##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
   FORM 10-Q
 þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005. COMMISSION FILE NUMBER 33389756    
 Alion Science and Technology Corporation 
  DELAWARE
(State or Other Jurisdiction of
Incorporation of Organization)
    
    
    542061691
(I.R.S. Employer
Identification No.)10 West 35thStreet
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)
      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. þYes     o No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b2 of the Exchange Act). Yes o     Noþ The number of shares outstanding of Alion Science and Technology Corporation
common stock as of March 31, 2005, was: Common Stock 3,515,200




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ALION SCIENCE AND
TECHNOLOGY CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2005 PART I  FINANCIAL INFORMATION
    
    
    1ITEM 1. FINANCIAL STATEMENTS
    
    
    1Consolidated Balance Sheets
    
    
    1Consolidated Statements of Operations
    
    
    3Consolidated Statements of Cash Flows
    
    
    4Notes to Consolidated Financial Statements
    
    
    5ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    29ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    57ITEM 4. CONTROLS AND PROCEDURES
    
    
    58PART IIOTHER INFORMATION
    
    
    59ITEM 1. LEGAL PROCEEDINGS
    
    
    59ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    60ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    60ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    60ITEM 5. OTHER INFORMATION
    
    
    60ITEM 6. EXHIBITS
    
    
    60




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##### 



PART I  FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ALION SCIENCE AND TECHNOLOGY CORPORATION Consolidated Balance Sheets As of March 31, 2005 (Unaudited) and September 30, 2004
(In thousands, except share and per share information) September 30,March 31, 2005
    
    
    2004Current assets:Cash
    
    $
    2,489
    
    
    $
    4,717Accounts receivable, less allowance of $3,634 and $2,896 at March 31, 2005
and September 30, 2004, respectively
    
    
    63,710
    
    
    
    68,949Stock subscriptions receivable
    
    
    2,441
    
    
    
    1,556Receivable from Trust
    
    
    9
    
    
    
    Prepaid expenses
    
    
    2,302
    
    
    
    1,333Other current assets
    
    
    3,262
    
    
    
    1,008Total current assets
    
    
    74,213
    
    
    
    77,563Fixed assets, net
    
    
    11,329
    
    
    
    10,778Intangible assets, net
    
    
    8,281
    
    
    
    13,618Goodwill
    
    
    101,380
    
    
    
    83,075Other assets
    
    
    2,130
    
    
    
    1,688Deferred compensation assets
    
    
    2,023
    
    
    
    1,739Total assets
    
    
    199,356
    
    
    
    188,461Current liabilities:Current portion, Term B Senior Credit Facility note payable
    
    $
    690
    
    
    $
    468Acquisition obligations
    
    
    4,470
    
    
    
    3,059Trade accounts payable and accrued liabilities
    
    
    20,376
    
    
    
    23,420Accrued payroll and related liabilities
    
    
    24,943
    
    
    
    20,689ESOP liabilities
    
    
    154
    
    
    
    136Current portion of accrued loss on operating leases
    
    
    789
    
    
    
    832Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    3,710
    
    
    
    676Total current liabilities
    
    
    55,133
    
    
    
    49,280Term B Senior Credit Facility note payable, excluding current portion
    
    
    68,128
    
    
    
    46,367Mezzanine note payable
    
    
    
    
    
    
    17,503Subordinated note payable
    
    
    40,946
    
    
    
    34,247Agreements with officers
    
    
    
    
    
    
    1,514Deferred compensation liability
    
    
    2,023
    
    
    
    1,735Accrued postretirement benefit obligations
    
    
    3,480
    
    
    
    3,398Deferred rent and accrued loss on operating leases
    
    
    3,696
    
    
    
    3,892Redeemable common stock warrants
    
    
    35,676
    
    
    
    20,777Total liabilities
    
    
    209,082
    
    
    
    178,713Shareholders equity (deficit), subject to redemption:Common stock (subject to redemption), $0.01 par value, 8,000,000 shares
authorized, 3,515,200 shares and 3,376,197 shares issued, and 3,515,200
shares and 3,376,197 shares outstanding at March 31, 2005 and
September 30, 2004, respectively
    
    
    36
    
    
    
    34Additional paid-in capital
    
    
    41,384
    
    
    
    37,532Accumulated deficit
    
    
    (51,145
    )
    
    
    (27,818
    )Total shareholders equity (deficit), subject to redemption
    
    
    (9,725
    )
    
    
    9,748Total liabilities and shareholders equity, subject to redemption
    
    $
    196,356
    
    
    $
    188,461
 See accompanying notes to consolidated financial statements. 1




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ALION SCIENCE AND TECHNOLOGY CORPORATION Consolidated Statements of Operations Three Months Ended March 31, 2005 and 2004 and
for the Six Months Ended March 31, 2005 and 2004
(In thousands, except share and per share information)
(Unaudited) Three Months
    
    
    Three Months
    
    
    Six Months
    
    
    Six MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedMarch 31, 2005
    
    
    March 31, 2004
    
    
    March 31, 2005
    
    
    March 31, 2004Contract revenue
    
    $
    80,691
    
    
    $
    64,712
    
    
    $
    149,912
    
    
    $
    123,303Direct contract expense
    
    
    59,445
    
    
    
    46,378
    
    
    
    109,637
    
    
    
    88,491Gross profit
    
    
    21,246
    
    
    
    18,334
    
    
    
    40,275
    
    
    
    34,812Operating expenses:Indirect contract expense
    
    
    4,650
    
    
    
    4,665
    
    
    
    9,129
    
    
    
    8,654Research and development
    
    
    184
    
    
    
    104
    
    
    
    271
    
    
    
    178General and administrative
    
    
    7,689
    
    
    
    6,880
    
    
    
    14,398
    
    
    
    14,265Rental and occupancy expense
    
    
    2,508
    
    
    
    2,495
    
    
    
    4,952
    
    
    
    5,008Depreciation and amortization
    
    
    3,771
    
    
    
    3,267
    
    
    
    7,259
    
    
    
    6,371Stock-based compensation (1)
    
    
    3,745
    
    
    
    417
    
    
    
    4,202
    
    
    
    908Bad debt expense
    
    
    123
    
    
    
    92
    
    
    
    415
    
    
    
    134Total operating expenses
    
    
    22,670
    
    
    
    17,920
    
    
    
    40,626
    
    
    
    35,518Operating income (loss)
    
    
    (1,424
    )
    
    
    414
    
    
    
    (351
    )
    
    
    (706
    )Other income (expense):Interest income
    
    
    37
    
    
    
    7
    
    
    
    56
    
    
    
    9Interest expense
    
    
    (15,891
    )
    
    
    (3,677
    )
    
    
    (22,885
    )
    
    
    (6,964
    )Other
    
    
    (88
    )
    
    
    (130
    )
    
    
    (99
    )
    
    
    (68
    )Loss before income taxes
    
    
    (17,366
    )
    
    
    (3,386
    )
    
    
    (23,279
    )
    
    
    (7,729
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    (51
    )
    
    
    Net loss
    
    
    (17,366
    )
    
    
    (3,386
    )
    
    
    (23,330
    )
    
    
    (7,729
    )Basic and diluted loss per share
    
    $
    (5.21
    )
    
    $
    (1.16
    )
    
    $
    (6.96
    )
    
    $
    (2.62
    )Basic and diluted weighted average
common shares outstanding
    
    
    3,331,415
    
    
    
    2,923,783
    
    
    
    3,350,205
    
    
    
    2,947,294
   (1)
    
    Stock-based compensation is a separately reported component of general and
administrative expense. See accompanying notes to consolidated financial statements. 2




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ALION SCIENCE AND TECHNOLOGY CORPORATION Consolidated Statements of Cash Flows Six Months Ended March 31, 2005 and 2004
(In thousands)
(unaudited) Six MonthsEnded March 31,
    
    
    Six Months Ended2005
    
    
    March 31, 2004Cash flows from operating activities:Net loss
    
    $
    (23,330
    )
    
    $
    (7,729
    )Adjustments to reconcile net loss to net cash provided by
operating activities:Depreciation and amortization
    
    
    7,257
    
    
    
    6,371Accretion of debt to face value
    
    
    2,614
    
    
    
    760Amortization of debt issuance costs
    
    
    341
    
    
    
    208Increase
(decrease) in value of interest rate cap agreement
    
    
    (24
    )
    
    
    50Change in fair value of redeemable common stock warrants
    
    
    14,814
    
    
    
    2,058Stock-based compensation
    
    
    4,201
    
    
    
    908Gain on investments, net
    
    
    (19
    )
    
    
    (20
    )Changes in assets and liabilities, net of effect of acquisitions:Accounts receivable, net
    
    
    6,980
    
    
    
    (4,605
    )Other assets
    
    
    (775
    )
    
    
    (76
    )Trade accounts payable and accruals
    
    
    5,188
    
    
    
    3,379Other liabilities
    
    
    1,593
    
    
    
    2,271Net cash provided by operating activities
    
    
    18,840
    
    
    
    3,575Cash flows from investing activities:Cash paid for acquisitions, net of cash acquired
    
    
    (17,054
    )
    
    
    (14,122
    )Capital expenditures
    
    
    (1,114
    )
    
    
    (837
    )Purchase of investment securities
    
    
    (1,527
    )
    
    
    (1,333
    )Net cash used in investing activities
    
    
    (19,695
    )
    
    
    (16,292
    )Cash flows from financing activities:Proceeds from Term B Senior Credit Facility note payable
    
    
    22,000
    
    
    
    Proceeds form senior note payable
    
    
    
    
    
    
    141Payment of debt issuance costs
    
    
    (58
    )
    
    
    Repayment of Term B Credit Facility note payable
    
    
    (360
    )
    
    
    Repayment of senior note payable
    
    
    
    
    
    
    (2,500
    )Repayment of mezzanine note payable
    
    
    (20,201
    )
    
    
    (750
    )Proceeds from agreement with officer
    
    
    
    
    
    
    750Payment of agreements with officers
    
    
    (1,823
    )
    
    
    Borrowings under revolving credit facility
    
    
    
    
    
    
    14,600Repayment of ITSC revolving credit facility
    
    
    
    
    
    
    (375
    )Cash paid for Daedalic acquisition earn out
    
    
    
    
    
    
    (18
    )Purchase of shares of common stock from ESOP Trust
    
    
    (931
    )
    
    
    (736
    )Cash received from issuance of common stock to Trust
    
    
    
    
    
    
    1,247Net cash provided by (used in) financing activities
    
    
    (1,373
    )
    
    
    12,359Net decrease in cash
    
    
    (2,228
    )
    
    
    (358
    )Cash at beginning of period
    
    
    4,717
    
    
    
    494Cash at end of period
    
    $
    2,489
    
    
    $
    136Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    4,955
    
    
    $
    2,322Cash paid
for income taxes
    
    
    101
    
    
    
    449Non-cash
financing activities:Common stock
issued to ESOP Trust in satisfaction of employer contribution to
liability
    
    
    2,460
    
    
    
    2,169
 See accompanying notes to consolidated financial statements. 3




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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(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, and nuclear safety and analysis. The Company provides
these research services primarily to agencies of the federal government and, to a lesser extent, to
commercial and international customers. Alion, a for-profit S Corporation, was formed in October 2001 for the purpose of purchasing
substantially all of the assets and certain of the liabilities of IIT Research Institute (IITRI), a
not-for-profit membership corporation affiliated with and controlled by the Illinois Institute of
Technology. Prior to the acquisition of substantially all of the assets and liabilities of IITRI
(the Transaction), the Companys activities had been organizational in nature. On December 20,
2002, Alion acquired substantially all of the assets and liabilities of IITRI (Business), excluding
the assets and liabilities of IITRIs Life Sciences Operation, for aggregate total proceeds of
$127.3 million consisting of (in thousands):  
    $58,571 in cash, consisting of $56,721 paid to IITRI and $1,517 paid for
certain transaction expenses on behalf of IITRI, and $333 paid for other
transaction expenses;
    $39,900 in seller notes to IITRI, with detachable warrants representing
approximately 26% of the outstanding common stock of Alion at the closing date (on
a fully diluted basis). The seller notes bear interest at an effective interest
rate of 6.71% per annum. See notes 8 and 9;
    $20,343 in mezzanine notes to IITRI, with detachable warrants representing 12%
of the outstanding common stock of Alion at the closing date (on a fully diluted
basis). The mezzanine notes bear interest at 12% per annum. See notes 8 and 9;
    $2,300 in transaction costs less the $1,517 referenced above;
    $6,188 in assumed IITRI debt due to its bank; and
    $1,520 in additional amounts due to IITRI for purchase price adjustments
related to the Life Sciences Operation. 4




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The acquisition was accounted for using the purchase method. The purchase price has been allocated
to the acquired assets and assumed liabilities based on their estimated fair values at the date of
acquisition. As a result of the Transaction, the Company recorded goodwill of approximately $63.6
million, which is subject to an annual impairment review, as discussed below. In addition, the
Company recorded intangible assets of approximately $30.6 million, comprised of purchased
contracts. The intangible
assets have an estimated useful life of three years and are amortized using the straight-line
method. The total purchase consideration of approximately $127.3 million was allocated to the fair
value of the net assets acquired as follows (in thousands): Cash and restricted cash
    
    $
    1,187Accounts receivable
    
    
    47,485Other current assets
    
    
    3,784Acquired contracts
    
    
    30,645Goodwill
    
    
    63,610Fixed assets
    
    
    9,094Liabilities assumed
    
    
    (28,500
    )$
    127,305
 (2) Summary of Significant Accounting Policies Basis of Presentation and Principles of Consolidation The accompanying unaudited consolidated financial statements include the accounts of Alion
Science and Technology Corporation and its subsidiaries (collectively, the Company or Alion)
and have been prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC) regarding interim financial reporting. Accordingly, they do not include all of
the information and notes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the audited consolidated financial
statements included in the Companys Annual Report on Form 10-K
for the year ended September 30,
2004 (File No. 333-89756) filed with the SEC on December 28, 2004. The consolidated financial statements are prepared on the accrual basis of accounting and
include the accounts of Alion and its wholly-owned subsidiaries: Human Factors Application, Inc.
(HFA), acquired at the time of the Transaction, Innovative Technology Solutions Corporation (ITSC)
and Identix Public Sector (IPS), which were acquired during the fiscal year ended September 30,
2004, ManTech Environmental Technology, Inc. (METI), Carmel Applied Technologies, Inc. (CATI),
Alion Canada (U.S.), Inc., and Alion Science and Technology (Canada) Corporation, which were
acquired or established during the quarter ended March 31, 2005. All significant intercompany
accounts have been eliminated in consolidation. Operating results for the six months ended March
31, 2005 are not necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 2005. For further information, refer to the consolidated financial statements
and notes thereto included in the Post Effective Amendment No. 5 to the Companys registration
statement on Form S-1 (No. 333-89756) filed with the Securities and Exchange Commission (SEC) on
January 24, 2005. 5




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The preparation of financial statements, in conformity with generally accepted accounting
principles, requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosures of contingencies at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the reporting period.
Estimates have been prepared on the basis of the most current and best available information and
actual results could differ from those estimates. Reclassifications Where appropriate, certain items relating to prior years have been reclassified to conform to
the current year presentation. Revenue Recognition The Companys revenue results from contract research and other services under a variety of
contracts, some of which provide for reimbursement of cost plus fees and others of which are
fixed-price or time-and-material type contracts. The Company generally recognizes revenue when a
contract has been executed, the contract price is fixed or determinable, delivery of the services
or products has occurred and collectibility of the contract price is considered probable. Revenue on cost-reimbursement contracts is recognized as costs are incurred and include
estimates of applicable fees earned. Revenue on fixed price contracts is recognized on the percentage-of-completion method based on
various performance measures. From time to time, facts develop that require the Company to revise
its estimated total costs or revenues expected. The cumulative effect of revised estimates is
recorded in the period in which the facts requiring revisions become known. The full amount of
anticipated losses on any type of contract are recognized in the period in which they become known. Revenue on time-and-material contracts is recognized at contractually billable rates as labor
hours and direct expenses are incurred. Under time-and-material contracts, labor and related costs
are reimbursed at negotiated, fixed hourly rates. Contracts with agencies of the federal government are subject to periodic funding by the
contracting agency concerned. Funding for a contract may be provided in full at inception of the
contract or ratably throughout the term of the contract as the services are provided. If funding is
not assessed as probable, revenue recognition is deferred until realization is probable. Contract costs on federal government contracts, including indirect costs, are subject to audit
by the federal government and adjustment pursuant to negotiations between the Company and
government representatives. All of the Companys federal contract indirect costs have been audited
and negotiated through fiscal year 2001.
Government audit of fiscal year 2002 on indirect costs has been completed pending final
negotiation of the indirect rates. Audit for fiscal year 2003 is in process. The Company submitted
its fiscal year 2004 indirect cost submission on March 29, 2005. The results of the negotiation of
the indirect rates for fiscal year 2002 and the completion of the indirect rate audits and indirect
rate negotiations for fiscal years 2003 and 2004 are not expected to have a material effect on the
future results of operations. Contract revenues on federal government contracts have been recorded
in amounts that are expected to be realized upon final settlement. 6




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The Company recognizes revenue on unpriced change orders as expenses are incurred only to the
extent that the Company expects it is probable that such costs will be recovered. The Company
recognizes revenue in excess of costs on unpriced change orders only when management can also
reliably estimate the amount of excess and experience provides a sufficient basis for recognition.
The Company recognizes revenue on claims as expenses are incurred only to the extent that the
Company expects it is probable that such costs will be recovered and the amount of recovery can be
reliably estimated. Income Taxes The Company is an S corporation under the provisions of the Internal Revenue Code of 1986, as
amended. For federal and certain state income tax purposes, the Company is not subject to tax on
its income. Such income is allocated to the Companys shareholder, Alion Science and Technology
Corporations Employee Stock Ownership Savings and Investment Trust (the Trust). The Company may be
subject to state income taxes in those states that do not recognize S corporations. Additionally,
the Company may be subject to additional types of taxes including franchise and business taxes. All
of the Companys subsidiaries are qualified subchapter S entities which, for federal income tax
purposes, are not treated as separate corporations. Accounts Receivable and Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts Accounts receivable include billed accounts receivable, amounts currently billable, and costs
and estimated earnings in excess of billings on uncompleted contracts which represent accumulated
project expenses and fees that have not been billed or are not currently billable as of the date of
the consolidated balance sheet. These amounts are stated at estimated realizable value and
aggregated $18.7 million and $14.5 million at March 31, 2005 and September 30, 2004, respectively.
Costs and estimated earnings in excess of billings on uncompleted contracts at March 31, 2005
include $2.2 million related to costs incurred on projects for which the Company has been requested
by the customer to begin work under a new contract or extend work under an existing contract, but
for which formal contracts or contract modifications have not been executed. The allowance for
doubtful accounts is the Companys best estimate of the amount of probable losses in the Companys
existing billed and unbilled accounts receivable. The
Company determines the allowance using specific identification and historical write-off
experience based on the age of the population. 7




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##### 



Billings in excess of costs and estimated earnings and advance collections from customers
represent amounts received from or billed to commercial customers in excess of project revenue
recognized to date. Fixed Assets 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 (2 to 15 years for the various classes of software and equipment)
generally using the straight-line method. Leasehold improvements are amortized on the straight-line
method over the shorter of the assets estimated useful lives or the lives of the leases. Upon sale
or retirement of an asset, costs and related accumulated depreciation are deducted from the
accounts, and any gain or loss is recognized in the consolidated statements of operations. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate fair value. It is impracticable for
the Company to estimate the fair value of its subordinated debt because the only market for this
financial instrument consists of principal to principal transactions. For all of the following
items, the fair value is not materially different than the carrying value. Cash, Cash Equivalents, Accounts Payable and Accounts Receivable The carrying amount approximates fair value because of the short maturity of these
instruments. Marketable Securities The fair values of these investments are estimated based on quoted or market prices for these
or similar instruments. Senior Long-term Debt The carrying amount of the Companys senior debt approximates fair value which is estimated on
current rates offered to the Company for debt of the same remaining maturities. Interest Rate Cap The fair value of the Companys interest rate cap agreement is estimated based on current
rates offered to the Company for contracts with similar terms and maturities. 8




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##### 



Redeemable Common Stock Warrants The Company uses an option pricing model to estimate the fair value of its redeemable common
stock warrants. (3) Employee Stock Ownership Plan (ESOP) and Stock Ownership Trust On December 19, 2001, the Company adopted the Alion Science and Technology Corporation
Employee Ownership, Savings and Investment Plan (the Plan) and the Alion Science and Technology
Corporation Employee Ownership, Savings and Investment Trust (the Trust). The Plan, a
tax-qualified retirement plan, includes an ESOP component and a non-ESOP component. On September
11, 2003, the Internal Revenue Service issued a determination letter that the Trust and the Plan,
as amended through the Fourth Amendment, qualify under Sections 401(a) and 501(a) of the Internal
Revenue Code of 1986, as amended (the IRC). The Company has filed another application for a
determination letter from the IRS with respect to the Fifth through Ninth Amendments to the Plan.
The Company believes that the Plan and Trust have been designed and are currently being operated in
compliance with the applicable requirements of the IRC. (4) Pensions and Postretirement Benefits The Company sponsors a medical benefits plan providing certain medical, dental, and vision
coverage to eligible employees and former employees. The Company is self-insured with respect to
the medical benefits plan, with a stop-loss limit under an insurance agreement. The Company also provides postretirement medical benefits for employees who meet certain age
and service requirements. Retiring employees may become eligible for those benefits at age 55 if
they have 20 years of service, or at age 60 with 10 years of service. The plan provides benefits
until age 65 and requires employees to pay one-quarter of their health care premiums. A small,
closed group of employees is eligible for coverage after age 65. These retirees contribute a fixed
portion of the health care premium. There were no plan assets as of March 31, 2005 and September 30, 2004. The Company uses an
October 1 measurement date. The Company provides a prescription drug benefit to a small, closed group of retirees after
age 65. Employers providing a retiree prescription drug benefit which is at least actuarially
equivalent to Medicare Part D can qualify for a federal subsidy. The Company has yet to determine
whether the benefit that it provides can meet this standard. The Company does not expect the effect
of any subsidy to be material. Accordingly, neither the accumulated postretirement benefit
obligation nor the net periodic
postretirement benefit cost in the Companys financial statements reflects the effect of any
potential subsidy. 9




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##### 



(5) Loss Per Share Basic and diluted loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding. Loss per share excludes the impact of warrants and stock
appreciation rights described herein as this impact would be anti-dilutive for all periods
presented. (6) Shareholders Equity, Subject to Redemption The Companys common stock is owned by the Alion Science and Technology Corporation Employee
Ownership, Savings and Investment Trust. The Company provides a put option to any participant or
beneficiary who receives a distribution of common stock which permits the participant or
beneficiary to sell such common stock to the Company during certain periods, at the estimated fair
value price per share. Accordingly, all of the Companys equity is classified as subject to
redemption in the accompanying consolidated balance sheets. Certain participants have the right to sell shares distributed from participant accounts that
were acquired on the closing date of the Transaction at a price equal to the greater of the
original purchase price and the estimated fair value price per share of common stock. (7) Goodwill and Intangible Assets The Company accounts for goodwill and other intangible assets in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and other
Intangible Assets, which requires that goodwill be reviewed at least annually for impairment. The
Company performs this review at the end of each fiscal year. As of March 31, 2005, the Company has recorded goodwill of approximately $101.1 million. For
the six months ended March 31, 2005, goodwill increased by approximately $18.0 million.
Approximately $1.7 million related to additional earn out obligations from historical acquisitions
and approximately $16.3 million related to purchase price allocation, and related adjustments to
the initial allocation, for acquisitions that occurred during the previous twelve-month period
ended March 31, 2005, as described in Note 15. The purchase price allocation is preliminary and
subject to change based upon the completion of the valuation of certain intangible assets and other
items. The Company has yet to finalize the purchase accounting for acquisitions that occurred in
the previous twelve-month period ended March 31, 2005. As of March 31, 2005, the Company has recorded net intangible assets of approximately $8.3
million comprised primarily of contracts purchased from IITRI of
approximately $7.4 million and approximately $0.9 million for contracts purchased in
acquisitions described in Note 15. The intangible assets have an estimated useful life of one to
three years and are being amortized using the straight-line method. 10




---



##### 



(8) Long-Term Debt To fund the Transaction described in Note 1, the Company entered into various debt agreements
(i.e., Senior Credit Agreement, Mezzanine Note, and Subordinated Note) on December 20, 2002. On
August 2, 2004, the Company entered into a new Term B Senior Credit Facility with Credit Suisse
First Boston (CSFB)(Term B Senior Credit Facility), and used proceeds to extinguish the LaSalle
Bank senior term note, the LaSalle Bank revolving credit facility, and the Mezzanine Note. The discussion below describes the Term B Senior Credit Facility and the initial debt
agreements used to finance the Transaction. Term B Senior Credit Facility On August 2, 2004, the Company entered into the Term B Senior Credit Facility administered by
CSFB consisting of a $30.0 million revolving credit facility, a Senior Secured Term B Loan for
$100.0 million, and a $50.0 million uncommitted Incremental Term Loan accordion facility. The
total principal amount that could be borrowed under the Term B Senior Credit Facility was
originally $180.0 million (see Note 18  Subsequent Events). During the first four years of the term, principal under the Senior Secured Term B Loan is
payable quarterly in an amount equal to 0.25 percent of the principal amount then outstanding.
During the fifth and final year of the term, the Company is obligated to pay quarterly installments
of principal in an amount equal to 24 percent of the principal amount then outstanding. All
principal obligations under the revolving credit facility are to be repaid in full no later than
August 2, 2009. As of March 31, 2005, the Company had outstanding indebtedness of approximately $71.6
million under the Term B Senior Credit Facility, all of it under the term loan component of the facility. The Senior Secured Term B Loan and the revolving credit facility each may bear interest at
either of two floating rates. The Company was able to elect that interest be payable on the Senior
Secured Term B Loan at an annual rate equal to the prime rate charged by CSFB plus a maximum spread
of 225 basis points or at an annual rate equal to the Eurodollar rate plus a maximum spread of 275
basis points. On August 2, 2004, the Company elected to have the Senior Secured Term B Loan bear
interest at the Eurodollar rate, which was approximately 1.6 percent as of August 2, 2004, plus the
applicable margin, which totaled approximately 4.35 percent (i.e., LIBOR 1.6 percent plus 2.75
percent Eurodollar spread). 11




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##### 



The Term B Senior Credit Facility requires the Company to enter into an interest rate hedge
agreement acceptable to CSFB which fixes or caps the actual interest the
Company will pay on no less than 40 percent of our long-term indebtedness. On August 16, 2004,
the Company entered into an interest rate cap agreement effective September 30, 2004 with one of
the Companys senior lenders. Under this agreement, in exchange for the Companys payment to the
senior lender of approximately $319,000, the Companys maximum effective rate of interest payable
with regard to a portion of the outstanding principal balance of the Term B Senior Credit Facility
is not to exceed 6.64 percent (i.e., LIBOR 3.89 percent cap plus maximum 2.75 percent Eurodollar
spread) for the period September 30, 2004 through September 29, 2005 and is not to exceed 7.41
percent (i.e., LIBOR 4.66 percent plus 2.75 percent maximum Eurodollar spread) for the period
September 30, 2005 through September 29, 2007. As of March 31, 2005, the effective interest rate
under the Term B Senior Credit facility was approximately 5.2%. If the Company borrows under the Incremental Term Loan facility and certain economic terms of
the Incremental Term Loan, including applicable yields, maturity dates and average life to
maturity, are more favorable to the incremental term loan lenders than the comparable economic
terms under the Senior Secured Term B Loan or the revolving credit facility, then the Term B Senior
Credit Facility provides that the applicable interest rate spread will be adjusted upward. The
upward adjustment will take place if the yield payable under the incremental term loan exceeds the
yield under the Senior Secured Term B Loan or revolving credit facility by more than 50 basis
points. The effect of this provision is that borrowing under the Incremental Term Loan Facility,
may also increase the cost of borrowings under the Senior Secured Term B Loan and the revolving
credit facility. Under the terms of the Senior Secured Term B Loan, the Company is subject to
certain financial covenants with respect to the Companys maximum leverage ratio and our interest
coverage ratio. The Company was in compliance with these covenants at March 31, 2005. On August 2, 2004, the Company borrowed $50.0 million under the Senior Secured Term B Loan to
retire its outstanding Senior Term Note and revolving credit facility under the Senior Credit
Agreement with LaSalle Bank. The Company paid approximately $47.2 million in principal
(approximately $23.2 million to redeem the senior term note and $24.0 million on the revolving
credit facility) and accrued and unpaid interest and approximately $3.3 million in transaction fees
associated with the refinancing. On October 1, 2004, the Company drew down approximately $22.0 million on the Senior Secured
Term B Loan to retire its existing Mezzanine Note in the approximate principal amount of $19.6
million, plus approximately $1.8 million prepayment premium, and $0.6 million for accrued and
unpaid interest. The Company is permitted to use any future proceeds it might receive from the currently
uncommitted Incremental Term Loan Facility to finance permitted acquisitions and to make certain
put right payments required under the Companys Mezzanine Warrant, if the put rights are exercised,
and for any other purpose permitted by
Incremental Term Loans, as defined in the Term B Senior Credit Facility, if and when such
loans are funded. 12




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##### 



Senior Credit Agreement On December 20, 2002, the Company executed a Senior Credit Agreement among LaSalle Bank
National Association and other lenders to refinance and replace IITRIs prior credit arrangements
and to finance, in part, the Transaction. The Senior Credit Agreement consisted of a $35.0 million
Senior Term Note and a $25.0 million revolving credit facility. All principal obligations under the
Senior Credit Agreement were to be repaid in full no later than December 20, 2007. The Senior
Credit Agreement was secured by a first priority, perfected security interest in all of the
Companys current and future tangible and intangible property. Prior to the CSFB refinancing in August 2004, the Company had approximately $47.2 million in
borrowings under the Senior Credit Agreement (approximately $24.0 million under the revolving
credit facility and approximately $23.2 million under the Senior Term Note), each of which bore
interest at either of two floating rates: a per year rate equal to the Eurodollar rate plus 350
basis points, or LaSalles prime rate (base rate) plus 200 basis points. Under the Senior Credit Agreement, balances drawn on the revolving credit facility bore
interest at the LaSalle Bank prime rate plus 200 basis points. Effective February 14, 2003, the Company exercised its right and elected that the Senior Term
Note bear interest at a Eurodollar rate. This election did not affect the interest rate applicable
to amounts borrowed under the revolving line of credit. Interest under the Senior Term Note was
payable at LaSalles prime rate (base rate) plus 200 basis points until February 14, 2003.
Thereafter, the Senior Term Note bore interest at the Eurodollar rate plus 350 basis points. On August 2, 2004, the revolving credit facility and senior term loan were extinguished with
proceeds from the Term B Senior Credit Facility. As of August 2, 2004, the Company had
approximately $24.0 million borrowed under the revolving credit facility at an interest rate equal
to approximately 6.25% (LaSalle Bank prime rate plus 200 basis points). The Company entered into an interest rate cap agreement effective as of February 3, 2003 with
one of its senior lenders. Under this agreement, the Companys maximum effective rate of interest
payable on the first $25 million of principal under its term note was not to exceed 6%. Any
interest the Company paid on the first $25 million of principal in excess of 6% was to be
reimbursed to the Company semiannually by the senior lender pursuant to the cap agreement. On
August 2, 2004, the cap agreement was extinguished and its remaining value was recognized as
interest expense. 13




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##### 



Mezzanine Note On December 20, 2002, the Company issued a mezzanine note to IITRI under a Mezzanine Note
securities purchase agreement (Mezzanine Note) with a face value of approximately $20.3 million.
The Mezzanine Note served as part of the consideration for the Transaction. On July 1, 2004, the
Illinois Institute of Technology (IIT) acquired all of IITRIs rights and interests in the
Mezzanine Note and the related Warrant Agreement. On March 28, 2003, an officer of the Company purchased a portion of the Companys Mezzanine
Note owned by IITRI for $750,000, its face value (as described below in Other Notes and
Agreements). On October 1, 2004, the Company borrowed $22.0 million under the Senior Secured Term B Loan.
The Company used the proceeds of the October 1, 2004, borrowing to redeem the Mezzanine Note for
approximately $19.6 million, to pay a prepayment penalty of approximately $1.8 million and to pay
approximately $0.6 million in accrued interest. The Company recognized an expense of approximately
$3.9 million on extinguishment of the Mezzanine Note, including approximately $2.1 million for
amortization of original issue discount in addition to the $1.8 million prepayment penalty. Subordinated Note On December 20, 2002, the Company issued a seller note to IITRI under a seller note securities
purchase agreement (Subordinated Note) with a face value of $39.9 million. The Subordinated Note
served as part of the consideration for the Transaction. On July 1, 2004, the Illinois Institute of
Technology (IIT) acquired all of IITRIs rights and interests in the Subordinated Note and the
related Warrant Agreement. The Subordinated Note bears interest at a rate of 6% per year through
December 2008 payable quarterly by the issuance of non-interest bearing notes (paid-in-kind notes
or PIK notes) maturing at the same time as the Subordinated Note. The issuance of the PIK notes has
the effect of deferring cash interest expense on the Subordinated Note. Because the PIK notes do
not themselves bear interest, they do not have the effect of compounding any interest on these
interest payment obligations. Commencing December 2008, the Subordinated Note will bear interest at
16% per year payable quarterly in cash through the time of repayment in full of the Subordinated
Note. Principal on the Subordinated Note will be payable in equal installments of $19.95 million in
December 2009 and December 2010; the PIK notes are also due in equal installments of $7.2 million
on these same dates. Other Notes and Agreements On December 20, 2002, the Company entered into a $0.9 million deferred compensation agreement
with Dr. Bahman Atefi, its President, CEO and Chairman, as a condition to completing the
Transaction, with payment terms substantially equivalent to
those of the Mezzanine Note, and issued Dr. Atefi detachable warrants representing the right
to buy approximately 22,062 shares of Alion common stock at an exercise price of $10.00 per share,
with put rights similar to those contained in the warrants accompanying the Mezzanine Note. On
October 29, 2004, Dr. Atefi elected to redeem the amount due under his deferred compensation
agreement with Alion. Dr. Atefi was paid approximately $0.9 million, plus $0.2 million in accrued
interest. The warrants relating to the deferred compensation agreement remain outstanding. 14




---



##### 



On March 28, 2003, an officer of the Company purchased a portion of the Companys Mezzanine
Note owned by IITRI for $750,000, its face value, along with warrants to purchase 19,327 shares of
Alions common stock at an exercise price of $10.00 per share. On November 12, 2003, the Company
purchased the portion of the Mezzanine Note and warrants from the officer for an aggregate purchase
price of $1,034,020. On February 11, 2004, the Company borrowed $750,000 from an officer of the Company. In
exchange, on June 7, 2004, the Company issued a promissory note in the principal amount of $750,000
to the officer maturing on March 31, 2009. The promissory note bore interest at a rate of 15% per
year, payable quarterly beginning February 11, 2004. On December 9, 2004, the Company extinguished
the promissory note by paying the officer $750,000 plus accrued interest of $21,635. As of March 31, 2005, the remaining fiscal year principal repayments (at face amount before
debt discount) are as follows: 6-Fiscal Year Period ($ in millions)2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    TotalSenior Secured Term B Loan (1)
    
    $
    0.36
    
    
    $
    0.72
    
    
    $
    0.72
    
    
    $
    0.72
    
    
    $
    69.12
    
    
    $
    
    
    
    $
    71.64Subordinated Note (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19.95
    
    
    
    19.95
    
    
    
    39.90Subordinated Paid in Kind Note
(3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.18
    
    
    
    7.18
    
    
    
    14.36Total principal payments
    
    $
    0.36
    
    
    $
    0.72
    
    
    $
    0.72
    
    
    $
    0.72
    
    
    $
    96.25
    
    
    $
    27.13
    
    
    $
    125.90
   (1)
    
    The Term B Senior Credit Facility requires the Company to repay 1 percent of
the principal balance outstanding under the Senior Secured Term B Loan during each of the
first four years (i.e., fiscal years 2005 through 2008) of the Term B Senior Credit Facilitys
term and 96 percent of the principal balance outstanding during the fifth and final year of
the term. As of March 31, 2005, the Company had paid approximately $0.36 million in principal.
The Company is required to pay at least $0.36 million in principal during the remainder of
fiscal year 2005. The Term B Senior Credit Facility also requires the Company to make
mandatory prepayments of principal depending upon whether the Company generates certain excess
cash flow in a given fiscal year, issues certain equity, issues or incurs certain debt or
sells certain assets. Due to the uncertainty of these payments, the table does not reflect any
such payments. The remaining balance of approximately $71.6 million, as of March 31, 2005, is
shown net of approximately $2.8 million of
unamortized debt discount. The Company recorded approximately $3.3 million of debt issuance
costs as debt discount. 15




---



##### 



(2)
    
    Repayment of $39.9 million for the face value of the Subordinated Note in two equal
payments of $19.95 million in years 2009 and 2010. The $39.9 million as of March 31, 2005, is
shown net of approximately $5.2 million of unamortized debt discount, assigned to fair value
of the detachable warrants. At date of issuance, the Company recognized approximately $7.1
million as the fair value of the warrants in accordance with Emerging Issues Task Force Issue
No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially
settled in, a Companys Own Stock.(3)
    
    During the eight-year term of the Subordinated Note, approximately $14.4 million of
principal accretes to the note through the PIK. These amounts are included in the principal
payments in fiscal years 2009 and 2010. In fiscal years 2009 and 2010, interest at 16% will be
paid quarterly in cash on the original principal of $39.9 million. The principal, together
with the outstanding balance of the PIK notes, will be paid in equal amounts at the end of
fiscal years 2009 and 2010. (9) Redeemable Common Stock Warrants With the issuance of the Mezzanine Note, Subordinated Note, and the Deferred Compensation
Agreement described in Note 8, the Company issued 524,229, 1,080,437, and 22,062, respectively,
detachable redeemable common stock warrants (the Warrants) to the holders of those instruments. As
of July 1, 2004, IITRI transferred all of its rights, title and interest in its Warrants to IIT.
The Warrants have an exercise price of $10 per share and are exercisable until December 20, 2008
for the warrants associated with the Mezzanine Note and the Deferred Compensation Agreement and
until December 20, 2010 for the warrants associated with the Subordinated Note. The Warrants enable
the holders to sell the warrants back to the Company, at predetermined times, at the then current
fair value of the common stock less the exercise price. Accordingly, the Warrants are classified as
debt instruments in accordance with Emerging Issues Task Force Issue No. 00-19, Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock. On
the date of issuance, the Company recorded the estimated fair value of the Warrants of
approximately $10.3 million as a discount to the face value of the notes issued and as a liability
in the accompanying consolidated balance sheet. The estimated fair value of the Warrants was $35.7
million as of March 31, 2005. The change in the estimated fair value of the Warrants is recorded as
interest expense in the accompanying consolidated statements of operations. Warrant-related
interest expense for the three months ended March 31, 2005 and 2004, was $13.8 million and $0.9
million, respectively, and $14.7 million and $1.8 million for the six months ended March 31, 2005
and 2004, respectively. (10) Leases Future minimum lease payments under non-cancelable operating leases for buildings, equipment
and automobiles at March 31, 2005 are set out below. Under these operating leases, the Company
subleased some excess capacity to subtenants under non-cancelable operating leases. 16




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##### 



In connection with the IPS acquisition, the Company assumed two operating leases at
above-market rates and recorded a loss accrual of $4.4 million based on the estimated fair value of
the lease liabilities assumed; this is being amortized over the lease terms. The remaining
unamortized accrued loss was $3.4 million at March 31, 2005. In connection with the IPS
acquisition, the Company also acquired a related sublease at above-market rates. Based on the
estimated fair value of the sublease, the Company recognized an asset of $0.6 million which is
being amortized over the lease term. The remaining unamortized asset value was $0.5 million at
March 31, 2005. Fiscal years ending:
    
    (In thousands)2005 (for the remainder of fiscal year)
    
    $
    6,5802006
    
    
    13,1902007
    
    
    13,1622008
    
    
    12,1732009
    
    
    11,7512010
    
    
    8,391and thereafter
    
    
    3,989Gross lease payments
    
    
    69,236Less: non-cancelable subtenant receipts
    
    
    8,299Net lease payments
    
    $
    60,937
 Rent expense under operating leases was $2.9 million and $2.2 million for the three
months ended March 31, 2005 and 2004, respectively and $5.6 million and $4.4 million for the six
months ended March 31, 2005 and 2004, respectively. Sublease rental income under operating leases
was $0.4 million and $0.0 million for the three months ended March 31, 2005 and March 31, 2004,
respectively, and $0.9 million and $0.1 million for the six months ended March 31, 2005 and 2004,
respectively. (11) Fixed Assets Fixed assets consisted of the following: March 31,
    
    
    September 30,2005
    
    
    2004(in thousands)Leasehold improvements
    
    $
    2,281
    
    
    $
    1,992Equipment and software
    
    
    15,389
    
    
    
    13,358Total cost
    
    
    17,670
    
    
    
    15,350Less accumulated depreciation and
amortization
    
    
    6,341
    
    
    
    4,572Net fixed assets
    
    $
    11,329
    
    
    $
    10,778
 Depreciation and leasehold amortization expense for fixed assets was approximately $1.0
million and $0.7 million for the three months ended March 31, 2005 and 2004, respectively and $1.8
million and $1.3 million for the six months ended March 31, 2005 and 2004, respectively. 17




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##### 



(12) 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 Alion directors,
officers, employees, and consultants. Outstanding SAR awards cannot exceed the equivalent of 10% of
the Companys outstanding shares of common stock on a fully diluted basis. Upon exercise, a grantee
has the right to receive payment equal to the difference between the appraised value of a share of
Alion common stock as of the grant date and the appraised value of a share of Alion common stock as
of the exercise date per 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 March 31, 2005, under this
plan, the Company had granted 242,350 SARs summarized as follows: Number of
    
    
    Number of
    
    
    
    
    
    
    
    
    
    
    CumulativeSARs
    
    
    SARs granted
    
    
    Total Number
    
    
    
    
    
    
    Number ofEffective Date of
    
    Granted to
    
    
    to Board of
    
    
    of SARs
    
    
    Exercise
    
    
    SARsGrant
    
    Employees
    
    
    Directors
    
    
    Granted
    
    
    Price/Share
    
    
    GrantedDecember 23, 2002
    
    
    68,550
    
    
    
    29,400
    
    
    
    97,950
    
    
    $10.00/share
    
    
    97,950May 15, 2003
    
    
    300
    
    
    
    
    
    
    
    300
    
    
    $11.13/share
    
    
    98,250June 5, 2003
    
    
    300
    
    
    
    
    
    
    
    300
    
    
    $11.13/share
    
    
    98,550December 21, 2003
    
    
    131,200
    
    
    
    12,600
    
    
    
    143,800
    
    
    $14.71/share
    
    
    242,350
 As of March 31, 2005, approximately 21,260 SARs had been exercised and 14,580 SARs had
been forfeited resulting in approximately 206,510 SARs outstanding. On November 9, 2004, the plan
was amended; no further grants shall be made under this plan. On January 13, 2005, the Companys board of directors adopted a second SAR plan, the Alion
Science and Technology Corporation 2004 Stock Appreciation Rights Plan (the 2004 SAR Plan), to
comply with the deferred compensation provisions of the American Jobs Creation Act of 2004. The 2004 SAR Plan has a 10-year term. Awards may be granted under the plan to Alion directors,
officers, employees and consultants. Outstanding SAR awards cannot exceed the equivalent of 10% of
the Companys outstanding shares of common stock on a fully diluted basis. Awards to employees vest
over four years at 25% per year and awards to directors vest ratably over each directors term of
service. SARs may be exercised at anytime after grant to the extent they have vested. 18




---



##### 



Upon exercise, a grantee has the right to receive payment equal to the difference between the
appraised value of a share of Alion common stock as of the grant date and the appraised value of a
share of Alion common stock as of the exercise date per the most recent valuation of the common
stock held by the ESOP. As of March 31, 2005, under this plan, the Company has granted 175,900
outstanding SARs summarized as follows: Number of
    
    
    Number of SARs
    
    
    Total Number
    
    
    
    
    
    
    CumulativeEffective Date
    
    SARs Granted
    
    
    granted to Board
    
    
    of SARs
    
    
    Exercise
    
    
    Number ofof Grant
    
    to Employees
    
    
    of Directors
    
    
    Granted
    
    
    Price/Share
    
    
    SARs GrantedFebruary 1, 2005
    
    
    161,300
    
    
    
    12,600
    
    
    
    173,900
    
    
    $19.94/share
    
    
    173,900March 7, 2005
    
    
    2,000
    
    
    
    
    
    
    
    2,000
    
    
    $19.94/share
    
    
    175,900
 As of March 31, 2005, no SARs have been exercised and 1,000 SARs have been forfeited
under this plan. For the three months ended March 31, 2005 and 2004, the Company recognized approximately $0.9
million and $0.1 million, respectively, in compensation expense associated with the two SAR plans
and $1.0 million and $0.2 million for the six months ended March 31, 2005 and 2004, respectively. (13) Phantom Stock Program In February 2003, the compensation committee of Alions board of directors approved, and the
board of directors subsequently adopted, the Companys phantom stock plan (the Initial Phantom
Stock Plan). 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 Initial 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. The phantom
stock awards vest according to the following schedule: Vested Amount for Grant inFebruary
    
    NovemberAnniversary from Grant Date
    
    2003
    
    20031st
    
    
    
    20%2nd
    
    
    
    20%3rd
    
    50%
    
    20%4th
    
    25%
    
    20%5th
    
    25%
    
    20%
 19




---



##### 



As of March 31, 2005, the Company had 223,685 shares of phantom stock outstanding under
the Initial Phantom Stock Plan summarized as follows: Shares of
    
    
    CumulativePhantom Stock
    
    
    Shares ofawarded to
    
    
    Phantom StockEffective date of Grant
    
    employees
    
    
    awardedFebruary 11, 2003
    
    
    171,000
    
    
    
    171,000November 11, 2003
    
    
    52,685
    
    
    
    223,685
 On November 9, 2004, the Companys compensation committee approved, and the full board
adopted, The Alion Science and Technology Corporation Performance Shares and Retention Phantom
Stock Plan (the Second Phantom Stock Plan) to comply with the requirements of the American Jobs
Creation Act. Awards granted under the Second Phantom Stock Plan may not exceed 2.0 million shares
of Alion common stock. Awards under the Second Phantom Stock Plan vest three years from date of grant (unless
otherwise provided in an individual award agreement), provided that the grantee is still employed
by the Company. Grants are to be paid out five years and sixty days from the date of grant. Under
limited circumstances, a grantee may defer an award payout beyond the original date. Both the
Initial Phantom Stock Plan and the Second Phantom Stock Plan contain provisions for acceleration of
vesting and payouts in connection with an employees death, disability, involuntary termination of
employment without cause or a change in control of the Company. The Second Phantom Stock Plan permits awards of retention share phantom stock and performance
share phantom stock. A retention award is for a fixed number of shares determined at the date of
grant. A performance award is for an initial number of shares subject to change at the vesting
date. Performance phantom shares are subject to forfeiture for failure to achieve a specified
threshold value for a share of the Companys common stock as of the vesting date. If the value of a
share of the Companys common stock equals the threshold value but does not exceed the target
value, the number of performance shares in a given grant may be decreased by a specified percentage
(generally up to 50%). If, the value of a share of the Companys common stock exceeds a
pre-established target price on the vesting date, the number of performance shares in a given grant
may be increased by a specified percentage (generally up to 20%). On February 15, 2005, the Company granted 98,399 shares of retention incentive phantom stock
and 207,788 shares of performance incentive phantom stock to executive officers of the Company
pursuant to the Second Phantom Stock Plan. Depending on the future financial performance of the
Company, grantees may vest in performance incentive phantom shares at a greater (up to 20% more) or
lesser (up to 50% less) number of shares than the target number of shares disclosed above. For the three months ended March 31, 2005 and 2004, the Company recognized approximately $1.5
million and $0.3 million, respectively, in compensation expense
associated with the phantom stock plans, and $1.9 million and $0.7 million for the six months
ended March 31, 2005 and 2004, respectively. 20




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##### 



(14) 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, and nuclear safety and analysis under contracts with the
federal, state and local governments, and commercial customers. The Companys federal government
customers typically exercise independent contracting authority, and even offices or divisions
within an agency or department may directly, or through a prime contractor, use the Companys
services as a separate customer so long as that customer has independent decision-making and
contracting authority within its organization. Contract receivables from agencies of the federal government represented approximately $64.7
million, or 96%, of accounts receivable at March 31, 2005 and $68.6 million, or 96%, of accounts
receivable at September 30, 2004. Contract revenues from agencies of the federal government
represented approximately 98% of total contract revenues for each of the six month periods ended
March 31, 2005 and 2004. During the six months ended March 31, 2005, the Company had no sales to any customers within a
single country (except for the United States) where the sales accounted for 10% or more of total
revenue. The Company treats sales to U.S. Government customers as sales within the United States
regardless of where services are performed. Substantially all of the Companys assets were located
within the United States for the six months ended March 31, 2005. (15) Business Combinations Acquisition of Innovative Technologies Solutions Corporation On October 31, 2003, Alion acquired 100% of the outstanding stock of Innovative Technologies
Solutions Corporation (ITSC) for $4.0 million. As of March 31, 2005, the transaction is subject to
a remaining earn out provision not-to-exceed $1.5 million. ITSC is a New Mexico corporation that,
at the time of acquisition, had approximately 53 employees, most of whom were located in New
Mexico. ITSC provides nuclear safety and analysis services to the U.S. Department of Energy (DOE)
as well as to the commercial nuclear power industry. As of March 31, 2005, the Company has recorded
approximately $4.1 million of goodwill relating to this acquisition. ITSCs results of operations
are included in Alions operations from the date of acquisition. The pro forma impact of this
acquisition was not significant. 21




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##### 



Acquisition of Identix Public Sector, Inc. On February 13, 2004, Alion acquired 100% of the outstanding stock of Identix Public Sector,
Inc. (IPS) for $8.0 million in cash. Founded in 1980, IPS is based in Fairfax, Virginia and
provides program and acquisition management, integrated logistics support, and foreign military
support primarily to U.S. Navy customers. IPS was a wholly-owned subsidiary of Identix Incorporated
(Identix). In the three months following closing, the Company paid Identix approximately $2.6 million for
intercompany payables. Per the agreement, the Company placed a payment of $0.5 million in escrow
contingent on the Company having the opportunity to compete or bid for services on certain
government solicitations. As of March 31, 2005, the Company has recorded approximately $6.3 million of goodwill relating
to the IPS acquisition and approximately $0.9 million of purchased contracts being amortized over
three years. The results of operations for IPS are included in Alions operations from the date of
acquisition. The table below sets out the unaudited pro forma effects of the IPS acquisition on the
Companys revenue, net income and earnings per share as though the IPS acquisition had taken place
on the first day of fiscal year 2004. The unaudited pro forma information does not purport to be
indicative of the results of operations that would have actually been achieved if the transaction
had occurred on the date indicated or the results of operations that will be reported in the
future. Three Months Ended March 31, 2004IPS Pro
    
    
    Alion ProAlion
    
    
    Forma
    
    
    FormaRevenue
    
    $
    64,712
    
    
    $
    3,291
    
    
    $
    68,003Net loss
    
    $
    (3,386
    )
    
    $
    (95
    )
    
    $
    (3,481
    )Weighted average
shares outstanding
    
    
    2,923,783
    
    
    
    2,923,783
    
    
    
    2,923,783Loss per share
    
    $
    (1.16
    )
    
    $
    (0.03
    )
    
    $
    (1.19
    )
 Six Months Ended March 31, 2004IPS Pro
    
    
    Alion ProAlion
    
    
    Forma
    
    
    FormaRevenue
    
    $
    123,303
    
    
    $
    11,291
    
    
    $
    134,594Net loss
    
    $
    (7,729
    )
    
    $
    (87
    )
    
    $
    (7,816
    )Weighted average
shares outstanding
    
    
    2,947,294
    
    
    
    2,947,294
    
    
    
    2,947,294Loss per share
    
    $
    (2.62
    )
    
    $
    (0.03
    )
    
    $
    (2.65
    )
 22




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##### 



Acquisition of Countermeasures, Inc. On October 28, 2004, Alion purchased substantially all of the assets of Countermeasures, Inc.
for approximately $2.4 million. At the time of acquisition, Countermeasures, Inc. had two employees
and was located in Hollywood, Maryland. As of March 31, 2005, the Company has recorded
approximately $1.4 million in goodwill relating to this acquisition. The allocation of purchase price is preliminary as the Company completes its valuation of the
fair value of assets acquired and liabilities assumed. The results of operations for
Countermeasures, Inc. are included in Alions operations from the date of acquisition. The pro
forma impact of this acquisition was not significant. Acquisition of ManTech Environmental Technology, Inc. On February 11, 2005, Alion acquired 100% of the outstanding stock of ManTech Environmental
Technology, Inc. (METI), an environmental and life sciences research and development company for
approximately $7.0 million in cash. METI conducts research and performs support services in
environmental and life sciences for the Environmental Protection Agency (EPA), the National
Institute of Health (NIH), the Department of Defense (DoD), the Department of Homeland Security,
the Department of Energy and other agencies and organizations. METI was headquartered in Research
Triangle Park, NC. As of March 31, 2005, the Company has recorded $5.3 million in goodwill related to this
acquisition. The allocation of purchase price is preliminary as the Company completes its valuation
of assets acquired and liabilities assumed. The pro forma impact of this acquisition was not
significant. Acquisition of Carmel Applied Technologies, Inc. On February 25, 2005 Alion acquired 100% of the outstanding stock of Carmel Applied
Technologies, Inc. (CATI), a flight training software and simulator development company, for
approximately $7.3 million in cash. The transaction is subject to an earn out provision
not-to-exceed a cumulative amount of $9.0 million based on attaining certain cumulative revenue
goals for fiscal years 2005, 2006, and 2007, and a second earn out provision not-to-exceed $1.5
million for attaining certain revenue goals in the commercial aviation industry. As of March 31, 2005, the Company has recorded $6.6 million in goodwill related to this
acquisition. The allocation of purchase price is preliminary as the Company completes its valuation
of assets acquired and liabilities assumed. The pro forma impact of this acquisition was not
significant. 23




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##### 



Investment in VectorCommand Ltd. On March 22, 2005, Alion acquired approximately 12.5% of the A ordinary shares in
VectorCommand Ltd. for $1.5 million which investment is accounted for at cost. VectorCommand Ltd.,
which is headquartered in the United Kingdom, designs and develops technologies used in training
and operations by emergency managers and incident commanders in Australia, Europe, North America
and the United Kingdom. (16) Related Party Transactions On October 29, 2004, Dr. Atefi elected to redeem the amount due under his Deferred
Compensation Agreement with Alion. Dr. Atefi was paid approximately $1.1 million including accrued
interest of approximately $0.2 million. Dr. Atefis related warrants remain outstanding. On December 9, 2004, the Company extinguished a Promissory Note held by an officer of the
Company. Alion paid the officer $750,000 plus accrued interest of $21,635. (17) Commitments and Contingencies Earn Out Commitments The Company has earn out commitments related to the following acquisitions: AB
Technologies (AB Tech) - Earn out is based on an agreed-upon formula applied to net income
of the business units that formerly comprised AB Tech. The earn out obligation period expired on
February 7, 2005, the fifth anniversary of the original acquisition date. As of March 31, 2005,
approximately $1.4 million of earn out has been recorded for fiscal year 2005. ITSC
- Earn out is based on a portion of the gross revenue of the business units that formerly
comprised ITSC. As of March 31, 2005, the transaction is subject to a remaining earn out provision
not-to-exceed $1.5 million. The obligation continues through September 30, 2005. CATI
- Earn out is based on the performance of the business units that formerly comprised
CATI. The transaction is subject to an earn out provision not-to-exceed a cumulative amount of
$9.0 million based on attaining certain revenue goals for fiscal years 2005, 2006, and 2007, and a
second earn out provision not-to-exceed $1.5 million for attaining certain revenue goals in the
commercial aviation industry. The obligation continues through February 25, 2007. In the opinion of management, the realization of the amounts due under these arrangements will
not have a material adverse effect upon the financial position, results of operations, or the
liquidity of the Company. 24




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##### 



Legal Proceedings On December 23, 2004, the estate of Joseph Hudert filed an action against Grunley-Walsh Joint
Venture, L.L.C. (Grunley-Walsh) and the Company in the District of Columbia Superior Court for
damages in excess of $80 million. On January 6, 2005, the estate of Frank Stotmeister filed an
action against the Company in the same court on six counts, some of which are duplicate causes of
action, claiming $30 million for each count. Several other potential defendants may be added to
these actions in the future. The suits arose in connection with a steam pipe explosion that occurred on or about April 23,
2004 on a construction site at 17th Street, N.W. in Washington, D.C. The plaintiffs died,
apparently as a result of the explosion. They were employees of the prime contractor on the site,
Grunley-Walsh, and the subcontractor, Cherry Hill Construction Company Inc., respectively.
Grunley-Walsh had a contract with the U.S. General Services Administration (GSA) for construction
on 17th Street N.W. near the Old Executive Office Building in Washington, D.C. Sometime after the
award of Grunley-Walshs construction contract, Alion was awarded a separate contract by GSA.
Alions responsibilities on this contract were non-supervisory monitoring of Grunley-Walshs
activities and report to GSA any deviations from contract requirements. The Company intends to defend these lawsuits vigorously, and based on the facts currently
known to the Company. The Companys management does not believe that these lawsuits will have a
materially adverse effect upon the Company, its operations or its financial condition. Alions primary provider of general liability insurance, St. Paul Travelers, has assumed
defense of these lawsuits subject to a reservation of rights to deny coverage. American
International Group, the Companys excess insurance carrier, has also been notified regarding these
lawsuits. Other than the foregoing action, 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. Government Audits The amount of government contract expense reflected in the consolidated financial statements
attributable to cost reimbursement contracts is subject to audit and possible adjustment by the
Defense Contract Audit Agency (DCAA). The government considers the Company to be a major contractor
and DCAA maintains an office on site to perform its various audits throughout the year. DCAA has
concluded its audits of the Companys indirect costs and cost accounting practices through fiscal
year 2001. There were no significant disallowances for fiscal years ended September 31, 2000 and
2001. The results of the negotiation of the indirect rates for fiscal year 2002 and the completion
of the indirect rate audits and indirect rate negotiations for 2003 and 2004 are not expected
to have a material effect on the results of future operations. 25




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##### 



(18) Subsequent events Acquisition of JJMA On April 1, 2005, the Company acquired all of the outstanding capital stock of John J.
McMullen Associates, Inc., a New York corporation (JJMA), in a stock purchase transaction. The
Company paid the equity holders of JJMA approximately $58.67 million at closing, including
distributions of JJMA cash on hand. The Company also issued 1,347,197 shares of Alion common stock
to the John J. McMullen Associates, Inc. Employee Stock Ownership Trust at $27.65 per share, which
price was determined based on a valuation report from Houlihan, Lokey, Howard & Zukin Financial
Advisors, Inc. (Houlihan, Lokey) dated as of March 28, 2005. Upon the closing, the John J.
McMullen Associates, Inc. Employee Stock Ownership Plan (JJMA ESOP) and JJMAs existing 401(k)
plan (JJMA 401(k) Plan) merged into Alions KSOP. The transaction also provides for approximately
$8.4 million in deferred payments to certain individual equity holders of JJMA, payable at various
times over a three year period, and subject to set-off for certain indemnity obligations. The
aggregate purchase price for JJMA in cash and common stock, including any future payment
obligations and excluding approximately $5.8 million of JJMA cash on hand to be distributed to the
JJMA equity holders at closing and in deferred payments, is approximately $97.5 million. Incorporated in 1959, JJMA provides shipbuilding and ship repair clients with detail designs
and engineering support teams to provide design and construction support for new ship programs,
ship conversions, fleet engineer support, and for ship system modifications. JJMA also provides
hazardous material control and management services, including pollution prevention, waste
management, regulatory compliance, OSHA/EPA training, logistics research and analysis, affirmative
procurement, and operation of hazardous material distribution centers. Amendment One to the Credit Suisse First Boston Term B Senior Credit Facility On April 1, 2005, the Company entered into an incremental term loan facility and Amendment One
to our Term B Senior Credit Facility (as described in Note 8), which added $72 million in term
loans to our total indebtedness under our Term B Senior Credit Facility. Set forth below is a
summary of the terms of the Term B Senior Credit Facility, as modified by the incremental term loan
and the amendment. The Term B Senior Credit Facility has a term of five years and consists of:  
    a senior term loan in the approximate amount of $143.6 million (which includes the
incremental term loan), all of which was drawn down as of April 1, 2005; 26




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##### 




    a senior revolving credit facility, in the amount of $30.0 million, of which
approximately $0.66 million is deemed borrowed as of April 1, 2005, through the
issuance of letters of credit issued under our prior senior credit facility which
remain outstanding under the Term B Senior Credit Facility and the issuance of one
additional letter of credit directly under the Term B Senior Credit Facility; and
    an uncommitted incremental term loan accordion facility in the amount of $150.0
million in addition to the incremental term loan facility we entered into as of April
1, 2005. Until the quarter ending December 31, 2008, the Company is obligated to pay quarterly
installments of principal on the senior term loan in the amount of $360,000. On December 31, 2008,
March 31, 2009, June 30, 2009 and August 2, 2009, the Company is obligated to pay installments of
principal in the amount of $34,650,000. The senior term loan and the senior revolving credit facility each may bear interest at either
of two floating rates. The Company may elect that interest be payable on the $143.6 million senior
term loan at an annual rate equal to the prime rate charged by CSFB plus 125 basis points or at an
annual rate equal to the Eurodollar rate plus 225 basis points. As of April 1, 2005, the CSFB prime
rate was 7.0% (i.e. 5.75% plus 1.25% CSFB spread) and the Eurodollar rate was approximately 5.35%
(i.e. 3.1% plus 2.25% Eurodollar spread. LIBOR refers to the London Interbank Offered Rate at
which major banks are willing to lend Eurodollars). The Company has elected to have the Senior
Secured Term B Loan bear interest at the Eurodollar rate. The Term B Senior Credit Facility requires the Company to enter into an interest rate hedge
agreement acceptable to CSFB which fixes or caps the actual interest rate the Company will pay on
no less than 40 percent of the long-term indebtedness. Prior to the execution of Amendment One, as
of March 31, 2005, the Company had approximately $71.6 million in principal amount of indebtedness
outstanding under the Term B Senior Credit Facility, of which approximately $37.4 million was
covered by an interest rate hedge agreement. Per the interest rate hedge agreement, the interest
rate on approximately $37.4 million of the $71.6 million was capped at 7.41% (i.e., LIBOR cap of
4.66% plus 2.75% Eurodollar spread). Pursuant to the execution of Amendment One on April 1, 2005,
the following has occurred:  1)
    the Company elected to have the incremental $72.0 million bear interest at
the Eurodollar rate,2)
    on April 7, 2005, the Company entered into a second interest rate hedge
agreement which covers $28.0 million of the incremental $72.0 million, so that the
interest rate on approximately $28.0 million of the $72.0 million incremental loan
amount is capped at 7.25% (i.e., LIBOR cap of 5.00% plus 2.25% Eurodollar spread), and 27




---



##### 



3)
    the interest on $37.3 million (i.e., the previously capped portion of the
initial $71.6 million in principal amount of indebtedness outstanding under the Term B
Senior Credit Facility) has been reset and capped at a maximum rate of 6.91% (i.e.,
LIBOR cap of 4.66% plus 2.25% Eurodollar spread). For this second cap agreement, the
Company paid a senior lender $117,000. As of April 7, 2005, a total of approximately
$65.3 million, or 45.5%, of the $143.6 million drawn under the Term B Senior Credit
facility is at a capped interest rate. On April 1, 2005, the Company borrowed $72.0 million in an incremental term loan under the
Term B senior credit facility. The Company used approximately $58.7 million of the incremental
term loan proceeds to pay a portion of the JJMA acquisition price, and approximately $1.25 million
to pay certain transaction fees associated with the incremental term loan. The remaining portion of
the $72.0 million incremental term loan facility will be used to finance permitted acquisitions and
for general corporate purposes, among other things. 28




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##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read
together with the consolidated financial statements and the notes to those statements. This
discussion contains forward-looking statements that involve risks and uncertainties. These
statements relate to our future plans, objectives, expectations and intentions and are for
illustrative purposes only. These statements may be identified by the use of words such as
believe, expect, intend, plan, anticipate, likely, will, pro forma, forecast,
projections, could, estimate, may, potential, should, would, and similar expressions. The factors that could cause actual results to differ materially from those anticipated
include, but are not limited to, the following: changes to the ERISA laws related to the Companys
Employee Ownership, Savings and Investment Plan; changes to the tax laws relating to the treatment
and deductibility of goodwill, the Companys subchapter S status, or any change in the Companys
effective tax rate; additional costs associated with compliance with provisions of the
Sarbanes-Oxley Act of 2002, including any changes in the SECs rules, and other corporate
governance requirements; failure of government customers to exercise options under contracts;
funding decisions relating to U.S. Government projects; government contract procurement (such as
bid protest) and termination risks; competitive factors such as pricing pressures and/or
competition to hire and retain employees; the results of current and/or future legal proceedings
and government agency proceedings which may arise out of our operations (including our contracts
with government agencies) and the attendant risks of fines, liabilities, penalties, suspension
and/or debarment; undertaking acquisitions that could increase our costs or liabilities or be
disruptive; taking on additional debt to fund acquisitions; failure to adequately integrate
acquired businesses; material changes in laws or regulations applicable to the Companys
businesses; as well as other risk factors discussed in the Companys annual report on Form 10-K for
the year ended December 31, 2004 (File No. 333-89756) filed with the SEC on December 28, 2004, and
Post-Effective Amendment No. 5 to the Companys registration statement on Form S-1 (File No.
333-89756) filed with the SEC on January 24, 2005. Readers are cautioned not to place undue reliance on these forward-looking statements, which
reflect managements view only as of May 16, 2005. The Company undertakes no obligation to update
any of the forward-looking statements made herein, whether as a result of new information, future
events, changes in expectations or otherwise. This discussion addresses only our continuing
operations. Critical Accounting Estimates and Policies Our significant accounting policies are described in Note 2 to the consolidated financial
statements included in Post-Effective Amendment No. 5 to the Companys
registration statement on Form S-1 (No. 333-89756) filed with the SEC on January 24, 2005. 29




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##### 



Critical accounting policies are defined as those that are reflective of significant judgments
and uncertainties, which potentially result in materially different results under different
assumptions and conditions. Application of these policies is a critical element in the portrayal of
our financial condition and results of operations. The discussion and analysis of our financial
condition and results of operations are based on our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States of
America. The preparation of these quarterly consolidated financial statements requires management
to make estimates and judgments that affect the reported amount of assets, liabilities, revenues
and expenses. Actual results may differ from these estimates under different assumptions or
conditions. Our critical accounting policies are set forth below: Revenue Recognition, Cost Estimation and Payment We recognize revenue when persuasive evidence of an arrangement exists, services have been
rendered, the contract price is fixed or determinable, and collectibility is reasonably assured. We
have a standard internal process that we use to determine whether all required criteria for revenue
recognition have been met. This standard internal process includes a monthly review of contract
revenues and expenses by several levels of management. This review covers, among other matters,
progress against schedule, project staffing and levels of effort, risks and issues, subcontract
management, incurred and estimated costs, and disposition of prior action items. This monthly
internal review is designed to determine whether the overall progress on a contract is consistent
with the effort expended and revenue recognized to date. Our revenues consist primarily of payments for the work of our employees, and to a lesser
extent, related costs for materials and subcontract efforts under contracts with our customers.
Cost of services consists primarily of compensation expenses for program personnel, the fringe
benefits associated with this compensation, and other direct expenses incurred to complete
programs, including cost of materials and subcontract efforts. The Companys revenue results from contract research and other services under a variety of
contracts, some of which provide for reimbursement of cost plus fees and others of which are
fixed-price or time-and-material type contracts. Absent evidence to the contrary, we recognize
revenues as follows:  
    Cost-reimbursement contracts  revenue is recognized as costs are incurred and
include an estimate of applicable fees earned.
    Fixed-price contracts  revenue is recognized using the percentage-of-completion
method based on various performance measures. From time to time, facts develop that
require the Company to revise its estimated total costs or revenues expected. The cumulative effect of revised estimates is recorded in the
period in which the facts requiring revisions become known. The full amount of
anticipated losses on any type of contract are recognized in the period in which they
become known.
    Time-and-material contracts  revenue is recognized at contractually billable rates
as labor hours and direct expenses are incurred. Labor and related costs are
reimbursed at negotiated, fixed hourly rates. 30




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##### 



The following table summarizes the percentage of revenues attributable to each contract type
for the periods indicated. For the Six Months Ended March 31,Contract Type
    
    2005
    
    
    2004(in millions)Cost-reimbursement
    
    $
    90
    
    
    
    60
    %
    
    $
    77
    
    
    
    63
    %Fixed-price
    
    $
    28
    
    
    
    19
    %
    
    $
    17
    
    
    
    14
    %Time-and-material
    
    $
    32
    
    
    
    21
    %
    
    $
    29
    
    
    
    23
    %Total
    
    $
    150
    
    
    
    100
    %
    
    $
    123
    
    
    
    100
    %
 Contracts with agencies of the federal government are subject to periodic funding by the
contracting agency concerned. Funding for a contract may be provided in full at inception of the
contract or ratably throughout the term of the contract as the services are provided. If funding is
not assessed as probable, revenue recognition is deferred until realization is probable. Contract costs on federal government contracts, including indirect costs, are subject to audit
by the federal government and adjustment pursuant to negotiations between the Company and
government representatives. All of the Companys federal government contract indirect costs have
been audited and negotiated through fiscal year 2001. Contract revenues on federal government
contracts have been recorded in amounts that are expected to be realized upon final settlement.
Government audit of fiscal year 2002 on indirect costs has been completed pending final negotiation
of the indirect rates. Audit for fiscal year 2003 is in process. The Company submitted its fiscal
year 2004 indirect cost submission on March 29, 2005. The Company recognizes revenue on unpriced change orders as expenses are incurred only to the
extent that the Company expects it is probable that such costs will be recovered. The Company
recognizes revenue in excess of costs on unpriced change orders only when management can also
reliably estimate the amount of excess and experience provides a sufficient basis for recognition.
The Company recognizes revenue on claims as expenses are incurred only to the extent that the
Company expects it is probable that such costs will be recovered and the amount of recovery can be
reliably estimated. 31




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##### 



Contract revenue recognition inherently involves estimation. Examples of estimates include the
contemplated level of effort to accomplish the tasks under contract, the cost of the effort, and
the ongoing assessment of our progress towards completing the contract. From time to time, as part
of our standard management processes, facts develop that require us to revise our estimated total
costs or revenues. In most cases, these revisions relate to changes in the contractual scope of our
work. To the extent that a revised estimate affects contract profit or revenue previously
recognized, we record the cumulative effect of the revision in the period in which the facts
requiring the revision become known. Anticipated losses are recognized in the accounting period in
which they are first determined. Our most significant expense is our cost of services, which consists primarily of direct labor
costs for program personnel and direct expenses incurred to complete contracts, including cost of
materials and subcontract efforts. Our ability to accurately predict personnel requirements,
salaries and other costs, as well as to manage personnel levels and successfully redeploy
personnel, can have a significant impact on our cost of services. Overhead costs consist primarily
of indirect costs such as facility lease expenses, indirect labor expenses, supplies and other
office expenses in support of our direct contract activities. General and administrative expenses
consist primarily of costs associated with our management, finance and administrative groups;
personnel training; sales and marketing expenses which include bid and proposal efforts; and
certain occupancy, travel and other corporate costs. The majority of our revenue is earned under contracts with various departments and agencies,
or prime contractors, of the federal government. Certain revenues and payments we receive are based
on provisional billings and payments that are subject to adjustment under audit. Federal government
agencies and departments have the right to challenge our cost estimates and allocations with
respect to government contracts. Also, contracts with such agencies are subject to audit and
possible adjustment to account for unallowable costs under cost-type contracts or other regulatory
requirements that affect both cost-type and fixed-price contracts. The following table sets forth, for each period indicated, the percentage of our revenues
derived from each of our major types of customers. For the Six Months Ended March 31,Contract Type
    
    2005
    
    
    2004(in millions)U.S. Department of Defense (DoD)
    
    $
    139
    
    
    
    93
    %
    
    $
    114
    
    
    
    92
    %Other Federal Civilian Agencies
    
    $
    8
    
    
    
    5
    %
    
    $
    7
    
    
    
    6
    %Commercial / State / Local and
International
    
    $
    3
    
    
    
    2
    %
    
    $
    2
    
    
    
    2
    %Total
    
    $
    150
    
    
    
    100
    %
    
    $
    123
    
    
    
    100
    %
 32




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##### 



Goodwill and Identifiable Intangible Assets The Company accounts for goodwill and other intangible assets in accordance with the
provisions of SFAS No. 142. The Company does not amortize goodwill; it reviews goodwill for
impairment at least annually at the end of each fiscal year. The Company assesses the impairment of
goodwill and identifiable intangible assets whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. 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 acquired assets or overall business
strategy;
    Significant negative industry or economic trends; and
    Significant decline in Alions stock price for a sustained period. If the Company determines the carrying value of intangibles or goodwill may not be
recoverable, management measures any impairment using a projected discounted cash flow or other
appropriate measure of fair value, including independent valuation. As of March 31, 2005, the Company has goodwill of approximately $101.1 million, subject to an
annual impairment review. As of March 31, 2005, the Company has recorded approximately $8.3 million
of intangible assets comprised primarily of the value assigned to purchased contracts. The
intangible assets have an estimated useful life of one to three years and are amortized using the
straight-line method. Results of Operations Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004 The table below reflects the approximate impact of the following events and circumstances as
they relate to the financial performance of Alion for the three months ended March 31, 2005 and
2004. The discussion of the results of operations includes references to the selected financial
information in the table below in conjunction with the Companys consolidated financial statements
provided elsewhere in this document. The selected financial information in the table is based on
estimates of Alion management.  
    On October 31, 2003, Alion completed the acquisition of Integrated Technology
Solutions Corporation (ITSC). The operating results for ITSC are separately
identifiable within the consolidated results of operations.
    On February 13, 2004, Alion completed the acquisition of Identix Public Sector,
Inc. (IPS) . The operating results for IPS are separately identifiable within the
consolidated results of operations. 33




---



##### 




    On October 28, 2004, Alion purchased substantially all of the assets of
Countermeasures, Inc. The operating results for Countermeasures, Inc. are not
separately identifiable within the consolidated results of operations.
    On February 11, 2005, Alion acquired ManTech Environmental Technology, Inc. (METI).
The operating results for METI are separately identifiable within the consolidated
results of operations.
    On February 25, 2005, Alion acquired Carmel Applied Technologies, Inc. (CATI). The
operating results for CATI are separately identifiable within the consolidated results
of operations.
    References to the acquired operations includes the operating results of ITSC, IPS,
METI, and CATI. Three Months Ended March 31, 2005
    
    
    Three Months Ended March 31, 2004Consolidated
    
    
    
    
    
    
    
    
    
    
    ConsolidatedOperations of Alion
    
    
    
    
    
    
    
    
    
    
    Operations of AlionConsolidated
    
    
    Acquired
    
    
    less the Acquired
    
    
    Consolidated
    
    
    Acquired
    
    
    less the AcquiredFinancial information (in millions)
    
    Operations of Alion
    
    
    Operations
    
    
    Operations
    
    
    Operations of Alion
    
    
    Operations
    
    
    OperationsTotal revenue
    
    $
    80.7
    
    
    $
    9.4
    
    
    $
    71.3
    
    
    $
    64.7
    
    
    $
    5.7
    
    
    $
    59.0Material and subcontract revenue
    
    
    22.5
    
    
    
    2.8
    
    
    
    19.7
    
    
    
    14.8
    
    
    
    2.4
    
    
    
    12.4Total direct contract expenses
    
    
    59.4
    
    
    
    6.9
    
    
    
    52.5
    
    
    
    46.4
    
    
    
    4.5
    
    
    
    41.9Major components of direct contract expenseDirect labor cost
    
    
    35.8
    
    
    
    4.0
    
    
    
    31.8
    
    
    
    30.1
    
    
    
    2.1
    
    
    
    28.0Other direct cost (ODC)
    
    
    1.8
    
    
    
    0.1
    
    
    
    1.7
    
    
    
    2.0
    
    
    
    0.1
    
    
    
    1.9Material and subcontract (M&S) cost
    
    
    21.8
    
    
    
    2.7
    
    
    
    19.1
    
    
    
    14.3
    
    
    
    2.3
    
    
    
    12.0Gross profit
    
    
    21.2
    
    
    
    2.5
    
    
    
    18.7
    
    
    
    18.3
    
    
    
    1.2
    
    
    
    17.1Total operating expense
    
    
    22.7
    
    
    
    2.1
    
    
    
    20.6
    
    
    
    17.9
    
    
    
    1.1
    
    
    
    16.8Major components of operating expenseIndirect personnel and facilities
    
    
    7.2
    
    
    
    1.1
    
    
    
    6.0
    
    
    
    6.5
    
    
    
    0.6
    
    
    
    5.9General and administrative
    
    
    7.7
    
    
    
    0.8
    
    
    
    6.9
    
    
    
    7.6
    
    
    
    0.5
    
    
    
    7.1Depreciation and amortization
    
    
    3.8
    
    
    
    0.1
    
    
    
    3.7
    
    
    
    3.3
    
    
    
    
    
    
    
    3.3Stock-based compensation
    
    
    3.7
    
    
    
    
    
    
    
    3.7
    
    
    
    0.5
    
    
    
    
    
    
    
    0.5Income (loss) from operations
    
    
    (1.4
    )
    
    
    0.5
    
    
    
    (1.9
    )
    
    
    0.4
    
    
    
    0.2
    
    
    
    0.2Other income and expense
    
    
    (15.9
    )
    
    
    
    
    
    
    (15.9
    )
    
    
    (3.8
    )
    
    
    
    
    
    
    (3.8
    )Income tax benefit / (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (17.4
    )
    
    $
    0.5
    
    
    $
    (17.9
    )
    
    $
    (3.4
    )
    
    $
    0.2
    
    
    $
    (3.6
    )
    The financial information attributed to these entities are the estimates of management. Revenues.Revenues increased $16.0 million to $80.7 million, or 24.7%, from $64.7 million
for the three months ended March 31, 2005, and 2004, respectively. Acquired operations generated
approximately $3.7 million of the increase and $12.3 million came primarily from work on contracts
that were in existence during the prior year. For the three months ended March 31, 2005, our performance of additional work under contracts
that were in existence during the prior year includes an increase of approximately $6.4 million
related to support under the Modeling & Simulation Information Analysis Center (MSIAC) contract, an
increase of approximately $3.0 million in our services under the U.S. Army Night Vision Lab
Hightech Omnibus (Night Vision) contract, and an increase of approximately $2.1 million related
to increased support under the Mobile Parts Hospital contract with the Tank Armaments and
Automotive Command (TACOM). On the balance of our contracts, revenue increased approximately $0.8
million for the three months ended March 31, 2005 as compared to the three months ended March 31,
2004. 34




---



##### 



As a component of revenue, material and subcontract (M&S) revenue increased approximately $7.7
million to $22.5 million, or 52.0%, from $14.8 million for the three months ended March 31, 2005
and 2004, respectively. Approximately $0.4 million of the increase was generated by contracts
performed by the acquired operations and approximately $7.3 million was generated by contracts that
were in existence during the prior year. Of the $7.3 million increase, approximately $2.0 million
was related to increased support to TACOM, approximately $2.3 million related to the Night Vision
contract, and approximately $1.6 million was related to support under the MSIAC contract with the
Defense Information Systems Agency. The remaining $1.4 million increase was attributable to various
other contracts. As a percentage of total revenue, M&S revenue increased approximately 5.0% to
27.9% from 22.9% for the three months ended March 31, 2005 and 2004, respectively. The increase
comes partially from M&S work performed by the acquired operations for subcontractor support to
ITSC commercial utility customers and IPS support to the Department of the Navy, and partially from
the increased level of M&S support required under the specific contracts referenced above. Direct Contract Expenses.Direct contract expenses increased approximately $13.0 million to
$59.4 million, or 28.0%, from $46.4 million for the three months ended March 31, 2005, and 2004,
respectively. Acquired operations generated approximately $2.4 million of this increase and
approximately $10.6 million was generated by contracts that were in existence during the prior
year. As a percentage of revenue, direct contract expenses were 73.6% for the three months ended
March 31, 2005 as compared to 71.7% for the three months ended March 31, 2004. The changes in
specific components of direct contract expenses were:  
    Direct labor costs for the three months ended March 31, 2005 increased by $5.7
million, or 19.0%, to $35.8 million from $30.1 million for the three months ended
March 31, 2004. As a percentage of revenue, direct labor cost was 44.4% for the
three-month period ended March 31, 2005 and 46.5% for the three-month period ended
March 31, 2004.
    M&S cost increased approximately $7.5 million, or 52.5%, to $21.8 million for
the three months ended March 31, 2005, compared to $14.3 million for the three
months ended March 31, 2004. As a percentage of revenue, M&S cost was 27.0% for
the three months ended March 31, 2005 as compared to 22.0% for the three months
ended March 31, 2004. The percentage increase in M&S cost is directly associated
with the relative percentage increase in M&S revenue as described above. As a
percentage of M&S revenue, M&S cost was approximately 96.9% during the three
months ended March 31, 2005, as compared to 96.6% for the three months ended March
31, 2004. 35




---



##### 



Gross Profit.Gross profit increased $2.9 million, or 15.9%, to $21.2 million for the three
months ended March 31, 2005, from $18.3 million for the three months ended March 31, 2004. The $2.9
million increase is attributable to the following: 
    
    Gross profit increase generated by the activities of the
acquired operations
    
    
    
    $1.3 million
    
    Gross profit increase generated primarily by work performed
under contracts that were in existence during the prior year
    
    
    
    $1.6 millionTotal:
    
    
    
    $2.9 million
 As a percentage of revenue, gross profit was 26.3% for three months ended March 31, 2005 as
compared to 28.3% for the three months ended March 31, 2004. For the three months ended March 31,
2005, we experienced an increased proportion of M&S contract revenue as discussed above. M&S
contracts typically generate lower profit margins than direct labor contracts. M&S contracts have
been increasing relative to direct labor contracts, particularly due to the M&S efforts required on
existing contracts (e.g., Night Vision, TACOM, and MSIAC) as described above, and from contracts
obtained in the Companys recent acquisitions of IPS and ITSC. This trend is expected to continue
for the next two fiscal years until the funded contract backlog on these contracts is expended. Operating Expenses.Operating expenses increased $4.8 million, or 26.8% to $22.7 million for
the three months ended March 31, 2005, from $17.9 million for the
three months ended March 31, 2004. The $4.8 million increase is attributable to the following: 
    
    Operating expense increase incurred by the activities of the
acquired operations
    
    
    
    $1.0 million
    
    Operating expense increase incurred by the activities
of the existing operations
    
    
    
    $3.8 millionTotal:
    
    
    
    $4.8 million
 36




---



##### 



As a percentage of revenue, operating expense was 28.1% for the three months ended March 31,
2005 as compared to 27.7% for the three months ended March 31, 2004. Operating expenses, net of
depreciation, amortization expense, and stock-based compensation expense, increased approximately
$1.1 million, or 17.8%, to $15.2 million for the three months ended March 31, 2005, from $14.1
million for the three months ended March 31, 2004. As a percentage of revenue, operating expense,
net of depreciation, amortization expense, and stock-based compensation expense, was 18.8% for the
three months ended March 31, 2005 as compared to 21.8% for the three months ended March 31, 2004.
The changes in other specific components of operating expenses were:  
    Overhead expenses for indirect personnel and facilities costs related to rental and
occupancy expenses increased approximately $0.7 million, or 10.8%, to $7.2 million for the
three months ended March 31, 2005, from $6.5 million for the three months ended March 31,
2004. As a percentage of revenue, operating expense relating to indirect personnel and
facilities expense was 8.9% for the three months ended March 31, 2005 as compared to 10.0%
for the three months ended March 31, 2004. The decrease, as a percentage of revenue, is
partially attributable to the cost control initiatives put in place by line management.
    General and administrative (G&A) expense increased approximately $0.1 million, or 1.3%,
to $7.7 million for the three months ended March 31, 2005, compared to $7.6 million for
the three months ended March 31, 2004. During the three months ended March 31, 2005,
approximately $0.3 million in third-party expense was incurred related to the preparation
for and compliance with the provisions under the Sarbanes-Oxley Act of 2002 (SOX). The
Company will be subject to the provisions of Section 404 of SOX as it relates to internal
controls over financial reporting, beginning with the fiscal year ending September 30,
2006. For the three months ended March 31, 2004, approximately $0.4 million of third-party
expense incurred in that period was in support of the AB Technologies arbitration. As a
percentage of revenues, G&A expenses were 9.5% for the three months ended March 31, 2005,
compared to 11.7% for the three months ended March 31, 2004. Excluding the third-party
expenses, which occurred during each of the three periods ended March 31, 2005 and 2004,
G&A expense was approximately $7.2 million, or 8.9% of revenue, and $7.2 million, or
approximately 11.1% of revenue, for fiscal years 2005 and 2004, respectively. The
integration and partial absorption of the G&A support costs of the acquired operations of ITSC and IPS, and most
recently METI and CATI, resulted in a decrease in overall G&A expense when expressed as a
percentage of revenue.
    Stock-based compensation and deferred compensation relate primarily to the SAR and
phantom stock plans. This expense increased approximately $3.2 million, or approximately
640% to $3.7 million for the three months ended March 31, 2005, from approximately $0.5
million for the three months ended March 31, 2004. As a percentage of revenue, operating
expense relating to stock-based compensation and deferred compensation expense was 4.6%
and 0.8% for the three-month periods ended March 31, 2005 and 2004, respectively. The
increase in stock-based compensation and deferred compensation is a result of the increase
in the value of Alions common stock. 37




---



##### 




    Depreciation and amortization expense increased approximately $0.5 million, or 15.2%,
to $3.8 million for the three months ended March 31, 2005, as compared to $3.3 million for
the three months ended March 31, 2004. Of the $0.5 million increase, approximately $0.1
million of amortization expense was associated with intangible asset values assigned to
the purchased contracts of ITSC and IPS and approximately $0.1 million was associated with
the value assigned to software obtained in the Countermeasures, Inc. acquisition. The
remaining $0.3 million increase is associated with the increase in depreciation on
purchased and acquired fixed assets.For each three-month quarter ended March 31, 2005 and 2004, approximately $2.6 million of
amortization expense was incurred associated with the intangible asset value assigned to
purchased contracts of IITRI. Also, for each respective three-month quarter ended March 31,
2005 and 2004, approximately $0.1 million of depreciation expense was incurred associated
with the fair value assigned to the purchased fixed assets of IITRI. As a percentage of
revenue, operating expense relating to depreciation and amortization expense was 4.7% for
the three months ended March 31, 2005 as compared to 5.1% for the three months ended March
31, 2004.
    Bad debt expense remained constant at approximately $0.1 million for each of the
three-month period ended March 31, 2005 and 2004. As a percentage of revenue, bad debt
expense was 0.1% for each of the three-month period ended March 31, 2005 and 2004. Operating Loss.For the three months ended March 31, 2005, operating loss was approximately
$1.4 million compared with $0.4 million operating income for the three months ended March 31, 2004.
The $1.8 million decrease is associated with factors discussed above and is attributable to the
following: 
    
    Operating income increase generated from the activities
of the acquired operations
    
    
    
    $ 0.3 million
    
    Operating loss generated from the existing
operations
    
    
    
    $(2.1) millionTotal:
    
    
    
    $(1.8) million
 38




---



##### 



Other Income (Expense).Other income and expense increased approximately $12.1 million,
or 318.4%, to approximately $15.9 million, for the three months ended March 31, 2005 from
approximately $3.8 million for the three months ended March 31, 2004. As a component of other
income (expense), interest expense increased approximately $12.2 million to $15.9 million for the
three months ended March 31, 2005, as compared to $3.7 million for the three months ended March 31,
2004, as summarized in the following table: For Three Months Ended March 31,(in millions)2005
    
    
    2004Revolving facility
    
    $
    0.1
    
    
    $
    0.2Senior term loan
    
    
    1.0
    
    
    
    0.4Mezzanine
note - cash pay interest
    
    
    
    
    
    
    0.7- accretion of debt discount
    
    
    
    
    
    
    0.1Subordinated
note - PIK interest
    
    
    0.6
    
    
    
    0.6- accretion of long-term deferred interest
    
    
    0.2
    
    
    
    0.1- accretion of debt discount
    
    
    0.2
    
    
    
    0.2Accretion of warrant liability (a)
    
    
    13.8
    
    
    
    1.4$
    15.9
    
    
    $
    3.7
   (a)
    Reflects change in value assigned to the detachable warrants
associated with the change in the value of Alion common stock. Income Tax (Expense) Benefit.The Company has filed qualified subchapter-S elections for
all of its subsidiaries to treat them as disregarded entities for federal income tax purposes. Some
states do not recognize the effect of these elections or Alions S-corporation status.The Company
recorded no state income tax expense for the three months ended March 31, 2005 or 2004. Net Loss.The Companys net loss increased approximately $14.0 million or 411.8% to $17.4
million for the three months ended March 31, 2005, from $3.4 million for the three months ended
March 31, 2004. The increased loss is due to factors discussed above. Approximately $0.3 million of
increased income was generated by acquired
operations and approximately $14.3 million in increase in loss was generated by existing
operations. Six Months Ended March 31, 2005 Compared to Six Months Ended March 31, 2004 The table below reflects the approximate impact of the following events and circumstances as
they relate to the financial performance of Alion for the six months ended March 31, 2005 and 2004.
The discussion of the results of operations includes references to the selected financial
information in the table below in conjunction with the Companys consolidated financial statements
provided elsewhere in this document. The selected financial information in the table is based on
estimates of Alion management. 39




---



##### 




    On October 31, 2003, Alion completed the acquisition of Integrated Technology Solutions
Corporation (ITSC). The operating results for ITSC are separately identifiable within the
consolidated results of operations.
    On February 13, 2004, Alion completed the acquisition of Identix Public Sector, Inc.
(IPS). The operating results for IPS are separately identifiable within the consolidated
results of operations.
    On October 28, 2004, Alion purchased substantially all of the assets of
Countermeasures, Inc. for approximately $2.4 million. The operating results for
Countermeasures, Inc. are not separately identifiable within the consolidated results of
operations.
    On February 11, 2005, Alion acquired ManTech Environmental Technology, Inc. (METI). The
operating results for METI are separately identifiable within the consolidated results of
operations.
    On February 25, 2005, Alion acquired Carmel Applied Technologies, Inc. (CATI). The
operating results for CATI are separately identifiable within the consolidated results of
operations.
    References to the acquired operations includes the operating results of ITSC, IPS,
METI, and CATI. Six Months Ended March 31, 2005
    
    
    Six Months Ended March 31, 2004Consolidated
    
    
    
    
    
    
    
    
    
    
    ConsolidatedOperations of
    
    
    
    
    
    
    
    
    
    
    Operations ofConsolidated
    
    
    
    
    
    
    Alion less the
    
    
    Consolidated
    
    
    
    
    
    
    Alion less theOperations of
    
    
    Acquired
    
    
    Acquired
    
    
    Operations of
    
    
    Acquired
    
    
    AcquiredFinancial information (in millions)
    
    Alion
    
    
    Operations
    
    
    Operations
    
    
    Alion
    
    
    Operations
    
    
    OperationsTotal revenue
    
    $
    149.9
    
    
    $
    16.3
    
    
    $
    133.6
    
    
    $
    123.3
    
    
    $
    7.1
    
    
    $
    116.2Material and subcontract revenue
    
    
    38.6
    
    
    
    4.1
    
    
    
    34.5
    
    
    
    28.7
    
    
    
    2.8
    
    
    
    25.9Total direct contract expenses
    
    
    109.6
    
    
    
    10.0
    
    
    
    99.7
    
    
    
    88.5
    
    
    
    5.6
    
    
    
    82.9Major components of direct contract expenseDirect labor cost
    
    
    67.6
    
    
    
    5.8
    
    
    
    61.9
    
    
    
    57.0
    
    
    
    2.7
    
    
    
    54.3Other direct cost (ODC)
    
    
    3.8
    
    
    
    0.1
    
    
    
    3.7
    
    
    
    3.8
    
    
    
    0.1
    
    
    
    3.7Material and subcontract (M&S) cost
    
    
    38.2
    
    
    
    4.1
    
    
    
    34.1
    
    
    
    27.7
    
    
    
    2.7
    
    
    
    25.0Gross profit
    
    
    40.3
    
    
    
    4.4
    
    
    
    35.9
    
    
    
    34.8
    
    
    
    1.6
    
    
    
    33.2Total operating expense
    
    
    40.6
    
    
    
    3.6
    
    
    
    37.0
    
    
    
    35.5
    
    
    
    1.4
    
    
    
    34.1Major components of operating expenseIndirect personnel and facilities
    
    
    14.1
    
    
    
    1.9
    
    
    
    12.2
    
    
    
    13.7
    
    
    
    0.9
    
    
    
    12.8General and administrative
    
    
    14.4
    
    
    
    1.5
    
    
    
    12.9
    
    
    
    14.3
    
    
    
    0.5
    
    
    
    13.8Depreciation and amortization
    
    
    7.3
    
    
    
    0.2
    
    
    
    7.0
    
    
    
    6.4
    
    
    
    
    
    
    
    6.4Stock-based compensation
    
    
    4.2
    
    
    
    
    
    
    
    4.2
    
    
    
    0.9
    
    
    
    
    
    
    
    0.9Income (loss) from operations
    
    
    (0.4
    )
    
    
    0.7
    
    
    
    (1.1
    )
    
    
    (0.7
    )
    
    
    0.1
    
    
    
    (0.8
    )Other income and expense
    
    
    (22.9
    )
    
    
    
    
    
    
    (22.9
    )
    
    
    (7.0
    )
    
    
    
    
    
    
    (7.0
    )Income tax benefit / (expense)
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (23.3
    )
    
    $
    0.7
    
    
    $
    (24.0
    )
    
    $
    (7.7
    )
    
    $
    0.1
    
    
    $
    (7.8
    )
    The financial information attributed to these entities are
the estimates of management.  40




---



##### 



Revenues.Revenues increased $26.6 million to $149.9 million, or 21.6%, from $123.3
million for the six months ended March 31, 2005, and 2004, respectively. Acquired operations
generated approximately $9.2 million of the increase and $17.4 million of the increase came
primarily from work on contracts that were in existence during the prior year. For the six months ended March 31, 2005, our performance of additional work under contracts
that were in existence during the prior year included an increase of approximately $8.1 million
related to support under the Modeling & Simulation Information Analysis Center (MSIAC) contract
with the Defense Information Systems Agency, an increase of approximately $5.3 million for services
under the U.S. Army Night Vision Lab Hightech Omnibus (Night Vision) contract, and an increase of
approximately $1.7 million related to increased support under the Mobile Parts Hospital contract
with the Tank Armaments and Automotive Command (TACOM). On the balance of our contracts, revenue
increased approximately $2.3 million for the six months ended March 31, 2005 as compared to the six
months ended March 31, 2004. As a component of revenue, material and subcontract (M&S) revenue increased approximately $9.9
million to $38.6 million, or 34.5%, from $28.7 million for the six months ended March 31, 2005 and
2004, respectively. Approximately $1.3 million of the increase was generated by acquired operations
and approximately $8.6 million was generated by contracts that were in existence during the prior
year. Of the $8.6 million increase, approximately $5.6 million was related to increased support
under the Night Vision contract and approximately $2.3 million related to the TACOM contract. The
remaining revenue increase of approximately $0.7 million occurred on various contracts. As a
percentage of total revenue, M&S revenue increased approximately 2.5% to 25.8% from 23.3% for the
six months ended March 31, 2005 and 2004, respectively. The increase comes partially from the M&S
work performed by the acquired operations for subcontractor support to ITSC commercial utility
customers and IPS support to the Department of the Navy, and partially from the increased level of
M&S revenue generated under the contracts described above. Direct Contract Expenses.Direct contract expenses increased approximately $21.1 million to
$109.6 million, or 23.8%, from $88.5 million for the six months ended March 31, 2005, and 2004,
respectively. Acquired operations generated approximately $4.4 million of the increase and
approximately $16.7 million was generated by contracts that were in existence during the prior
year. As a percentage of revenue, direct contract expenses were 73.1% for the six months ended March
31, 2005 as compared to 71.8% for the six months ended March 31, 2004. The changes in specific
components of direct contract expenses were:  
    Direct labor costs for the six months ended March 31, 2005 increased by $10.6
million, or 18.6%, to $67.6 million from $57.0 million for the six months ended
March 31, 2004. As a percentage of revenue, direct labor cost was 45.1% and 46.2%
for each of the six-month periods ended March 31, 2005 and 2004, respectively. 41




---



##### 




    M&S cost increased approximately $10.5 million, or 37.9%, to $38.2 million for
the six months ended March 31, 2005, compared to $27.7 million for the six months
ended March 31, 2004. As a percentage of revenue, M&S cost was 25.5% for the six
months ended March 31, 2005 as compared to 22.5% for the six months ended March
31, 2004. The percentage increase in M&S cost is directly associated with the
relative percentage increase in M&S cost of the contracts as described above. As a
percentage of M&S revenue, M&S cost was approximately 98.9% during the six months
ended March 31, 2005, as compared to 96.5% for the six months ended March 31,
2004. See discussion of decrease in gross margin in Gross Profit section,
below. Gross Profit.Gross profit increased $5.5 million, or 15.8%, to $40.3 million for the six
months ended March 31, 2005, from $34.8 million for the six months ended March 31, 2004. The $5.5
million increase is attributable to the following:  Gross profit increase generated by the activities of the
acquired operations
    
    $2.8 million Gross profit increase generated primarily by work performed
under contracts that were in existence during the prior year
    
    $2.7 millionTotal:
    
    $5.5 million
 As a percentage of revenue, gross profit was 26.9% for three months ended March 31, 2005 as
compared to 28.2% for the six months ended March 31, 2004. For the six months ended March 31, 2005,
we experienced an increased proportion of M&S contract revenue. M&S contracts typically generate
lower profit margins than direct labor contracts. M&S contracts have been increasing relative to
direct labor contracts, particularly due to the M&S efforts required on existing contracts (e.g.,
Night Vision, TACOM, and MSIAC) as described above, and from contracts obtained in the Companys
recent acquisitions of IPS and ITSC. This trend is expected to continue for the next two fiscal
years until the funded contract backlog on these contracts is expended. 42




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##### 



Operating Expenses.Operating expenses increased $5.1 million, or 14.4% to $40.6 million for
the six months ended March 31, 2005, from $35.5 million for the six months ended March 31, 2004.
The $5.1 million increase is attributable to the following:  Operating expense increase incurred by the activities of the
acquired operations
    
    $2.2 million Operating expense increase incurred by the activities
of the existing operations
    
    $2.9 millionTotal:
    
    $5.1 million
 As a percentage of revenue, operating expense was 27.1% for the six months ended March 31,
2005 as compared to 28.8% for the six months ended March 31, 2004. Operating expenses, net of
depreciation, amortization expense, and stock-based compensation expense increased approximately
$0.9 million, or 3.2%, to $29.1 million for the six months ended March 31, 2005, from $28.2 million
for the six months ended March 31, 2004. As a percentage of revenue, operating expense, net of
depreciation, amortization expense, and stock-based compensation expense was 19.4% for the six
months ended March 31, 2005 as compared to 22.9% for the six months ended March 31, 2004. The
changes in some of specific components of operating expenses were:  
    Overhead expenses for indirect personnel and facilities costs related to rental and
occupancy expenses increased approximately $0.4 million, or 2.9%, to $14.1 million for the
six months ended March 31, 2005, from $13.7 million for the six months ended March 31,
2004. As a percentage of revenue, operating expense relating to indirect personnel and
facilities expense was 9.4% for the six months ended March 31, 2005 as compared to 11.1%
for the six months ended March 31, 2004. The decrease, as a percentage of revenue, is
partially attributable to the cost control initiatives put in place by line management.
    General and administrative (G&A) expense increased approximately $0.1 million, or 0.7%,
to $14.4 million for the six months ended March 31, 2005, compared to $14.3 million for
the six months ended March 31, 2004. During the six months ended March 31, 2005,
approximately $0.6 million in third-party expense was incurred related to the preparation
for and compliance with SOX. The Company will be subject to provisions under Section 404
of SOX, as it relates to internal controls over financial reporting, beginning with the
fiscal year ending September 30, 2006. During the six months ended March 31, 2004,
approximately $0.6 million of third-party legal and accounting expense was incurred in
support of the ITSC and IPS acquisitions and for support to the AB Technologies
arbitration. As a percentage of revenues, G&A expenses were 9.6% for the six months ended
March 31, 2005, compared to 11.6% for the six months ended March 31, 2004. Excluding the
third-party expenses, which occurred during each of the six month periods ended March 31,
2005 and 2004, G&A expense was approximately $13.8 million and $13.7 million,
respectively, or 9.2% and 11.1% of revenue, for fiscal
years 2005 and 2004, respectively. The integration and absorption of the G&A support costs
of the acquired operations of ITSC and IPS, and most recently METI and CATI, resulted in a
decrease in overall G&A expense as a percentage of revenue. 43




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##### 




    Stock-based compensation and deferred compensation relate primarily to the SAR and
phantom stock plans. This expense increased approximately $3.3 million, or 367% to $4.2
million for the six months ended March 31, 2005, from approximately $0.9 million for the
six months ended March 31, 2004. As a percentage of revenue, operating expense relating to
stock-based compensation and deferred compensation expense was 2.8% and 0.7% the six
months ended March 31, 2005 and 2004, respectively. The increase in stock-based
compensation and deferred compensation is a result of the increase in the value of Alions
common stock.
    Depreciation and amortization expense increased approximately $0.9 million, or 14.1%,
to $7.3 million for the six months ended March 31, 2005, as compared to $6.4 million for
the six months ended March 31, 2004. Of the $0.9 million increase, approximately $0.2
million of amortization expense was incurred associated with intangible asset value
assigned to the purchased contracts of ITSC and IPS and approximately $0.1 million for
intangible asset value assigned to software obtained in the Countermeasures, Inc.
acquisition.For each six-month period ended March 31, 2005 and 2004, approximately $5.2 million of
amortization expense incurred was associated with the intangible asset value assigned to
purchased customer contracts of IITRI. Also, for each respective six-month period ended
March 31, 2005 and 2004, approximately $0.3 million of depreciation expense incurred was
associated with the fair value assigned to the purchased fixed assets of IITRI. As a
percentage of revenue, operating expense relating to depreciation and amortization expense
was 4.9% for the six months ended March 31, 2005 as compared to 5.1% for the six months
ended March 31, 2004.
    Bad debt expense increased approximately $0.3 million to $0.4 million for the six
months ended March 31, 2005 as compared to $0.1 million for the six months ended March 31,
2004. As a percentage of revenue, bad debt expense was 0.3% and 0.1% for the six months
ended March 31, 2005 and 2004, respectively. 44




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##### 



Operating Loss.For the six months ended March 31, 2005, operating loss was approximately $0.4
million compared with $0.7 million operating loss for the six months ended March 31, 2004. The $1.1
million increase in loss is associated with factors discussed above and is attributable to the
following:  An increase in operating income generated from the
activities of the acquired operations
    
    $0.6 million A decrease in operating loss generated from the existing
operations
    
    $(0.3) millionTotal:
    
    $(0.3) million
 Other Income (Expense).Other income and expense increased approximately $15.9 million to
approximately $22.9 million, or 227.1%, for the six months ended March 31, 2005, from $7.0 million
for the six months ended March 31, 2004. As a component of other income (expense), interest expense
increased approximately $15.9 million, or 230.4%, to $22.9 million for the six months ended March
31, 2005 from $6.9 million for the six months ended March 31, 2004 and is summarized in the
following table: For Six Months Ended March 31,(in millions)2005
    
    
    2004Revolving facility
    
    $
    0.1
    
    
    $
    0.3Senior term loan
    
    
    2.1
    
    
    
    0.9Mezzanine
note - cash pay interest
    
    
    1.8
    

    
    
    1.3- accretion of debt discount
    
    
    2.1
    
    
    
    0.4Subordinated
note - PIK interest
    
    
    1.2
    
    
    
    1.2- accretion of long-term deferred interest
    
    
    0.3
    
    
    
    0.1- accretion of debt discount
    
    
    0.4
    
    
    
    0.4Agreements with officers
    
    
    0.1
    
    
    
    0.0Accretion of warrant liability (a)
    
    
    14.7
    
    
    
    2.2Other
    
    
    0.1
    
    
    
    0.1$
    22.9
    
    
    $
    6.9
   (a)
    Reflects change in value assigned to the detachable warrants
associated with the change in the value of Alion common stock. 45




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##### 



Income Tax (Expense) Benefit.The Company has filed qualified subchapter-S elections for
all of its subsidiaries to treat them as disregarded entities for federal income tax purposes. Some
states do not recognize the effect of these elections or Alions S-corporation status. As a result,
the Company recorded approximately $0.05 million in state income tax expense for the six months
ended March 31, 2005. The Company recorded no income tax expense for the six months ended March 31,
2004. Net Loss.The Companys net loss increased approximately $15.6 million or 202.6% to $23.3
million for the six months ended March 31, 2005, from $7.7 million for the six months ended March
31, 2004. The increased loss is due to factors discussed above. Approximately $16.2 million of the
increased loss was generated by existing operations and approximately $0.6 million of increase in
income was generated by acquired operations. Liquidity and Capital Resources. The Companys primary liquidity requirements are for debt service, working capital, capital
expenditures, and acquisitions. The principal working capital need is to fund accounts receivable,
which increases with the growth of the business. We are funding our present operations, and we
intend to fund future operations, primarily through cash provided by operating activities and
through use of our revolving credit facility. Net cash provided by operating activities of Alion was approximately $18.8 million for the six
months ended March 31, 2005, compared to cash provided by operations of approximately $3.6 million
for the six months ended March 31, 2004. Of the $15.2 million difference, $11.6 million is due to
increased collection of accounts receivable and $1.6 million due to increased trade accounts
payable and accruals during the 2005 period. Net cash used in investing activities was approximately $19.7 million for the six months ended
March 31, 2005. The most significant component of the Companys investing activities is the
strategic acquisitions of, or investments in, other companies. During the six months ended March
31, 2005, the Company paid approximately $18.2 million for the following acquisitions and
investments: CATI  $7.3 million; METI  $7.0 million; Countermeasures, Inc.  $2.4 million;
VectorCommand Ltd.  $1.5 million. The Company spent approximately $1.1 million for capital
expenditures unrelated to its acquisitions. Net cash used in financing activities was approximately $1.4 million for the six months ended
March 31, 2005, compared to net cash provided by financing activities of approximately $12.4
million for the six months ended March 31, 2004. The most significant components of the Companys
financing activities are: 1) net proceeds from (or repayment of) short term borrowings and 2) net
proceeds from (or repayment of) long term debt securities. During the six months ended March 31,
2005, Alion borrowed $22.0 million in proceeds under the Term B Senior Credit Facility to redeem
the Mezzanine
Note for approximately $19.6 million, pay approximately $1.8 million in prepayment penalty for
early redemption of the Mezzanine Note, and to pay approximately $0.6 million in accrued interest. 46




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##### 



Discussion of Debt Structure On August 2, 2004, the Company entered into a Term B Senior Credit Facility, that resulted in
the extinguishment of the LaSalle Bank senior term note, the LaSalle Bank revolving credit facility
and the Mezzanine Note. The discussion below describes the new Term B Senior Credit Facility
followed by a description of Amendment One to the Term B Senior Credit Facility and of certain debt
agreements which were used to fund the Transaction, as described in Note 1 to Alions Consolidated
Financial Statements (unaudited) provided above. Term B Senior Credit Facility.On August 2, 2004, we entered into a Term B Senior Credit
Facility for an amount up to $180.0 million with a syndicate of financial institutions for which
Credit Suisse First Boston (CSFB) serves as arranger, administrative agent and collateral agent.
LaSalle Bank serves as syndication agent under the Term B Senior Credit Facility. The Term B Senior
Credit Facility consists of a committed $100.0 million term loan (Senior Secured Term B Loan), a
committed $30.0 million revolving credit facility (Senior Revolving Credit Facility) and provides
for an additional $50.0 million (uncommitted) incremental term loan in which funding is available
subject to lender syndication approval. The term of the facility is five years. During the first
four years of the term, principal under the Senior Secured Term B Loan is payable quarterly in an
amount equal to 0.25 percent of the principal amount then outstanding. During the fifth and final
year of the term, we are obligated to pay quarterly installments of principal in an amount equal to
24 percent of the principal amount then outstanding. All principal obligations under the senior
revolving credit facility are to be repaid in full no later than August 2, 2009. As of March 31,
2005, we had outstanding indebtedness of approximately $71.6 million under the Term B Credit
Facility all of it under the term loan component of the facility. At our option, the Senior Secured Term B Loan and the Senior Revolving Credit Facility each
may bear interest at either of two floating rates. We may elect that interest be payable on our
$100.0 million Senior Secured Term B Loan at an annual rate equal to the prime rate charged by CSFB
plus a maximum spread of 225 basis points or at an annual rate equal to the Eurodollar rate plus a
maximum spread of 275 basis points. If we elect a prime rate borrowing under our Senior Revolving
Credit Facility, interest would be payable at an annual rate equal to the prime rate charged by
CSFB plus the additional basis points reflected in the table below under the column ABR Spread
corresponding to our leverage ratio at the time. If we elect a Eurodollar borrowing under our
Senior Revolving Credit Facility, interest would be payable at an annual rate equal to the
Eurodollar rate plus the additional basis points reflected in the table below under the column
Eurodollar Spread corresponding to our leverage ratio at the time. 47




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##### 



ABR Spread
    
    
    Eurodollar SpreadLeverage Ratio
    
    (in basis points)
    
    
    (in basis points)Category 1
    
    
    225
    
    
    
    275Greater than or equal to 3.00 to 1.00
Category 2
    
    
    200
    
    
    
    250Greater than or equal to 2.50 to
1.00 but less than 3.00 to 1.00
Category 3
    
    
    175
    
    
    
    225Greater than or equal to 2.00 to
1.00 but less than 2.50 to 1.00
Category 4
    
    
    150
    
    
    
    200Less than 2.00 to 1.00
 If we borrow under the incremental term loan facility and certain economic terms of the
incremental term loan, including applicable yields, maturity dates and average life to maturity,
are more favorable to the incremental term loan lenders than the comparable economic terms under
the Senior Secured Term B Loan or the Senior Revolving Credit Facility, then the Term B Senior Credit
Facility provides that the applicable interest rate spread will be adjusted upward. The upward
adjustment will take place if the yield payable under the incremental term loan exceeds the yield
under the Senior Secured Term B Loan or Senior Revolving Credit Facility by more than 50 basis
points. The effect of this provision is that if we borrow an incremental term loan, that borrowing
may make our borrowings under the Senior Secured Term B Loan and the Senior Revolving Credit
Facility more expensive. The Term B Senior Credit Facility requires us to enter into an interest rate hedge agreement
acceptable to CSFB which fixes or caps the actual interest we will pay on no less than 40 percent
of our long-term indebtedness. On August 2, 2004, we elected to have the Senior Term B Loan bear
interest at the Eurodollar rate, which was approximately 1.6 percent as of August 2, 2004, plus the
applicable margin, which totaled approximately 4.35 percent (i.e., LIBOR 1.6 percent plus 2.75
percent Eurodollar spread). On August 16, 2004, we entered into an interest rate cap agreement
effective September 30, 2004 with one of our senior lenders. Under this agreement, in exchange for
our payment to the senior lender of approximately $0.3 million our maximum effective rate of
interest payable with regard to a portion of the outstanding principal balance of the Term B Senior
Credit Facility is not to exceed 6.64 percent (i.e., LIBOR 3.89 percent cap plus maximum 2.75
percent Eurodollar spread) for the period September 30, 2004 through September 29, 2005 and is not
to exceed 7.41 percent (i.e., LIBOR 4.66 percent plus 2.75 percent maximum Eurodollar spread) for
the period September 30, 2005 through September 29, 2007. The maximum principal balance, by
quarter, to which this interest rate cap agreement applies, is as follows: 48




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##### 



Principal BalanceQuarter
    
    (in millions)January 1, 2005 through March 31, 2005
    
    $
    37.4April 1, 2005 through June 30, 2005
    
    $
    37.3July 1, 2005 through September 30, 2005
    
    $
    37.2October 1, 2005 through December 31, 2005
    
    $
    37.1January 1, 2006 through March 31, 2006
    
    $
    37.0April 1, 2006 through June 30, 2006
    
    $
    36.9July 1, 2006 through September 30, 2006
    
    $
    36.8October 1, 2006 through December 31, 2006
    
    $
    36.8January 1, 2007 through March 31, 2007
    
    $
    36.7April 1, 2007 through June 30, 2007
    
    $
    36.6July 1, 2007 through September 30, 2007
    
    $
    34.5
 Each quarter, the senior lender counter-party to this interest rate cap agreement is
required to calculate and reimburse us for all interest payments under the Term B Senior Credit
Facility in excess of the applicable cap. This cap agreement expires September 30, 2007. Under the terms of the Term B Senior Credit Facility, we are subject to certain financial
covenants with respect to our maximum leverage ratio and our interest coverage ratio. The Term B
Senior Credit Facility is secured by a first priority, perfected security interest in all of our
current and future tangible and intangible property. On August 2, 2004, the Company borrowed $50.0 million under the Senior Secured Term B Loan to
retire its outstanding Senior Term Note and revolving credit facility under the Senior Credit
Agreement with LaSalle Bank. The Company paid approximately $47.2 million in principal
(approximately $23.2 million to redeem the Senior Term Note and approximately $24.0 million to pay
the revolving credit facility), accrued and unpaid interest, and approximately $3.2 million in
transaction fees associated with the refinancing. On October 1, 2004, the Company drew down approximately $22.0 million on the Senior Secured
Term B Loan to retire the Mezzanine Note (see below) in the approximate principal amount of $19.6
million, plus approximately $1.8 million for prepayment penalty, and $0.6 million for accrued and
unpaid interest. On April 1, 2005, the Company entered into an incremental term loan facility and Amendment One
to our Term B Senior Credit Facility described above under which the Company obtained an additional
$72.0 million in term loans to the facility. Set forth below is a summary of the terms of the Term
B Senior Credit Facility, as modified by the incremental term loan and Amendment One. The Term B
Senior Credit Facility has a term of five years and consists of: 49




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##### 




    a senior term loan in the approximate amount of $143.6 million, (which includes the
incremental term loan), all of which was drawn down as of April 1, 2005;
    a senior revolving credit facility, in the amount of $30.0 million, of which we
borrowed approximately $0.66 million as of April 1, 2005, through the deemed issuance
of letters of credit issued under our prior senior credit facility which remain
outstanding under the Term B Senior Credit Facility and the issuance of one additional
letter of credit directly under the Term B Senior Credit Facility; and
    an uncommitted incremental term loan accordion facility in the amount of $150.0
million in addition to the incremental term loan facility we entered into as of April
1, 2005. Until the quarter ending December 31, 2008, the Company is obligated to pay quarterly
installments of principal on the senior term loan in the amount of $360,000. On December 31, 2008,
March 31, 2009, June 30, 2009 and August 2, 2009, the Company is obligated to pay installments of
principal in the amount of $34,650,000. The senior term loan and the senior revolving credit facility each may bear interest at either
of two floating rates. The Company may elect that interest be payable on the $143.6 million senior
term loan at an annual rate equal to the prime rate charged by CSFB plus 125 basis points or at an
annual rate equal to the Eurodollar rate plus 225 basis points. As of April 1, 2005, the CSFB
prime rate was 7.0% (i.e., 5.75% plus 1.25% Eurodollar spread) and the Eurodollar rate was 5.35%
(i.e., 3.1% plus 2.25% Eurodollar spread). The Company has elected to have the Senior Secured Term
B Loan bear interest at the Eurodollar rate. The Term B Senior Credit Facility requires the Company to enter into an interest rate hedge
agreement acceptable to CSFB which fixes or caps the actual interest rate the Company will pay on
no less than 40 percent of the long-term indebtedness. Prior to the execution of Amendment One, as
of March 31, 2005, the Company has approximately $71.6 million in principal amount of indebtedness
outstanding under the Term B Senior Credit Facility of which approximately $37.4 million is covered
by an interest rate hedge agreement. Per the interest rate hedge agreement, the interest rate on
approximately $37.4 million of the $71.6 million is capped at 7.41% (i.e., LIBOR cap of 4.66% plus
2.75% Eurodollar spread). Pursuant to the execution of Amendment One on April 1, 2005, the
following has occurred:  1)
    the Company elected to have the incremental $72.0 million bear interest at
the Eurodollar rate,  2)
    on April 7, 2005, the Company entered into a second interest rate hedge
agreement which covers $28.0 million of the incremental $72.0 million, so that the
interest on approximately $28.0 million of the $72.0 million
incremental loan amount is capped at 7.25% (i.e., LIBOR cap of 5.00% plus 2.25%
Eurodollar spread), and 50




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##### 



3)
    the interest on $37.4 million (i.e., the previously capped portion of the
initial $71.6 million in principal amount of indebtedness outstanding under the Term B
Senior Credit Facility) has been reset and capped at maximum interest rate 6.91%
(i.e., LIBOR cap of 4.66% plus 2.25% Eurodollar spread). For this second cap
agreement, the Company paid a senior lender $117,000. As of April 7, 2005, a total of
approximately $65.3 million, or 45.5%, of the $143.6 million drawn under the Term B
Senior Credit Facility is at a capped interest rate. The maximum effective interest
rate on $65.3 million that is currently under cap agreement(s) is approximately 7.06%.
The remaining loan balance of approximately $78.7 million will fluctuate with the
LIBOR rate plus, the applicable Eurodollar spread. On April 1, 2005, the Company borrowed $72.0 million in an incremental term loan under the
Term B Senior Credit Facility. The Company used approximately $58.7 million of the incremental
term loan proceeds to pay a portion of the JJMA acquisition price, and approximately $1.25 million
to pay certain transaction fees associated with the incremental term loan. The Company is permitted to use any future proceeds it might receive from the currently
uncommitted Incremental Term Loan Facility to finance permitted acquisitions; to make certain put
right payments required under the Companys Mezzanine Warrant, if the put rights are exercised;
and, for any other purpose permitted by incremental term loans, as defined in the Senior Credit
Facility. Mezzanine Note. 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 was junior to the senior credit facility, but ranked senior to the Subordinated
Note. The outstanding Mezzanine Note principal was payable in a lump sum on December 20, 2008.
Prepayment penalties applied for early redemption. Each quarter, the Company paid interest on the
Mezzanine Note, in cash, at a rate of 12% per year. In July 2004, IITRI transferred all of its
rights, title and interest in the Mezzanine Note to IIT. On October 1, 2004, Alion redeemed the
Mezzanine Note with proceeds from the Term B Senior Credit Facility including a prepayment penalty
of approximately $1.8 million. Subordinated Note.On December 20, 2002, the Company issued the Subordinated Note to IITRI,
with a face value of $39.9 million, as part of the consideration for the IITRI acquisition. The
Subordinated Note bears interest at a rate of 6% per year through December 2008, payable quarterly
by the issuance of non-interest bearing notes, called paid-in-kind or (PIK) notes, which mature at
the same time as the Subordinated Note. Issuance of the PIK notes defers the underlying cash
interest expense on the Subordinated Note. The PIK notes do not bear interest and do 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 $7.2 million
installments on these same dates. In July 2004, IITRI transferred all of its rights, title and
interest in the Subordinated Note to IIT. 51




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##### 



Warrants. The Company issued detachable warrants with the Mezzanine Note and the Subordinated
Note. As of March 31, 2005, the outstanding warrants associated with the Mezzanine Note represent
the right to buy approximately 504,902 shares of Alion common stock at an exercise price of $10.00
per share. These warrants are exercisable until December 20, 2008 and contain a put right giving
the holder the right to require the Company to purchase the warrants back at the then-current fair
value of the Companys common stock, minus the warrants exercise price. The put right can be
exercised within thirty days after a change in control, or within thirty days prior to December 20,
2008, or within thirty days after delivery to the current holders of an appraisal of the per share
value of the Companys common stock as of September 30, 2008, if the ESOP still exists and no
public market price exists for the Companys common stock. Although the Mezzanine Note was redeemed
on October 1, 2004, the detachable warrants remain outstanding. As of March 31, 2005, outstanding warrants associated with the Subordinated Note represent the
right to buy approximately 1,080,437 shares of Alion common stock at an exercise price of $10.00
per share. These warrants are exercisable until December 20, 2010 and also contain a put right
giving the holder the right to require the Company to purchase the warrants back at the
then-current fair value of the Companys common stock, minus the warrants exercise price. This put
right applies to up to 50% of these warrants within thirty days prior to December 20, 2009 (or
within thirty days after delivery to the warrant holders of an appraisal of the per share value of
the Companys common stock as of September 30, 2009, if the ESOP still exists and no public market
price exists for its common stock), and up to 100% of these warrants within thirty days prior to
December 20, 2010 (or within thirty days after delivery to the warrant holders of an appraisal of
the per share value of its common stock as of September 30, 2010, if the ESOP still exists and no
public market value exists for its common stock). All put rights terminate upon one or more underwritten public offerings of Alion common stock
resulting in aggregate gross proceeds of at least $30.0 million to the sellers (excluding proceeds
received from certain affiliates of Alion). In July 2004, IITRI transferred all of its rights, title and interest in the warrants to the
Illinois Institute of Technology. Other Notes and Agreements.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. The Company also issued Dr. Atefi detachable warrants representing the
right to buy approximately 22,062 shares of Alion common stock at an exercise price of $10.00 per
share, with put rights similar to
those contained in the warrants accompanying the Mezzanine Note. On October 29, 2004, Dr.
Atefi elected to redeem the amount due under his Deferred Compensation Agreement. The Company paid
Dr. Atefi approximately $0.9 million, plus approximately $0.2 million in accrued interest. Although
the note was redeemed, the warrants remain outstanding. 52




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##### 



On February 11, 2004, the Company borrowed $750,000 from an officer of the Company. On June 7,
2004, the Company issued the officer a Promissory Note with interest at a rate of 15% per annum
effective February 11, 2004 to March 31, 2009. The Company extinguished the Promissory Note on
December 9, 2004, and paid $750,000 plus accrued interest of $21,635 to the officer. As of March 31, 2005 and for the remainder of fiscal year 2005, and for the next five fiscal
years, at a minimum, we expect that we will have to make the estimated interest and principal
payments set forth below. 6-Fiscal Year Period ($ in thousands)2005*
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010Bank revolving credit facility-Interest(1)
    
    $
    75
    
    
    $
    150
    
    
    $
    150
    
    
    $
    150
    
    
    $
    150
    
    
    $
    Senior Secured Term B Loan-Interest(2)
    
    
    4,306
    
    
    
    10,825
    
    
    
    11,281
    
    
    
    9,465
    
    
    
    4,791
    
    
    
    -Principal(3)
    
    
    720
    
    
    
    1,440
    
    
    
    1,440
    
    
    
    1,440
    
    
    
    138,600
    
    
    
    Subordinated note
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,384
    
    
    
    3,192-Interest(4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,384
    
    
    
    3,192-Principal(4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,132
    
    
    
    27,132Total cash - Pay interest
    
    
    4,381
    
    
    
    10,975
    
    
    
    11,431
    
    
    
    9,615
    
    
    
    11,325
    
    
    
    3,192Total cash - Pay principal
    
    
    720
    
    
    
    1,440
    
    
    
    1,440
    
    
    
    1,440
    
    
    
    165,732
    
    
    
    27,132Total
    
    $
    5,101
    
    
    $
    12,415
    
    
    $
    12,871
    
    
    $
    11,055
    
    
    $
    177,057
    
    
    $
    30,324
   *
    
    For the remaining two quarters of fiscal year 2005.(1)
    
    We anticipate accessing, from time to time, our $30.0 million bank revolving
credit facility to finance our ongoing working capital needs. The term of the revolving credit
facility is five years. For the six months remaining in fiscal year 2005, and for the fiscal
years 2006 through 2009, we anticipate the balance drawn on the revolving credit facility to
be minimal. The interest expense value includes an estimate for the unused balance fee on the
$30.0 million revolving credit facility. 53




---



##### 



(2)
    
    The projected average annual balance which we estimate will be drawn under the
Senior Secured Term B Loan is as follows: $143.3 million, $141.8 million, $140.4 million,
$139.0 million, and $69.9 million for the six months remaining in fiscal year 2005, and for
fiscal years 2006, 2007, 2008, and 2009, respectively. Based on an
estimated LIBOR rate plus the CSFB Eurodollar spread, the effective annual interest rate for
fiscal years 2005, 2006, 2007, 2008, and 2009 is estimated to be approximately 6.0%, 6.5%,
6.7%, 6.8%, and 6.9%, respectively. The effective interest rate takes into account the interest
rate cap agreements which cap the interest rate we will pay on a portion, but not all, of the
outstanding principal balance of the Term B Senior Credit Facility. The current cap agreements
expire in August 2007. Outstanding principal balances not under the cap agreement have interest
expense based on the alternative CSFB prime rate. The term of the Term B senior term loan is
five years. The approximate impact of a 1% increase in the interest rate, as applied to
principal balances drawn under the Senior Secured Term B Loan not covered by the current
interest rate cap agreement would be $0.4 million, $0.8 million, $0.8 million, $1.4 million,
and $0.7 million for the six months remaining in fiscal year 2005 and for the fiscal years
ending September 30, 2006, 2007, 2008 and 2009, respectively. The estimated interest expense
value includes an estimate for the commitment fee on the Senior Secured Term B Loan.(3)
    
    The Term B Senior Credit Facility requires us to repay 1 percent of the principal
balance outstanding under the senior term loan during each of the first four years (i.e.,
fiscal years 2005 through 2008) of the Term B Senior Credit Facilitys term and 96 percent of
the principal balance outstanding during the fifth and final year of the term. The table
reflects the balance drawn of $143.6 million as of April 1, 2005, resulting in expected
principal payments of approximately $0.7 million for the six months remaining in fiscal year
2005 and approximately $1.4 million in each of fiscal years 2006, 2007, and 2008. During the
fifth year, or 2009, we expect to pay principal in the amount of $138.6 million. The Term B
Senior Credit Facility also requires us to make mandatory prepayments of principal depending
upon whether we generate certain excess cash flow in a given fiscal year, we issue certain
equity, we issue or incur certain debt or we sell certain assets. As of March 31, 2005, no
mandatory prepayments are due.(4)
    
    Interest expense on the subordinated note during the four fiscal years from 2005 to
2008 is 6% simple interest, paid-in-kind by the issuance of the PIK notes. These interest
amounts accrue to principal increasing the principal value of the subordinated note. PIK notes
do not bear interest. Interest obligations paid by issuance of the PIK notes will not be
compounded. In the years 2005 through 2008, the PIK interest on the Subordinated Note will be
approximately $2.4 million in each year. During the eight-year term of the Subordinated Note,
approximately $14.4 million of principal accretes to the note through the PIK. These amounts
are included in the principal payments in fiscal years 2009 and 2010. In years 2009 and 2010,
interest at 16% will be paid quarterly in cash on the original principal of $39.9 million. The
principal, together with the outstanding balance of the PIK notes, will be paid in equal
amounts at the end of fiscal years 2009 and 2010. 54




---



##### 



Other Obligations Earn outs AB
Technologies Inc. - The Company has a maximum earn out payment obligation of $11.5 million
to the former shareholders of AB Technologies arising from IITRIs acquisition of their company.
The earn out 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. As of March 31, 2005, the maximum
earn out obligation of $11.5 million has been recorded. Carmel
Applied Technologies, Inc. - The Company has a maximum earn out payment obligation of
$10.5 million to the shareholders of CATI. The transaction is subject to an earn out provision
not-to-exceed a cumulative amount of $9.0 million based on attaining certain cumulative revenue
goals for fiscal years 2005, 2006, and 2007, and a second earn out provision not-to-exceed $1.5
million for attaining certain revenue goals in the commercial aviation industry. Lease Payments As of March 31, 2005, the Companys remaining minimum lease payment obligations under
non-cancelable operating leases for the fiscal years ending 2006, 2007, 2008, 2009, and 2010 are
$13.2 million, $13.2 million, $12.2 million, $11.8 million and $8.4 million, respectively. The
remaining aggregate obligations on these leases thereafter are approximately $4.0 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. Other contingent obligations which will impact the Companys cash flow relate to:  
    Repurchase obligations under the KSOP;
    Obligations related to the holders put rights associated with the Mezzanine
Note warrants;
    Obligations related to the holders put rights associated with the Subordinated
Note warrants;
    Obligations relating to our stock appreciation rights and phantom stock
programs; and
    Obligations relating to our deferred compensation programs for senior managers. 55




---



##### 



As of March 31, 2005, the Company has spent a cumulative total of $2.7 million to
repurchase shares of its common stock from the Trust to satisfy obligations under the KSOP to
terminated employees. Number of Shares
    
    
    
    
    
    
    Total ValueDate
    
    Repurchased
    
    
    Share Price
    
    
    RepurchasedJune 2003
    
    
    5,248
    
    
    $
    11.13
    
    
    $
    58,412July 2003
    
    
    2,696
    
    
    $
    11.13
    
    
    $
    30,000December 2003
    
    
    50,031
    
    
    $
    14.71
    
    
    $
    735,956May 2004
    
    
    117
    
    
    $
    16.56
    
    
    $
    1,938June 2004
    
    
    727
    
    
    $
    16.56
    
    
    $
    12,039June 2004
    
    
    743
    
    
    $
    16.56
    
    
    $
    12,304July 2004
    
    
    48,309
    
    
    $
    16.56
    
    
    $
    799,997December 2004
    
    
    46,816
    
    
    $
    19.94
    
    
    $
    933,505March 2005
    
    
    5,691
    
    
    $
    19.94
    
    
    $
    113,486
 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 approximately the next 42 months. Although the Company
expects to have positive cash flow from operations, it will need to generate significant additional
revenues and earn net income in order to repay principal and interest on the indebtedness assumed
under the new Term B Senior Credit Facility, and the remaining outstanding indebtedness incurred to
fund the Transaction. The Companys business plan calls for it to continue to acquire companies with complementary
technologies. The Term B Senior Credit Facility allows the Company to make certain permitted
acquisitions. The Company intends to use a portion of the financing available to it under the Term
B Senior Credit Facility to make permitted acquisitions. Given the structure of the Term B senior credit facility, the Company expects that it will
need to refinance the Term B Senior Credit Facility before the end of fiscal year 2008. The
Companys cash from operations will be insufficient to satisfy all of its obligations and it cannot
be certain that it will be able to refinance on terms that will be favorable to the Company, if at
all. Moreover, if the Companys plans or assumptions change, if its assumptions prove inaccurate,
if it consummates additional or larger investments in or acquisitions of other companies than are
currently planned, if it experiences unexpected costs or competitive pressures, or if its existing
cash and projected cash flow from operations prove insufficient, it may need to obtain greater
amounts of additional financing and sooner than expected. While it is the Companys intention only
to enter into new financing or refinancing that it considers advantageous, it cannot be certain
that such sources of financing will be available to the Company in the future, or, if available,
that financing could be obtained on terms favorable to the Company. 56




---



##### 



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk The Companys exposure to interest rate risk is primarily due to the debt it incurred to
finance the Transaction and the subsequent refinancing of a portion of that debt in August 2004.
The Subordinated Note has a stated fixed interest rate, and therefore presents no risk of change to
interest charges as a result of an increase in market interest rates. The balance drawn under the
$30.0 million senior revolving credit facility bears interest at variable rates based on the CSFB
prime rate plus a maximum spread of 225 basis points. The balance on the Senior Secured Term B
Loan bears 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 on the Senior Secured
Term B Loan by entering into interest rate cap agreement on the first
$37.4 million of principal
(which balance declines over time) borrowed. Under this cap agreement, in exchange for our payment
to the senior lender of approximately $0.3 million, our maximum effective rate of interest payable
with regard to a $37.4 million portion of the outstanding principal balance of the Senior Secured
Term B Loan will not exceed 6.64 percent. (i.e., LIBOR 3.89 percent cap plus maximum 2.75 percent
Eurodollar spread) for the period September 30, 2004 through September 29, 2005 and is not to
exceed 7.41 percent (i.e., LIBOR 4.66 percent plus 2.75 percent maximum Eurodollar spread) for the
period September 30, 2005 through September 29, 2007. For a description of the arrangement, refer
to Discussion of Debt Structure in Managements Discussion and Analysis of Financial Condition
and Results of Operations. The Company does not use derivatives for trading purposes. It invests its excess cash in
short-term, investment grade, and interest-bearing securities. Foreign Currency Risk Because the Companys expenses from its international research contracts are generally
denominated in U.S. dollars and given the current level of revenue generated by our Canadian
subsidiary, Alion Science and Technology (Canada) Corporation, the Company does not believe that
its operations are subject to material risks associated with currency fluctuations. 57




---



##### 



Investment Risk The Companys exposure to change in the fair market value of Alions stock as the economic
basis for the estimate of contingent liabilities relate to:  
    Repurchase obligations under the KSOP;
    Obligations related to the holders put rights associated with the Mezzanine
Note warrants;
    Obligations related to the holders put rights associated with the Subordinated
Note warrants; and
    Obligations relating to its stock appreciation rights and phantom stock
programs. 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 files or submits 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. 58




---



##### 



PART IIOTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On December 23, 2004, the estate of Joseph Hudert filed an action against Grunley-Walsh
Joint Venture, L.L.C. (Grunley-Walsh) and the Company in the District of Columbia Superior Court
for damages in excess of $80 million. On January 6, 2005, the estate of Frank Stotmeister filed
an action against the Company in the same court on six counts, some of which are duplicate
causes of action, claiming $30 million for each count. Several other potential defendants may be
added to these actions in the future. The suits arose in connection with a steam pipe explosion that occurred on or about April 23,
2004 on a construction site at 17th Street, N.W. in Washington, D.C. Frank Stotmeister
and Joseph Hudert died, apparently as a result of the explosion. The deceased were employees of the
prime contractor on the site, Grunley-Walsh, and the subcontractor, Cherry Hill Construction
Company Inc., respectively. Grunley-Walsh had a contract with the U.S. Government Services
Administration (GSA) for construction on 17th Street N.W. near the Old Executive Office
Building in Washington, D.C. Sometime after the award of Grunley-Walshs construction contract,
Alion was awarded a separate contract by GSA. Alions responsibilities on this contract were
non-supervisory monitoring of Grunley-Walshs activities and report to GSA any deviations from
contract requirements. The Company intends to defend these lawsuits vigorously, and based on the facts currently
known to the Company, the Company does not believe that these lawsuits will have a materially
adverse effect upon the Company, its operations or its financial condition. Alions primary provider of general liability insurance, St. Paul Travelers, has assumed
defense of these lawsuits subject to a reservation of rights to deny coverage. American
International Group, the Companys excess insurance carrier, has also been notified regarding these
lawsuits. 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 which are 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 the Company. The Company is
not aware of any such pending federal government claims or investigations. 59




---



##### 



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None, other than sales of securities already reported by the Company in current reports on
Form 8-K. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION ITEM 6. EXHIBITS Exhibit No.
    
    Description3.1
    
    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)3.3
    
    Third Amended and Restated Certificate of Incorporation of Alion Science and Technology Corporation.4.1
    
    Amended and Restated Alion Science and Technology Corporation Employee Ownership, Savings and Investment
Plan.(2)4.2
    
    First Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment
Plan.(4)4.3
    
    Second Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment
Plan.(5)4.4
    
    Third Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment
Plan.(5)4.5
    
    Fourth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment
Plan.(5)4.6
    
    Fifth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment
Plan.(7)4.7
    
    Sixth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment
Plan. (7)4.8
    
    Seventh Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment
Plan. (7)
 60




---



##### 



Exhibit No.
    
    Description4.9
    
    Eighth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment
Plan. (7)4.10
    
    Ninth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment
Plan.(8)10.37
    
    First Amendment to the Mezzanine Warrant Agreement. (9)10.38
    
    First Amendment to the Seller Warrant Agreement. (9)10.39
    
    First Amendment to the Alion Mezzanine Warrant Agreement between Alion Science and Technology Corporation,
Alion Science and Technology Corporation Employee Ownership, Savings and Investment Trust, and Bahman
Atefi. (9)10.40
    
    Third Amendment to the Alion Science and Technology Corporation Phantom Stock Plan.(10)10.41
    
    Alion Science and Technology Corporation Performance Shares and Retention Phantom Stock Plan. (10)10.42
    
    Second Amendment to the Alion Science and Technology Corporation 2002 Stock Appreciation Rights Plan.
(10)10.43
    
    Alion Science and Technology Corporation 2004 Stock Appreciation Rights Plan. (10)10.44
    
    Second Amendment to the Alion Science and Technology Corporation Directors Deferred Compensation Plan.
(10)10.45
    
    Second Amendment to the Alion Science and Technology Corporation Executive Deferred Compensation Plan.
(10)10.46
    
    Second Amendment to the Seller Warrant Agreement. (10)10.47
    
    Second Amendment to the Mezzanine Warrant Agreement. (10)10.48
    
    Second Amendment to the Alion Mezzanine Warrant Agreement between Alion Science and Technology Corporation,
Alion Science and Technology Corporation Employee Ownership, Savings
and Investment Trust, and Bahman Atefi. (10)10.49
    
    Commitment letter by and between Alion Science and Technologies, Inc. and Credit Suisse First Boston for the
$72 million Term Loan Facility, for Amendment One to existing Term Loan Facility. (11)10.50
    
    Third Amendment to the Seller Warrant Agreement . (12)10.51
    
    Third Amendment to Mezzanine Warrant Agreement . (12)10.52
    
    Third Amendment to the Alion Mezzanine Warrant Agreement between Alion Science and Technology Corporation,
Alion Science and Technology Corporation Employee Ownership, Savings
and Investment Trust, and Bahman Atefi. (12)10.53
    
    Stock Purchase Agreement by and among Alion Science and Technology, Inc, John J. Mc Mullen Associates, Inc.,
Marshall and Ilsley Trust Company, N.A. as Trustee to the John J. McMullen, Inc. Employee Stock Ownership Trust
and P. Thomas Diamant, Anthony Serro, and David Hanafourde.
(13)
 61




---



##### 



Exhibit No.
    
    Description10.54
    
    Incremental Term Loan Assumption Agreement and Amendment Number One to existing Term Loan Facility with Credit
Suisse First. (14)10.55
    
    Employment Agreement between Alion Science and Technology, Inc. and Anthony Serro. (15)10.56
    
    Employment Agreement between Alion Science and Technology, Inc. and P. Thomas Diamant. (15)31.1
    
    Certification of Chief Executive Officer of Alion Science and Technology Corporation pursuant to Rule 15d-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.31.2
    
    Certification of Chief Financial Officer of Alion Science and Technology Corporation pursuant to 15d-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.32.1
    
    Certification of Chief Executive Officer of Alion Science and Technology Corporation, pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer of Alion Science and Technology Corporation, pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   (1)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys
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.
333-89756).(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.
333-89756).(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.
333-89756).(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.
333-89756).(5)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys quarterly
report on Form 10-Q for the quarterly period ended July 4,
2003, filed with the Securities and Exchange Commission on
August 15, 2003.(6)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys
Registration Statement on Form S-8 filed with the
Securities and Exchange Commission on April 28, 2004 (File
no. 333-114935).(7)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys quarterly
report on Form 10-Q for the quarterly period ended
December 31, 2003, filed with the Securities and Exchange
Commission on February 17, 2003 (File no. 333-89756).(8)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys annual
report on Form 10-K for the fiscal year ended September
30, 2004, filed with the Securities and Exchange
Commission on December 28, 2004 (File no. 333-89756).(9)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys annual
report Form 10-K for the fiscal year ended September 30,
2004, filed with the Securities and Exchange Commission on
December 28, 2004 (File no. 333-89756). 62




---



##### 



(10)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys
Post-effective Amendment No. 5 to the Registration
Statement on Form S-1 filed with the Securities and
Exchange Commission on January 24, 2005 (File no.
333-89756).(11)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys Form 8-K
filed with the Securities and Exchange Commission on March
9, 2005 (File no. 333-89756).(12)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys Form 8-K
filed with the Securities and Exchange Commission on March
14, 2005 (File no. 333-89756).(13)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys Form 8-K
filed with the Securities and Exchange Commission on April
6, 2005 (File no. 333-89756).(14)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys Form 8-K
filed with the Securities and Exchange Commission on April
6, 2005 (File no. 333-89756).(15)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys Form 8-K
filed with the Securities and Exchange Commission on April
7, 2005 (File no. 333-89756). 63




---



##### 



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: May 13, 2005 By: /s/ John M. HughesName: John M. HughesTitle: Chief Financial Officer(Principal Financial and Accounting Officer
and Duly Authorized Officer)
 64




---



##### 



EXHIBIT INDEX Exhibit No.
    
    Description3.1
    
    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)3.3
    
    Third Amended and Restated Certificate of Incorporation of Alion Science and Technology Corporation.4.1
    
    Amended and Restated Alion Science and Technology Corporation Employee Ownership, Savings and
Investment Plan.(2)4.2
    
    First Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and
Investment Plan.(4)4.3
    
    Second Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and
Investment Plan.(5)4.4
    
    Third Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and
Investment Plan.(5)4.5
    
    Fourth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and
Investment Plan.(5)4.6
    
    Fifth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and
Investment Plan.(7)4.7
    
    Sixth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and
Investment Plan. (7)4.8
    
    Seventh Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and
Investment Plan. (7)4.9
    
    Eighth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and
Investment Plan. (7)4.10
    
    Ninth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and
Investment Plan. (8)10.37
    
    First Amendment to the Mezzanine Warrant Agreement.(9)10.38
    
    First Amendment to the Seller Warrant Agreement.(9)10.39
    
    First Amendment to the Alion Mezzanine Warrant Agreement between Alion Science and Technology
Corporation, Alion Science and Technology Corporation Employee Ownership, Savings and Investment
Trust, and Bahman Atefi.(9)10.40
    
    Third Amendment to the Alion Science and Technology Corporation Phantom Stock Plan.(10)
 65




---



##### 



Exhibit No.
    
    Description10.41
    
    Alion Science and Technology Corporation Performance Shares and Retention Phantom Stock Plan.
(10)10.42
    
    Second Amendment to the Alion Science and Technology Corporation 2002 Stock Appreciation Rights
Plan. (10)10.43
    
    Alion Science and Technology Corporation 2004 Stock Appreciation Rights Plan. (10)10.44
    
    Second Amendment to the Alion Science and Technology Corporation Directors Deferred Compensation
Plan. (10)10.45
    
    Second Amendment to the Alion Science and Technology Corporation Executive Deferred Compensation
Plan. (10)10.46
    
    Second Amendment to the Seller Warrant Agreement. (10)10.47
    
    Second Amendment to the Mezzanine Warrant Agreement. (10)10.48
    
    Second Amendment to the Alion Mezzanine Warrant Agreement between Alion Science and Technology
Corporation, Alion Science and Technology Corporation Employee Ownership, Savings and Investment
Trust, and Bahman Atefi.(10)10.49
    
    Commitment letter by and between Alion Science and Technologies, Inc. and Credit Suisse First Boston
for the $72 million Term Loan Facility, for Amendment One to existing Term Loan
Facility.(11)10.50
    
    Third Amendment to the Seller Warrant Agreement.(12)10.51
    
    Third Amendment to Mezzanine Warrant Agreement .(12)10.52
    
    Third Amendment to the Alion Mezzanine Warrant Agreement between Alion Science and Technology
Corporation, Alion Science and Technology Corporation Employee Ownership, Savings and Investment
Trust, and Bahman Atefi .(12)10.53
    
    Stock Purchase Agreement by and among Alion Science and Technology, Inc, John J. Mc Mullen
Associates, Inc., Marshall and Ilsley Trust Company, N.A. as Trustee to the John J. McMullen, Inc.
Employee Stock Ownership Trust and P. Thomas Diamant, Anthony Serro, and David
Hanafourde.(13)10.54
    
    Incremental Term Loan Assumption Agreement and Amendment Number One to existing Term Loan Facility
with Credit Suisse First.(14)10.55
    
    Employment Agreement between Alion Science and Technology, Inc. and Anthony Serro.(15)10.56
    
    Employment Agreement between Alion Science and Technology, Inc. and P. Thomas Diamant.(15)31.1
    
    Certification of Chief Executive Officer of Alion Science and Technology Corporation pursuant to
Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.31.2
    
    Certification of Chief Financial Officer of Alion Science and Technology Corporation pursuant to
15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.32.1
    
    Certification of Chief Executive Officer of Alion Science and Technology Corporation, pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer of Alion Science and Technology Corporation, pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 66




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##### 



(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.
333-89756).(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.
333-89756).(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.
333-89756).(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.
333-89756).(5)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys quarterly
report on Form 10-Q for the quarterly period ended July 4,
2003, filed with the Securities and Exchange Commission on
August 15, 2003.(6)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys
Registration Statement on Form S-8 filed with the
Securities and Exchange Commission on April 28, 2004 (File
no. 333-114935).(7)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys quarterly
report on Form 10-Q for the quarterly period ended
December 31, 2003, filed with the Securities and Exchange
Commission on February 17, 2003 (File no. 333-89756).(8)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys annual
report on Form 10-K for the fiscal year ended September
30, 2004, filed with the Securities and Exchange
Commission on December 28, 2004 (File no. 333-89756).(9)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys annual
report Form 10-K for the fiscal year ended September 30,
2004, filed with the Securities and Exchange Commission on
December 28, 2004 (File no. 333-89756).(10)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys
Post-effective Amendment No. 5 to the Registration
Statement on Form S-1 filed with the Securities and
Exchange Commission on January 24, 2005 (File no.
333-89756).(11)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys Form 8-K
filed with the Securities and Exchange Commission on March
9, 2005 (File no. 333-89756).(12)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys Form 8-K
filed with the Securities and Exchange Commission on March
14, 2005 (File no. 333-89756).(13)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys Form 8-K
filed with the Securities and Exchange Commission on April
6, 2005 (File no. 333-89756). 67




---



##### 



(14)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys Form 8-K
filed with the Securities and Exchange Commission on April
6, 2005 (File no. 333-89756).(15)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys Form 8-K
filed with the Securities and Exchange Commission on April
7, 2005 (File no. 333-89756).(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.
333-89756).(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.
333-89756).(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.
333-89756).(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.
333-89756).(5)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys quarterly
report on Form 10-Q for the quarterly period ended July 4,
2003, filed with the Securities and Exchange Commission on
August 15, 2003.(6)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys
Registration Statement on Form S-8 filed with the
Securities and Exchange Commission on April 28, 2004 (File
no. 333-114935).(7)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys quarterly
report on Form 10-Q for the quarterly period ended
December 31, 2003, filed with the Securities and Exchange
Commission on February 17, 2003 (File no. 333-89756).(8)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys annual
report on Form 10-K for the fiscal year ended September
30, 2004, filed with the Securities and Exchange
Commission on December 28, 2004 (File no. 333-89756).(9)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys annual
report Form 10-K for the fiscal year ended September 30,
2004, filed with the Securities and Exchange Commission on
December 28, 2004 (File no. 333-89756).(10)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys
Post-effective Amendment No. 5 to the Registration
Statement on Form S-1 filed with the Securities and
Exchange Commission on January 24, 2005 (File no.
333-89756).(11)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys Form 8-K
filed with the Securities and Exchange Commission on March
9, 2005 (File no. 333-89756). 68




---



##### 



(12)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys Form 8-K
filed with the Securities and Exchange Commission on March
14, 2005 (File no. 333-89756).(13)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys Form 8-K
filed with the Securities and Exchange Commission on April
6, 2005 (File no. 333-89756).(14)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys Form 8-K
filed with the Securities and Exchange Commission on April
6, 2005 (File no. 333-89756).(15)
    
    Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to the Companys Form 8-K
filed with the Securities and Exchange Commission on April
7, 2005 (File no. 333-89756). 69