.

Income(Loss) from Operations.For the interim period ended July 4, 2003,
the Company had operating income of approximately $0.2 million as compared with
an operating loss of approximately $0.9 million for the interim period ended
July 5, 2002. Operating performance for the respective periods included
non-cash depreciation and amortization expenses associated with the Transaction
and non-recurring Transaction-related expense.

Other Expense.Other expense decreased approximately $0.3 million to $2.9
million for the interim period ended July 4, 2003 as compared to $3.2 million
for the period ended

21



---



##### 



July 5, 2002. In each respective
interim period, there was approximately $2.6 million of
interest expense for debt related to the acquisition.

Income Tax Expense.The Companys wholly-owned subsidiary, HFA, had
operating income of approximately $0.5 million for the interim period ended
July 4, 2003, compared to $0.6 million for the interim period ended July 5,
2002. HFA recorded income tax provisions of approximately zero and $0.2
million, respectively, for the interim periods ended July 4, 2003 and July 5,
2002. The Company filed an election with the IRS to treat HFA as
a qualified Subchapter S subsidiary exempt from federal income tax at the
operating company level.

Net Loss.The net loss of approximately $2.7 million for the interim
period ended July 4, 2003, as compared to a net loss of approximately $4.3
million for the interim period ended July 5, 2002, is due to the factors
discussed above.

Pro Forma 40-week Interim Period Ended July 4, 2003 Compared to Pro Forma
40-week Interim Period Ended July 5, 2002

Revenue.Revenue increased $8.4 million, or approximately 5.5%, to $161.4
million for the interim period ended July 4, 2003, from $153.0 million for the
interim period ended July 5, 2002. The $8.4 million increase is attributable
primarily to additional work performed under contracts that were in existence
during the prior year. As a percentage of revenue, material and subcontract
revenue accounted for approximately 23.8% and 22.9% of the Companys revenue
for the interim periods ended July 4, 2003 and July 5,
2002, respectively, representing an increase of approximately $0.4 million.

The
following activities involved sizable revenue increases during the period:

|                                                                                                                          |  |                      
|------------------------------------------------------------------------------------------------------------------------- |  | ---------------------
|Additional services under the Modeling and Simulation
Information Analysis Center contract with the Department of
Defense |  | $7.8 million increase
|                                                                                                                         
|Demilitarization support services to the U.S. Armys Newport
Chemical Agent Disposal Facility                             |  | $3.5 million increase
|                                                                                                                         
|Support to the Joint Spectrum Center of the Department of
Defense                                                         |  | $2.1 million increase

The
following activities involved sizable revenue decreases during the period:

|                                                                                         |  |                      
|---------------------------------------------------------------------------------------- |  | ---------------------
|Decline in support to the Internal Revenue Service on various
contracts and subcontracts |  | $6.4 million decrease
|                                                                                        
|Decline in ordnance management and unexploded ordnance
support at HFA                    |  | $1.4 million decrease

22



---



##### 



During
the interim period ended July 4, 2003, increases in revenue were
partially offset by $0.6 million
related to certain additional costs on a fixed-price
contract and non-reimbursable fully-burdened direct costs on a
cost-reimbursement contract.

Direct Contract Expense.Direct contract expense increased approximately
$6.2 million, or 5.5%, to $118.1 million for the interim period ended July 4,
2003, from $111.9 million for the period ended July 5, 2002. Direct contract
expense as a percentage of revenue increased to 73.2% for the interim period
ended July 4, 2003 from 73.1% for the interim period ended July 5, 2002.
Direct labor costs for the interim period ended July 4, 2003, increased by
approximately 7.7% or $5.7 million when compared to the interim period ended
July 5, 2002 due to an increase in personnel, primarily in
support of the contracts discussed above. Other direct costs increased
by approximately 2.3% or $0.1 million when compared to the interim period ended
July 5, 2002. Material and subcontract costs increased approximately $0.4
million, or 1.3%, to $32.8 million for the interim period ended July 4, 2003,
compared to $32.4 million for the interim period ended July 5, 2002.

Gross Profit.Gross profit increased approximately $2.2 million, or 5.3%,
to $43.3 million for the interim period ended July 4, 2003, from $41.1 million
for the interim period ended July 5, 2002. Gross profit margin as a percentage
of revenue remained relatively constant at 26.8% for the interim period ended
July 4, 2003, compared to 26.9% for the interim period ended July 5, 2002.

Operating Expense.Operating expense, net of depreciation and amortization
expense, and non-recurring Transaction-related expenses, increased
approximately $3.1 million, or approximately 10.1%, to $33.8 million for the
interim period ended July 4, 2003, from approximately $30.7 million for the
interim period ended July 5, 2002. Of this $3.1 million increase, expenses for
indirect personnel and occupancy costs increased approximately $1.0 million, or
approximately 6.8%, to $15.8 million for the interim period ended July 4, 2003,
from $14.8 million for the interim period ended July 5, 2002, primarily for
infrastructure to support contract requirements. General and administrative
expense increased approximately $2.8 million, or 18.2%, to $18.2 million for
the interim period ended July 4, 2003, compared to $15.4 million for the
interim period ended July 5, 2002. As a percentage of revenue, general and
administrative expense was 11.3% and 10.0% for the interim periods ended July
4, 2003 and July 5, 2002, respectively. The approximate $2.8 million increase
can be categorized as follows:

23



---



##### 



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                      
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------
|Non-recurring expenses associated with the conversion and
roll-out of the newly created employee-owned entity.
Expenses include: conversion and upgrade of information
technology, system applications, financial systems, and
desktop software ($0.4 million); outside legal support on
ESOP and SEC matters ($0.4 million); additional required
financial audits in order to comply with government
regulations ($0.4 million); and company communications and
branding ($0.4 million) |  | $1.5 million increase
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                      
|Expense associated with the SAR and phantom stock programs
($0.3 million); outside legal costs in support of litigation
and arbitration matters ($0.3 million); increased expenses
for ESOP benefit administration ($0.3 million); and resources
for additional financial accounting staff ($0.2 million)                                                                                                                                                                                |  | $1.1 million increase
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                      
|Other administrative expenses of approximately $0.2 million
for areas including, but not limited to, human resources,
payroll, procurement, security and facilities management                                                                                                                                                                                                                                                                                                           |  | $0.2 million increase

Non-recurring
Transaction-Related Expense.Non-recurring Transaction-related expense
(e.g., third party legal, accounting, and finance) was approximately $6.6
million for the period ended July 4, 2003. For the period ended July 5, 2002,
Transaction-related expenses were $3.2 million. The increase in expense is
associated with activities related to the closing of the
Transaction on December 20, 2002 in the first period of fiscal year 2003.

Depreciation and Amortization.Depreciation and amortization expense
remained constant at approximately $9.5 million for the interim period ended
July 4, 2003 and for the interim period ended July 5, 2002.
In each interim
period, approximately $7.9 million of amortization expense related to
customer contracts purchased from IITRI and approximately $0.4 million of
depreciation expense was associated with the fair value of tangible assets
acquired in the Transaction.

Income from Operations.For the interim period ended July 4, 2003, the
Company sustained a loss from operations of approximately $6.6 million compared
with approximately a $2.2 million operating loss for the interim period ended
July 5, 2002. The $6.6 million operating loss for the period ended July 4,
2003 included approximately $6.6 million of non-recurring Transaction-related
expenses. For the period ended July 5, 2002, the operating loss
of $2.2
million included approximately $3.2 million in non-recurring
Transaction-related expenses. The operating losses for the respective periods
also included non-cash depreciation and amortization expenses resulting from
the Transaction.

Other
Expense.Other expenses were approximately $7.3 million for the
interim period ended July 4, 2003 and approximately $7.5 million for the
interim period ended July 5,

24



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##### 



2002. In each respective period, there
was approximately $7.0 million of interest expense related to the debt
financing associated with the purchase of assets from IITRI.

Income Tax Expense.The Companys wholly-owned subsidiary, HFA, had
operating income of approximately $0.7 million for the interim period ended
July 4, 2003, compared to $1.3 million for the interim period ended July 5,
2002. HFA recorded income tax provisions of approximately zero and $0.5
million, for the interim periods ended July 4, 2003 and July 5, 2002,
respectively. The Company filed an election with the IRS to treat HFA as a
qualified Subchapter S subsidiary exempt from federal income tax at the
operating level.

Net Loss.The net loss of approximately $13.9 million for the interim
period ended July 4, 2003 compared to the net loss of $10.2 million for the
interim period ended July 5, 2002, is due to the factors discussed above.

Liquidity and Capital Resources

For fiscal years 2000 through 2002, and for the interim period ended
December 20, 2002 during which time Alion operated as a shell company, the
primary liquidity requirements of the business acquired from IITRI were for
debt service, working capital, capital expenditures, and acquisitions. The
principal working capital need was to fund accounts receivable, which increased
with the growth of the business. The Company intends to fund future operations
primarily through cash provided by operating activities and a revolving credit
facility.

The following discussion relates to both the cash flows of the business
the Company acquired from IITRI through December 20, 2002 and the cash flows of
Alion throughout the periods, and subsequent to the acquisition of IITRI, which
are reflected in the consolidated statements of cash flows provided
herein. The cash flows presented cover the forty-week periods ended
July 4, 2003 and July 5, 2002.

Net cash provided by operating activities of the business the Company
acquired on December 20, 2002 was approximately $11.4 million for the interim
period ended July 4, 2003, as compared to cash used in operations of
approximately $3.2 million for the interim period ended July 5, 2002. The
increase in cash flows is primarily due to an $8.8 million improvement in
collecting accounts receivable and the issuance of $1.0 million of
common stock to the ESOP Trust to satisfy an employer contribution
liability.

Net cash used in investing activities was $60.9 million for the period
ended July 4, 2003. The business the Company acquired on December 20, 2002
used $3.7 million of cash for investing activities for the interim period ended
July 5, 2002. During the interim period ended July 4, 2003, Alion paid
approximately $58.0 million in cash for substantially all of the assets of
IITRI.

Net cash
provided by financing activities was approximately $51.3 million
for the interim period ended July 4, 2003, compared to cash provided by
financing activities of $0.5 million for the interim period ended July 5, 2002. The financing was required to complete the

25



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##### 



purchase of substantially all of the assets of IITRI. Alion generated $25.8
million in cash from the initial sale of the Companys common stock to the ESOP
Trust and approximately another $0.7 million from a subsequent sale of common
stock to the ESOP Trust. The Company also obtained $33.0 million from
borrowings under the senior term note. During the interim period ended July 4,
2003, the Company repaid approximately $1.8 million of principal on the senior
term loan and approximately $6.2 million on the Companys revolving credit
facility.

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 with anticipated annual repayments as follows:

|       |  |              |  | 
|------ |  | ------------ |  | 
|Year 1 |  | $5.0 million
|Year 2 |  | $5.0 million
|Year 3 |  | $7.5 million
|Year 4 |  | $8.5 million
|Year 5 |  | $9.0 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.

For the periods until the lenders receive the compliance certificate and
audited financial statements for the fiscal year ending September 30, 2003, the
term note and the revolving line of credit under the senior credit facility
will bear 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 the lenders receive the
Companys audited financial statements for the fiscal year ending September 30,
2003, the interest rate will equal 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.

26



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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 1.0 and
greater than or equal to 2.0 to
1.0 |  | Less than 3.0 to 1.0 and
greater than or equal to 2.5 to
1.0 |  | Greater than or equal to 3.0 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 the lenders receive the Companys audited financial
statements for the fiscal
year ending September 30, 2003, the term note will bear interest at the
Eurodollar rate plus 350 basis points.

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 six percent. The senior
lender counterparty to the cap agreement will semiannually calculate and
reimburse the Company for all interest payments in excess of this six percent
ceiling.

On July 3, 2003, the Company made a $0.6 million advance payment on the
senior term loan. The Company paid the second quarterly installment of $1.25
million 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. On July 4,
2003, the Company had approximately $31.9 million in borrowings outstanding
under the senior term note with no amounts outstanding under the revolving
credit facility.

The revolving credit facility bears interest at the LaSalle Bank
prime rate plus 200 basis points, which was 6.25% as of July 4,
2003. The approximately $31.9 million balance
remaining under the senior term note bears interest at the Eurodollar
rate plus 350 basis points, which was 4.75% as of July 4, 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

27



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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 must pay interest on the mezzanine note, in cash, at a
rate of 12 percent per year, based on a 360-day year of twelve 30-day months.

Also on December 20, 2002, the Company issued a seller note to IITRI (the
subordinated note), with a face value of $39.9 million as part of the purchase
price for the IITRI acquisition. The subordinated note bears interest at a
rate of six percent 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 warrants associated with the mezzanine note
represent the right to buy approximately 12 percent of the Companys shares of
common stock on a fully diluted basis (assuming the exercise of all warrants
outstanding on December 20, 2002), at an exercise price of $10.00 per share.
These warrants are exercisable until the sixth anniversary of the issue date
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 the
sixth anniversary date, 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 percent of the
Companys shares of common stock on a fully diluted basis (assuming the
exercise of all warrants outstanding on December 20, 2002), at an exercise
price of $10.00 per share. These warrants are exercisable until the eighth
anniversary of the issue date 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

28



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##### 



price. This put right applies to up to 50 percent of these warrants
within thirty days prior to the seventh anniversary of the issue date (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 percent of these warrants within thirty days prior to the eighth
anniversary of the issue date (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 means 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, IITRI and the senior
lenders. The subordinated note includes covenants customary for deeply
subordinated obligations, such as the timely payment of principal and interest.

During the next eight fiscal years, at a minimum, the Company will have to
make the estimated interest and principal payments set forth below.

29



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##### 



|                                             |                           |  |                                          |        |      |  |        |        |      |  |       |        |      |  |       |        |      |  |       |       |  |  |        |        |  |  |        |        |  |  |        |        | 
|-------------------------------------------- | ------------------------- |  | ---------------------------------------- | ------ | ---- |  | ------ | ------ | ---- |  | ----- | ------ | ---- |  | ----- | ------ | ---- |  | ----- | ----- |  |  | ------ | ------ |  |  | ------ | ------ |  |  | ------ | ------ | 
|                                             |                           |  | Post-Transaction 8-Year ($ in thousands)
|                                             |                           |  |                                         
|                                             |                           |  | 2003                                     |        | 2004 |  | 2005   |        | 2006 |  | 2007  |        | 2008 |  | 2009  |        | 2010
|                                             |                           |  |                                          |        |      |  |        |        |      |  |       |        |      |  |       |        |     
|Bank revolving credit facility               |                           |  |                                          |        |      |  |        |        |      |  |       |        |      |  |       |        |      |  |       |       |  |  |        |        |  |  |        |        |  |  |        |       
|                                             | - Interest(1)             |  | $                                        | 437    |      |  | $      |       |      |  | $     |       |      |  | $     |       |      |  | $     |      |  |  | $      |       |  |  | $      |       |  |  | $      |       | 
|Senior term note                             |                           |  |                                          |        |      |  |        |        |      |  |       |        |      |  |       |        |      |  |       |       |  |  |        |        |  |  |        |        |  |  |        |       
|                                             | - Interest(2)             |  |                                          | 2,100  |      |  |        | 1,800  |      |  |       | 1,192  |      |  |       | 611    |      |  |       | 135   |  |  |        |       |  |  |        |       |  |  |        |       | 
|                                             | - Principal(3)            |  |                                          | 5,000  |      |  |        | 3,286  |      |  |       | 3,838  |      |  |       | 1,757  |      |  |       | 2,256 |  |  |        |       |  |  |        |       |  |  |        |       | 
|                                             | - Mandatory prepayment(3) |  |                                          |       |      |  |        | 6,855  |      |  |       | 5,846  |      |  |       | 6,162  |      |  |       |      |  |  |        |       |  |  |        |       |  |  |        |       | 
|Mezzanine note and agreement with officer(4) |                           |  |                                          |        |      |  |        |        |      |  |       |        |      |  |       |        |      |  |       |       |  |  |        |        |  |  |        |        |  |  |        |       
|                                             | - Interest                |  |                                          | 2,544  |      |  |        | 2,544  |      |  |       | 2,544  |      |  |       | 2,544  |      |  |       | 2,544 |  |  |        | 2,544  |  |  |        |       |  |  |        |       | 
|                                             | - Principal               |  |                                          |       |      |  |        |       |      |  |       |       |      |  |       |       |      |  |       |      |  |  |        | 21,200 |  |  |        |       |  |  |        |       | 
|Subordinated note                            |                           |  |                                          |        |      |  |        |        |      |  |       |        |      |  |       |        |      |  |       |       |  |  |        |        |  |  |        |        |  |  |        |       
|                                             | - Interest(5)             |  |                                          |       |      |  |        |       |      |  |       |       |      |  |       |       |      |  |       |      |  |  |        |       |  |  |        | 6,384  |  |  |        | 3,192  | 
|                                             | - Principal               |  |                                          |       |      |  |        |       |      |  |       |       |      |  |       |       |      |  |       |      |  |  |        |       |  |  |        | 27,132 |  |  |        | 27,132 | 
|                                             |                           |  |                                          |        |      |  |        |        |      |  |       |        |      |  |       |        |      |  |       |       |  |  |        |        |  |  |        |        |  |  |        |       
|Total cash  Pay interest                    |                           |  | 5,081                                    |        |      |  | 4,344  |        |      |  | 3,736 |        |      |  | 3,155 |        |      |  | 2,679 |       |  |  | 2,544  |        |  |  | 6,384  |        |  |  | 3,192  |       
|Total cash  Pay principal                   |                           |  | 5,000                                    |        |      |  | 10,141 |        |      |  | 9,684 |        |      |  | 7,919 |        |      |  | 2,256 |       |  |  | 21,200 |        |  |  | 27,132 |        |  |  | 27,132 |       
|                                             |                           |  |                                          |        |      |  |        |        |      |  |       |        |      |  |       |        |      |  |       |       |  |  |        |        |  |  |        |        |  |  |        |       
|                                             | Total                     |  | $                                        | 10,081 |      |  | $      | 14,485 |      |  | $     | 13,420 |      |  | $     | 11,074 |      |  | $     | 4,935 |  |  | $      | 23,744 |  |  | $      | 33,516 |  |  | $      | 30,324 | 
|                                             |                           |  |                                          |        |      |  |        |        |      |  |       |        |      |  |       |        |      |  |       |       |  |  |        |        |  |  |        |        |  |  |        |       



---

|(1) |  | The Company anticipates a continuing requirement for a $25.0 million
revolving credit facility available for working capital. In 2003, the
average balance on the revolving credit facility is expected to be $7.0
million, bearing interest at 6.25%. In subsequent years, the balance on
the revolving credit facility, and the amount of interest payable, will
depend upon the Companys working capital needs.                                                                                                                                              
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Effective February 14, 2003 and, pursuant to the terms of the senior
credit facility, the Company elected to have $25.0 million of the $35.0
million principal amount of the term note bear interest at a Eurodollar
rate. Effective February 3, 2003, the Company entered into an interest
rate cap arrangement to limit the maximum interest rate on the Eurodollar
portion of the principal to six percent.                                                                                                                                                   
|   
|(3) |  | The senior term note is subject to mandatory prepayments of principal if
there is excess cash flow in a given year. Based upon projected cash
flow, the Company expects these mandatory prepayments to occur during the
first three years of the facility. This assumption is reflected in the
table above. If the prepayment conditions do not occur, the following
five-year principal repayment schedule will apply: $5.0 million in year
one, $5.0 million in year two, $7.5 million in year three, $8.5 million in
year four, and $9.0 million in year five.
|   
|(4) |  | The payment of mezzanine note interest and principal includes $20.3
million in mezzanine note principal plus $0.9 million for Dr. Atefis
deferred compensation agreement.                                                                                                                                                                                                                                                                                                                                                                                       

30



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|(5) |  | Interest expense on the subordinated note during the first six years
(2003 to 2008) is six percent simple interest, paid by the issuance of
non-interest bearing paid-in-kind (PIK) notes. Interest amounts accrue to
principal during this period, increasing the principal of the subordinated
note. No interest will be paid on interest accrued under the
subordinated note. In years one through six, the PIK interest on the
subordinated note will be approximately $2.4 million in each year. These
amounts are included in the principal payments in years seven and eight.
In years seven and eight, interest will be 16% paid quarterly in cash.
The principal, together with the outstanding balance of the PIK notes,
will be paid in equal amounts at the end of years seven and eight (2009
and 2010).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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. Due to the pending litigation associated with this
earnout arrangement, payments will only occur after completion of the current
arbitration proceedings. The AB Technologies lawsuit is discussed in detail in
the Legal Proceedings section of Part II of this filing.

The Companys minimum lease payment obligations under non-cancelable
operating leases for years ending September 30, 2003, 2004, 2005, 2006 and
2007, are $8.6 million, $8.1 million, $7.6 million, $5.7 million, and $5.7
million, respectively. The remaining aggregate obligations on these leases
thereafter are $11.0 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, or may be
cancelled upon termination of the related 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 its stock appreciation rights and phantom
stock programs; and        
|
| |  |  | Obligations relating to deferred compensation programs for senior
managers.                  

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 48 months. Although the Company expects to continue to have
positive cash flow from operations, it will need to generate significant
additional revenues and net income beyond its current revenue base in
order to repay principal and interest on the indebtedness it assumed to
finance the Transaction.

31



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##### 



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.

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 at all or on terms that will be favorable to
the Company. 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
acceptable 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 $25.0 million senior revolving credit facility and $6.9 million of
the Companys $31.9 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 six percent 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s exposure to foreign exchange risk related to the limited use
of forward contracts, entered into as a hedge against currency commitments on a
contract in the United Kingdom. The notional amount of the contracts was
approximately $362 with the final contract maturing on May 7, 2002. The
contracts were marked to market, with gains and losses recognized in the
consolidated statements of income. No such contracts were outstanding at July
4, 2003. The Company does not use derivatives for trading purposes. It
invests its excess cash in short-term, investment grade, and interest-bearing
securities.

Finally, 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.

32



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|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 is required to file or
submit under the Exchange Act.
|       
|(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 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 seeks 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 seeks declaratory judgment that it is entitled
to a downward adjustment to the purchase price of approximately $1.1 million
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. Discovery
is in process; the arbitrator is attempting to schedule a final
hearing of this matter for
October 2003. Alion assumed responsibility for and acquired all claims under
both of these lawsuits as part of its acquisition of IITRIs assets.

33



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##### 



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;                                                                                                                                                                                                                                                                                                                   
|
| |  |  | 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. The
Company believes that these routine legal proceedings, in the aggregate,
are not material to its financial condition and results of operations.

As a government contractor, the Company may be subject from time to time
to federal government inquiries relating to its operations and audits by the
Defense Contract Audit Agency. Contractors found to have violated the
False Claims Act, or who are

34



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##### 



indicted or convicted of violations of other
federal laws, may be suspended or debarred from federal 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 it. The Company is not aware of
any such pending federal government claims or investigations.



|ITEM 2. |  | CHANGES IN SECURITIES AND USE OF PROCEEDS
|------- |  | -----------------------------------------

In December 2002, the Company raised approximately $25.8 million in cash
through a private placement of its common stock. The Company sold 2,575,408
shares of common stock to the ESOP Trust for $10.00 per share. The shares of
common stock were offered pursuant to an exemption from registration under
Section 4(2) of the Securities Act of 1933.

In March
and May 2003, the Company raised approximately $0.7 million in
cash through a private placement of its common stock. The Company sold 55,028
shares of common stock to the ESOP Trust for $10.00 per share and
16,598 shares at $11.13 per share. The Company
issued an additional 89,955 shares of common stock to the ESOP Trust
at $11.13
per share as a contribution to the KSOP Plan. The shares of common stock were offered pursuant to an exemption
from registration under Section 4(2) of the Securities Act of 1933.



|ITEM 3. |  | DEFAULTS UPON SENIOR SECURITIES
|------- |  | -------------------------------

None.



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

None.



|ITEM 5. |  | OTHER INFORMATION
|------- |  | -----------------

None.



|ITEM 6. |  | EXHIBITS AND REPORTS ON FORM 8-K
|------- |  | --------------------------------



|(a) |  | Exhibits:
|--- |  | ---------

|        |             |                                                                                                                     
|------- | ----------- | --------------------------------------------------------------------------------------------------------------------
|Exhibit |             |                                                                                                                     
|No.     | Description
|        |             |                                                                                                                     
|3.1     |             | Second Amended and Restated Certificate of Incorporation of Beagle
Holdings, Inc. (3)                               
|        |             |                                                                                                                     
|3.2     |             | Amended and Restated By-laws of Alion Science and Technology Corporation.
(1)                                       
|        |             |                                                                                                                     
|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)
|        |             |                                                                                                                     

35



---



##### 



|        |             |                                                                                                                                                                                              
|------- | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |             |                                                                                                                                                                                              
|No.     | Description
|        |             |                                                                                                                                                                                              
|4.3     |             | Second Amendment to The Alion Science and Technology Corporation Employee
Ownership, Savings and Investment Plan.                                                                            
|        |             |                                                                                                                                                                                              
|4.4     |             | Third Amendment to The Alion Science and Technology Corporation Employee
Ownership, Savings and Investment Plan.                                                                             
|        |             |                                                                                                                                                                                              
|4.5     |             | Fourth Amendment to The Alion Science and Technology Corporation Employee
Ownership, Savings and Investment Plan.                                                                            
|        |             |                                                                                                                                                                                              
|10.9    |             | First Amendment to The Alion Science and Technology Corporation 2002
Stock Appreciation Rights Plan.                                                                                         
|        |             |                                                                                                                                                                                              
|10.25   |             | First Amendment to The Alion Science and Technology Corporation Director
Deferred Compensation Plan.                                                                                         
|        |             |                                                                                                                                                                                              
|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 Rule 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 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). 
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(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 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).
|   
|(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).    

36



---



##### 





|(b) |  | Reports on Form 8-K: The
Company filed a Current Report on Form 8-K
on May 23, 2003, with respect to Item 7. Financial Statements, Pro Forma
Financial Information and Exhibits and Item 12. Results of Operations and
Financial Condition (furnished under Item 9) announcing financial results
for the second 12-week interim period ended March 14, 2003 and the
24-week period ended March 14, 2003.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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: August 15, 2003 |  |                                                                                                                                                    
|                     
|                      |  | By: /s/ John M. HughesName: John M. Hughes
Title:  Chief Financial Officer
(Principal Financial and Accounting Officer and Duly
Authorized Officer)

37



---



##### 



EXHIBIT INDEX

|        |  |                                                                                                                                                                                              
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                              
|No.     |  | Description                                                                                                                                                                                  
|        |  |                                                                                                                                                                                              
|3.1     |  | Second Amended and Restated Certificate of Incorporation of Beagle
Holdings, Inc.(3)                                                                                                         
|        |  |                                                                                                                                                                                              
|3.2     |  | Amended and Restated By-laws of Alion Science and Technology
Corporation.(1)                                                                                                                 
|        |  |                                                                                                                                                                                              
|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.                                                                            
|        |  |                                                                                                                                                                                              
|4.4     |  | Third Amendment to The Alion Science and Technology Corporation Employee
Ownership, Savings and Investment Plan.                                                                             
|        |  |                                                                                                                                                                                              
|4.5     |  | Fourth Amendment to The Alion Science and Technology Corporation Employee
Ownership, Savings and Investment Plan.                                                                            
|        |  |                                                                                                                                                                                              
|10.9    |  | First Amendment to The Alion Science and Technology Corporation 2002
Stock Appreciation Rights Plan.                                                                                         
|        |  |                                                                                                                                                                                              
|10.25   |  | First Amendment to The Alion Science and Technology Corporation Director
Deferred Compensation Plan.                                                                                         
|        |  |                                                                                                                                                                                              
|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 Rule 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 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).

(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 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).

38



---



##### 



(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).

39