##### 









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, DC 20549




---

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934


FOR THE QUARTERLY PERIOD ENDED MARCH 14,
2003.


OR

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

THE SECURITIES EXCHANGE ACT 1934


FOR THE TRANSITION PERIOD FROM

TO

COMMISSION FILE NUMBER 333-89756



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ALION SCIENCE AND TECHNOLOGY
CORPORATION

(Exact Name of Registrant as Specified in Its
Charter)


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

(Address, including Zip Code and Telephone Number
with


Area Code, of Principal Executive Offices)





(Former name, former address and former fiscal
year, if changed since last report)


Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by

Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months


(or for such shorter period that the registrant
was required to file such reports), and


(2) has been subject to such filing
requirements for the past 90 days.


[X]Yes     [ ] No

Indicate by check mark whether the registrant is
an

accelerated filer (as defined in Rule 12b-2
of the Exchange Act).


Yes [ ]     No [X]

The number of shares outstanding of Alion Science
and Technology Corporation

common stock as of March 14, 2003, was:


Common Stock 2,575,508.127 Shares










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##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION

FORM 10-Q INDEX


FOR QUARTERLY PERIOD ENDED MARCH 14,
2003


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



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##### 



PART I  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALION SCIENCE AND TECHNOLOGY
CORPORATION

Consolidated Balance Sheets


As of March 14, 2003 (unaudited) and September
30, 2002

(In thousands, except share
information)


|                                                   |                                                                                                                                                                                        |                                      |        |               |         |  |   |     |     |  
|-------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ------ | ------------- | ------- |  | - | --- | --- | -
|                                                   |                                                                                                                                                                                        | March 14,                            |        | September 30,
|                                                   |                                                                                                                                                                                        | 2003                                 |        | 2002         
|                                                   |                                                                                                                                                                                        |                                      |        |              
|                                                   |                                                                                                                                                                                        | (unaudited)                          |        |              
|Assets                                             |                                                                                                                                                                                        |                                      |        |               |         |  |   |    
|Current assets:                                    |                                                                                                                                                                                        |                                      |        |               |         |  |   |    
|                                                   | Cash                                                                                                                                                                                   |                                      | $      | 797           |         |  | $ | 6   |    
|                                                   | Restricted cash                                                                                                                                                                        |                                      |        | 79            |         |  |   |    |    
|                                                   | Accounts receivable, less allowance of $3,568 at
    March 14, 2003                                                                                                                    |                                      |        | 48,491        |         |  |   |    |    
|                                                   | Note receivable from Trust                                                                                                                                                             |                                      |        |              |         |  |   | 1   |    
|                                                   | Other current assets                                                                                                                                                                   |                                      |        | 3,850         |         |  |   |    |    
|                                                   |                                                                                                                                                                                        |                                      |        |               |         |  |   |    
|                                                   |                                                                                                                                                                                        | Total current assets                 |        |               | 53,217  |  |   |     | 7   |  
|Fixed assets, net                                  |                                                                                                                                                                                        |                                      | 9,109  |               |         |  |  |    
|Intangible assets, net                             |                                                                                                                                                                                        |                                      | 28,289 |               |         |  |  |    
|Goodwill                                           |                                                                                                                                                                                        |                                      | 60,918 |               |         |  |  |    
|                                                   |                                                                                                                                                                                        |                                      |        |               |         |  |   |    
|                                                   |                                                                                                                                                                                        | Total assets                         |        | $             | 151,533 |  |   | $   | 7   |  
|                                                   |                                                                                                                                                                                        |                                      |        |               |         |  |   |    
|Liabilities and Shareholders
    Equity           |                                                                                                                                                                                        |                                      |        |               |         |  |   |    
|Current liabilities:                               |                                                                                                                                                                                        |                                      |        |               |         |  |   |    
|                                                   | Note payable to bank                                                                                                                                                                   |                                      | $      |              |         |  | $ | 10  |    
|                                                   | Notes payable to officer                                                                                                                                                               |                                      |        | 1             |         |  |   | 1   |    
|                                                   | Current portion of long-term debt                                                                                                                                                      |                                      |        | 7,000         |         |  |   |    |    
|                                                   | Current portion of senior note payable                                                                                                                                                 |                                      |        | 5,000         |         |  |   |    |    
|                                                   | Trade accounts payable and
    accrued liabilities                                                                                                                                     |                                      |        | 10,051        |         |  |   |    |    
|                                                   | Accrued payroll and related liabilities                                                                                                                                                |                                      |        | 11,198        |         |  |   | 86  |    
|                                                   | Advance payments                                                                                                                                                                       |                                      |        | 86            |         |  |   |    |    
|                                                   | Billings in excess of costs and estimated
    earnings on uncompleted contracts                                                                                                        |                                      |        | 533           |         |  |   |    |    
|                                                   | Due to IITRI                                                                                                                                                                           |                                      |        | 3,240         |         |  |   |    |    
|                                                   |                                                                                                                                                                                        |                                      |        |               |         |  |   |    
|                                                   |                                                                                                                                                                                        | Total current liabilities            |        |               | 37,109  |  |   |     | 97  |  
|Long-term debt, excluding current portion          |                                                                                                                                                                                        |                                      | 956    |               |         |  |  |    
|Senior note payable, excluding
    current portion |                                                                                                                                                                                        |                                      | 27,156 |               |         |  |  |    
|Mezzanine note payable                             |                                                                                                                                                                                        |                                      | 17,357 |               |         |  |  |    
|Subordinated note payable                          |                                                                                                                                                                                        |                                      | 33,010 |               |         |  |  |    
|Payable under agreement with officer               |                                                                                                                                                                                        |                                      | 731    |               |         |  |  |    
|Accrued postretirement benefit obligation          |                                                                                                                                                                                        |                                      | 2,357  |               |         |  |  |    
|Redeemable common stock warrants                   |                                                                                                                                                                                        |                                      | 10,308 |               |         |  |  |    
|                                                   |                                                                                                                                                                                        |                                      |        |               |         |  |   |    
|                                                   |                                                                                                                                                                                        | Total liabilities                    |        |               | 128,984 |  |   |     | 97  |  
|Shareholders equity:                              |                                                                                                                                                                                        |                                      |        |               |         |  |   |    
|                                                   | Common stock, $0.01 par value, 15,000,000 shares
    authorized, 100 shares and 2,575,508 shares issued and
    outstanding at September 30, 2002 and March 14,
    2003, respectively |                                      |        | 26            |         |  |   |    |    
|                                                   | Additional paid-in capital                                                                                                                                                             |                                      |        | 25,730        |         |  |   | 1   |    
|                                                   | Accumulated deficit                                                                                                                                                                    |                                      |        | (3,207        | )       |  |   | (91 | )  
|                                                   |                                                                                                                                                                                        |                                      |        |               |         |  |   |    
|                                                   |                                                                                                                                                                                        | Total shareholders equity (deficit) |        |               | 22,549  |  |   |     | (90 | )
|                                                   |                                                                                                                                                                                        |                                      |        |               |         |  |   |    
|                                                   | Total liabilities and
    shareholders equity                                                                                                                                         |                                      | $      | 151,533       |         |  | $ | 7   |    
|                                                   |                                                                                                                                                                                        |                                      |        |               |         |  |   |    

See accompanying notes to consolidated financial
statements.

1



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION

Consolidated Statements of
Operations


For the 12-Week and 24-Week Periods Ended
March 14, 2003 and March 15, 2002

(In thousands, except share
information)


(Unaudited)


|                                                                 |                                |                          |           |                        |        |                |   |                |   |   |        |        |        |   |   |   |   | 
|---------------------------------------------------------------- | ------------------------------ | ------------------------ | --------- | ---------------------- | ------ | -------------- | - | -------------- | - | - | ------ | ------ | ------ | - | - | - | - | 
|                                                                 |                                |                          |           |                       
|                                                                 |                                | For the 12-Week Period   |           | For the 24-Week Period
|                                                                 |                                |                          |           |                       
|                                                                 |                                | Ended                    |           | Ended                  |        | Ended          |   | Ended         
|                                                                 |                                | March 14, 2003           |           | March 15, 2002         |        | March 14, 2003 |   | March 15, 2002
|                                                                 |                                |                          |           |                        |        |                |   |               
|Contract revenue                                                 |                                | $                        | 49,005    |                        |        | $              |  |                |   | $ | 49,005 |        |        | $ |  |  
|Direct contract expenses                                         |                                |                          | 36,031    |                        |        |                |  |                |   |   | 36,031 |        |        |   |  |  
|                                                                 |                                |                          |           |                        |        |                |   |                |   |   |        |        |        |   |   |  
|                                                                 |                                | Gross profit             |           |                        | 12,974 |                |   |                |  |   |        |        | 12,974 |   |   |   |  | 
|                                                                 |                                |                          |           |                        |        |                |   |                |   |   |        |        |        |   |   |  
|Operating expenses:                                              |                                |                          |           |                        |        |                |   |                |   |   |        |        |        |   |   |  
|                                                                 | Indirect contract expenses     |                          |           | 2,848                  |        |                |   |               |   |   |        | 2,848  |        |   |   |  |  
|                                                                 | Research and development       |                          |           | 19                     |        |                |   |               |   |   |        | 19     |        |   |   |  |  
|                                                                 | General and administrative     |                          |           | 5,432                  |        |                |   |               |   |   |        | 5,473  |        |   |   |  |  
|                                                                 | Nonrecurring transaction costs |                          |           | 388                    |        |                |   |               |   |   |        | 388    |        |   |   |  |  
|                                                                 | Rental and occupancy expense   |                          |           | 2,093                  |        |                |   |               |   |   |        | 2,093  |        |   |   |  |  
|                                                                 | Depreciation and amortization  |                          |           | 2,819                  |        |                |   |               |   |   |        | 2,819  |        |   |   |  |  
|                                                                 | Bad debt expense               |                          |           | 155                    |        |                |   |               |   |   |        | 155    |        |   |   |  |  
|                                                                 |                                |                          |           |                        |        |                |   |                |   |   |        |        |        |   |   |  
|Total operating expense                                          |                                |                          | 13,754    |                        |        |                |  |                |   |   | 13,795 |        |        |   |  |  
|                                                                 |                                |                          |           |                        |        |                |   |                |   |   |        |        |        |   |   |  
|                                                                 |                                | Operating loss           |           |                        | (780   | )              |   |                |  |   |        |        | (821   | ) |   |   |  | 
|                                                                 |                                |                          |           |                        |        |                |   |                |   |   |        |        |        |   |   |  
|Other expense:                                                   |                                |                          |           |                        |        |                |   |                |   |   |        |        |        |   |   |  
|                                                                 | Interest income                |                          |           | 3                      |        |                |   |               |   |   |        | 3      |        |   |   |  |  
|                                                                 | Interest expense               |                          |           | (2,223                 | )      |                |   |               |   |   |        | (2,223 | )      |   |   |  |  
|                                                                 | Other                          |                          |           | (75                    | )      |                |   |               |   |   |        | (75    | )      |   |   |  |  
|                                                                 |                                |                          |           |                        |        |                |   |                |   |   |        |        |        |   |   |  
|                                                                 |                                | Loss before income taxes |           |                        | (3,075 | )              |   |                |  |   |        |        | (3,116 | ) |   |   |  | 
|                                                                 | Income tax expense             |                          |           |                       |        |                |   |               |   |   |        |       |        |   |   |  |  
|                                                                 |                                |                          |           |                        |        |                |   |                |   |   |        |        |        |   |   |  
|                                                                 |                                | Net loss                 |           | $                      | (3,075 | )              |   | $              |  |   |        | $      | (3,116 | ) |   | $ |  | 
|                                                                 |                                |                          |           |                        |        |                |   |                |   |   |        |        |        |   |   |  
|Basic and diluted loss per share                                 |                                | $                        | (1.19     | )                      |        |                |   |                |   |   |        |        |        |   |   |  
|                                                                 |                                |                          |           |                        |        |                |   |                |   |   |        |        |        |   |   |  
|Basic and diluted weighted average common shares
    outstanding |                                |                          | 2,575,508 |                        |        |                |   |                |   |   |        |        |        |   |   |  

See accompanying notes to consolidated financial
statements.

2



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION

Pro Forma Consolidated Statements of
Operations (See Note 9)


For the 12-Week and 24-Week Periods Ended
March 14, 2003 and March 15, 2002

(In thousands, except share
information)


(Unaudited)


|                                                                           |                                |                          |           |                        |        |                |           |                |        |   |           |        |         |   |           |        |        |  
|-------------------------------------------------------------------------- | ------------------------------ | ------------------------ | --------- | ---------------------- | ------ | -------------- | --------- | -------------- | ------ | - | --------- | ------ | ------- | - | --------- | ------ | ------ | -
|                                                                           |                                |                          |           |                       
|                                                                           |                                | Pro Forma                |           | Pro Forma             
|                                                                           |                                | For the 12-Week Period   |           | For the 24-Week Period
|                                                                           |                                |                          |           |                       
|                                                                           |                                | Ended                    |           | Ended                  |        | Ended          |           | Ended         
|                                                                           |                                | March 14, 2003           |           | March 15, 2002         |        | March 14, 2003 |           | March 15, 2002
|                                                                           |                                |                          |           |                        |        |                |           |               
|Contract revenue                                                           |                                | $                        | 49,005    |                        |        | $              | 44,852    |                |        | $ | 96,270    |        |         | $ | 88,554    |       
|Direct contract expenses                                                   |                                |                          | 36,031    |                        |        |                | 32,838    |                |        |   | 70,686    |        |         |   | 64,923    |       
|                                                                           |                                |                          |           |                        |        |                |           |                |        |   |           |        |         |   |           |       
|                                                                           |                                | Gross profit             |           |                        | 12,974 |                |           |                | 12,014 |   |           |        | 25,584  |   |           |        | 23,631 |  
|                                                                           |                                |                          |           |                        |        |                |           |                |        |   |           |        |         |   |           |       
|Operating expenses:                                                        |                                |                          |           |                        |        |                |           |                |        |   |           |        |         |   |           |       
|                                                                           | Indirect contract expenses     |                          |           | 2,848                  |        |                |           | 2,249          |        |   |           | 5,416  |         |   |           | 4,794  |       
|                                                                           | Research and development       |                          |           | 19                     |        |                |           | 114            |        |   |           | 55     |         |   |           | 205    |       
|                                                                           | General and administrative     |                          |           | 5,432                  |        |                |           | 4,710          |        |   |           | 10,746 |         |   |           | 9,373  |       
|                                                                           | Nonrecurring transaction costs |                          |           | 388                    |        |                |           | 1,078          |        |   |           | 5,836  |         |   |           | 1,078  |       
|                                                                           | Rental and occupancy expense   |                          |           | 2,093                  |        |                |           | 1,981          |        |   |           | 4,294  |         |   |           | 3,846  |       
|                                                                           | Depreciation and amortization  |                          |           | 2,819                  |        |                |           | 2,789          |        |   |           | 5,702  |         |   |           | 5,548  |       
|                                                                           | Bad debt expense               |                          |           | 155                    |        |                |           | 6              |        |   |           | 275    |         |   |           | 9      |       
|                                                                           |                                |                          |           |                        |        |                |           |                |        |   |           |        |         |   |           |       
|Total operating expenses                                                   |                                |                          | 13,754    |                        |        |                | 12,927    |                |        |   | 32,324    |        |         |   | 24,853    |       
|                                                                           |                                |                          |           |                        |        |                |           |                |        |   |           |        |         |   |           |       
|                                                                           |                                | Operating loss           |           |                        | (780   | )              |           |                | (913   | ) |           |        | (6,740  | ) |           |        | (1,222 | )
|                                                                           |                                |                          |           |                        |        |                |           |                |        |   |           |        |         |   |           |       
|Other expense:                                                             |                                |                          |           |                        |        |                |           |                |        |   |           |        |         |   |           |       
|                                                                           | Interest income                |                          |           | 3                      |        |                |           | 13             |        |   |           | 25     |         |   |           | 15     |       
|                                                                           | Interest expense               |                          |           | (2,223                 | )      |                |           | (2,178         | )      |   |           | (4,377 | )       |   |           | (4,335 | )     
|                                                                           | Other                          |                          |           | (75                    | )      |                |           | 19             |        |   |           | (96    | )       |   |           | (56    | )     
|                                                                           |                                |                          |           |                        |        |                |           |                |        |   |           |        |         |   |           |       
|                                                                           |                                | Loss before income taxes |           |                        | (3,075 | )              |           |                | (3,059 | ) |           |        | (11,188 | ) |           |        | (5,598 | )
|                                                                           | Income tax expense             |                          |           |                       |        |                |           | (159           | )      |   |           | (27    | )       |   |           | (366   | )     
|                                                                           |                                |                          |           |                        |        |                |           |                |        |   |           |        |         |   |           |       
|                                                                           |                                | Net loss                 |           | $                      | (3,075 | )              |           | $              | (3,218 | ) |           | $      | (11,215 | ) |           | $      | (5,964 | )
|                                                                           |                                |                          |           |                        |        |                |           |                |        |   |           |        |         |   |           |       
|Pro forma basic and diluted loss per share                                 |                                | $                        | (1.19     | )                      |        | $              | (1.25     | )              |        | $ | (4.35     | )      |         | $ | (2.32     | )     
|                                                                           |                                |                          |           |                        |        |                |           |                |        |   |           |        |         |   |           |       
|Pro forma basic and diluted weighted average
    common shares outstanding |                                |                          | 2,575,508 |                        |        |                | 2,575,508 |                |        |   | 2,575,508 |        |         |   | 2,575,508 |       

See accompanying notes to consolidated financial
statements.

3



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION

Consolidated Statement of Shareholders
Equity (Deficit)


For the 24-Week Period Ended March 14,
2003

(In thousands, except share
information)


(Unaudited)


|                                                  |  |        |           |        |  |            |    |             |  |       |        |  |  |   |        |   |  |   |        |  
|------------------------------------------------- |  | ------ | --------- | ------ |  | ---------- | -- | ----------- |  | ----- | ------ |  |  | - | ------ | - |  | - | ------ | -
|                                                  |  |        |           |        |  | Additional |    |             |  |      
|                                                  |  | Common |           | Common |  | Paid-in    |    | Accumulated |  |      
|                                                  |  | Shares |           | Stock  |  | Capital    |    | Deficit     |  | Total
|                                                  |  |        |           |        |  |            |    |             |  |      
|Balances at September 30, 2002                    |  |        | 100       |        |  | $          |   |             |  | $     | 1      |  |  | $ | (91    | ) |  | $ | (90    | )
|Issuance of common stock to Trust                 |  |        | 2,575,408 |        |  |            | 26 |             |  |       | 25,729 |  |  |   |       |   |  |   | 25,755 |  
|Net loss, 24-week period ended
    March 14, 2003 |  |        |          |        |  |            |   |             |  |       |       |  |  |   | (3,116 | ) |  |   | (3,116 | )
|                                                  |  |        |           |        |  |            |    |             |  |       |        |  |  |   |        |   |  |   |        |  
|Balances at March 14, 2003                        |  |        | 2,575,508 |        |  | $          | 26 |             |  | $     | 25,730 |  |  | $ | (3,207 | ) |  | $ | 22,549 |  
|                                                  |  |        |           |        |  |            |    |             |  |       |        |  |  |   |        |   |  |   |        |  

See accompanying notes to consolidated financial
statements.

4



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION

Consolidated Statements of Cash
Flows


For the 24-Week Periods Ended March 14,
2003 and March 15, 2002

(In thousands)


(unaudited)


|                                                                                    |                                                                                                           |                        |         |                |   |   |   |    |  
|----------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------- | ---------------------- | ------- | -------------- | - | - | - | -- | -
|                                                                                    |                                                                                                           |                       
|                                                                                    |                                                                                                           | For the 24-Week Period
|                                                                                    |                                                                                                           |                       
|                                                                                    |                                                                                                           | Ended                  |         | Ended         
|                                                                                    |                                                                                                           | March 14, 2003         |         | March 15, 2002
|                                                                                    |                                                                                                           |                        |         |               
|Cash flows from operating activities                                                |                                                                                                           |                        |         |                |   |   |   |   
|                                                                                    | Net loss                                                                                                  |                        | $       | (3,116         | ) |   |   |   |  
|Adjustments to reconcile net loss to net cash
    provided by operating activities: |                                                                                                           |                        |         |                |   |   |   |   
|                                                                                    | Depreciation and amortization                                                                             |                        |         | 2,819          |   |   |   |   |  
|                                                                                    | Accretion in value of debt-related warrants                                                               |                        |         | 307            |   |   |   |   |  
|                                                                                    | Gain on investments                                                                                       |                        |         | 9              |   |   |   |   |  
|Changes in assets and liabilities, net of effect
    of acquisition:                |                                                                                                           |                        |         |                |   |   |   |   
|                                                                                    | Accounts receivable, net                                                                                  |                        |         | 934            |   |   |   |   |  
|                                                                                    | Other assets                                                                                              |                        |         | (1,146         | ) |   |   | 1  |  
|                                                                                    | Trade accounts payable and accruals                                                                       |                        |         | (472           | ) |   |   |   |  
|                                                                                    | Other liabilities                                                                                         |                        |         | 2,218          |   |   |   | (1 | )
|                                                                                    |                                                                                                           |                        |         |                |   |   |   |   
|Net cash provided by operating activities                                           |                                                                                                           |                        | 1,553   |                |   |   |  |   
|                                                                                    |                                                                                                           |                        |         |                |   |   |   |   
|Cash flows from investing activities:                                               |                                                                                                           |                        |         |                |   |   |   |   
|                                                                                    | Cash paid for acquisition, net of cash
    acquired                                                       |                        |         | (58,858        | ) |   |   |   |  
|                                                                                    | Capital expenditures                                                                                      |                        |         | (475           | ) |   |   |   |  
|                                                                                    |                                                                                                           |                        |         |                |   |   |   |   
|Net cash used in investing activities                                               |                                                                                                           |                        | (59,333 | )              |   |   |  |   
|                                                                                    |                                                                                                           |                        |         |                |   |   |   |   
|Cash flows from financing activities:                                               |                                                                                                           |                        |         |                |   |   |   |   
|                                                                                    | Proceeds from senior note payable                                                                         |                        |         | 35,000         |   |   |   |   |  
|                                                                                    | Payment of debt issuance costs                                                                            |                        |         | (1,700         | ) |   |   |   |  
|                                                                                    | Repayment of senior note payable                                                                          |                        |         | (1,250         | ) |   |   |   |  
|                                                                                    | Amortization of debt issuance costs                                                                       |                        |         | 106            |   |   |   |   |  
|                                                                                    | Proceeds from note due to officer                                                                         |                        |         |               |   |   |   | 1  |  
|                                                                                    | Loan to Trust                                                                                             |                        |         |               |   |   |   | (1 | )
|                                                                                    | Borrowings under Alion revolving
    credit agreement                                                     |                        |         | 7,000          |   |   |   |   |  
|                                                                                    | Repayments under IITRI revolving
    credit agreement                                                     |                        |         | (6,185         | ) |   |   |   |  
|                                                                                    | Payment of acquisition obligations                                                                        |                        |         | (155           | ) |   |   |   |  
|                                                                                    | Distributions to former owner                                                                             |                        |         | 0              |   |   |   |   |  
|                                                                                    | Issuance of common stock to Trust                                                                         |                        |         | 25,755         |   |   |   | 1  |  
|                                                                                    |                                                                                                           |                        |         |                |   |   |   |   
|Net cash provided by financing activities                                           |                                                                                                           |                        | 58,571  |                |   |   | 1 |   
|                                                                                    |                                                                                                           |                        |         |                |   |   |   |   
|Net increase in cash                                                                |                                                                                                           |                        | 791     |                |   |   | 1 |   
|Cash at beginning of period                                                         |                                                                                                           |                        | 6       |                |   |   |  |   
|                                                                                    |                                                                                                           |                        |         |                |   |   |   |   
|Cash at end of period                                                               |                                                                                                           | $                      | 797     |                |   | $ | 1 |   
|                                                                                    |                                                                                                           |                        |         |                |   |   |   |   
|Supplemental disclosure of noncash financing
    activities:                        |                                                                                                           |                        |         |                |   |   |   |   
|                                                                                    | Mezzanine note and warrants issued in connection
    with acquisition of selected operations of IITRI     |                        | $       | 20,343         |   |   | $ |   |  
|                                                                                    | Subordinated note and warrants issued in
    connection with acquisition of selected operations of IITRI  |                        |         | 39,900         |   |   |   |   |  
|                                                                                    | Bank debt assumed in connection with the
    acquisition of selected operations of IITRI                  |                        |         | 6,185          |   |   |   |   |  
|                                                                                    | IITRI transaction costs assumed in connection
    with the acquisition of selected operations of IITRI    |                        |         | 783            |   |   |   |   |  
|                                                                                    | Additional non-cash consideration paid in
    connection with acquisition of selected operations of IITRI |                        |         | 1,798          |   |   |   |   |  
|                                                                                    | Deferred compensation arrangement
    with officer                                                        |                        |         | 857            |   |   |   |   |  

See accompanying notes to consolidated financial
statements.

5



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


Interim periods ended March 14, 2003 and
March 15, 2002 (unaudited)



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

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

Alion, a for-profit S Corporation, was
formed in October 2001 for the purpose of purchasing
substantially all of the assets and certain of the liabilities
of IIT Research Institute (IITRI), a not-for-profit membership
corporation.

On December 20, 2002, Alion completed the
acquisition of substantially all of the assets and certain of
the liabilities of IITRI (the Transaction) for an aggregate cost
of approximately $127.9 million which included cash and
notes issued to IITRI aggregating $119.4 million, the
assumption of $6.2 million of IITRI bank debt and
reimbursement of $2.3 million of IITRIs transaction
costs included in the liabilities assumed by Alion in the
Transaction. See Note 9.



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

The accompanying unaudited consolidated financial
statements include the accounts of Alion and its wholly-owned
subsidiary Human Factors Applications, Inc. (HFA) and have
been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission regarding interim financial
information. Certain information and note disclosures normally
included in the annual financial statements, prepared in
accordance with accounting principles generally accepted in the
United States of America, have been condensed or omitted
pursuant to those rules and regulations. In the opinion of
management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the 24-week interim period ended
March 14, 2003 are not necessarily indicative of the
results that may be expected for the fiscal year ending
September 30, 2003. For further information, refer to the
consolidated financial statements and notes thereto included in
Post-Effective Amendment No. 3 to the Companys
registration statement on Form S-1 filed with the SEC on
March 24, 2003.

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



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



| |                           
| | --------------------------
| | Fiscal and Interim Periods

The Companys fiscal year ends on
September 30. The Company operates on a 13-period fiscal
year consisting of three, four-week periods in its first interim
period; three, four-week periods in its second interim period;
four, four-week periods in its third interim period; and the
balance of the fiscal year of approximately three, four-week
periods in its fourth interim period. Accordingly, comparisons
between interim periods will need to consider the differing
length of the third and fourth interim periods.



| |                    
| | -------------------
| | Revenue Recognition

Alions revenue results from research and
other services under a variety of contracts, some of which
provide for reimbursement of costs plus fees and others of which
are fixed-price or time-and-materials type

6



---



##### 



contracts. Alion generally recognizes revenue
when a contract has been executed, the contract price is fixed
and determinable, delivery of the services or products has
occurred and collectibles of the contract price is considered
probable.


Revenue on cost-plus contracts is recognized as
costs are incurred plus a proportionate share of the fees earned.

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

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



| |                
| | ---------------
| | Restricted Cash

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



| |                              
| | -----------------------------
| | Property, Plant and Equipment

Buildings, leasehold improvements and equipment
are recorded at cost. Expenditures for maintenance and repairs
are charged to current operations. Buildings and equipment are
depreciated over their estimated useful lives (50 years for
buildings and 3 to 15 years for the various classes of
equipment) generally using the straight-line method. Leasehold
improvements are amortized on the accumulated depreciation are
deducted from the accounts, and the gain or loss is recognized
in the consolidated statement of activities.



| |             
| | ------------
| | Income Taxes

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



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

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



| |                  
| | -----------------
| | Reclassifications

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



|   |                   
|-- | ------------------
|4. | Earnings Per Share

Pro forma earnings per share have been computed
as though the 2,575,408 shares sold by the Company to the
employee stock ownership plan (ESOP) component of its Employee
Ownership Savings and Investment

7



---



##### 



Plan (KSOP) to fund the Transaction
described in Note 1 were outstanding for the entire pro forma
periods presented. Prior to the sale of shares of common stock
to the ESOP, the Companys capital structure consisted of
100 shares of common stock issued and outstanding. Accordingly,
historical earnings per share information for periods prior to
the Transaction has not been presented as it is not indicative
of the Companys capital structure.




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

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

As a result of the Transaction described in Note
1, the Company recorded goodwill of approximately
$60.9 million, which will be subject to the aforementioned
annual impairment review. In addition, the Company recorded
intangible assets of approximately $30.6 million, comprised
primarily of purchased contracts. The intangible assets have an
estimated useful life of three years and will be amortized using
the straight-line method.



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

In connection with the issuance of the Mezzanine
Note, Subordinated Note, and the Deferred Compensation Agreement
described in Note 7, the Company issued 524,229, 1,080,437, and
22,062, respectively, detachable redeemable common stock
warrants (the Warrants) to the holders of the notes. The
Warrants have an exercise price of $10 per share and are
exercisable until the sixth anniversary of the issue date for
the warrants associated with the Mezzanine Note and the Deferred
Compensation Agreement and until the eighth anniversary of the
issuance date for the warrants associated with the Subordinated
Note. In addition, 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
No. 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a
Companys Own Stock. The estimated fair value of the
Warrants of approximately $10.3 million on the date of
issuance was recorded as a discount to the face value of the
notes issued and as a liability in the accompanying consolidated
balance sheet.



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

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

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

|     |  |   |             | 
|---- |  | - | ----------- | 
|2003 |  | $ | 5.0 million | 
|2004 |  | $ | 5.0 million | 
|2005 |  | $ | 7.5 million | 
|2006 |  | $ | 8.5 million | 
|2007 |  | $ | 9.0 million | 

8



---



##### 



For the periods until the receipt of the
compliance certificate and audited financial statements for the
fiscal year ended September 30, 2003, our borrowings under the
senior credit facility will bear interest at either of two
floating rates: a per year rate equal to the Eurodollar rate
plus 3.5 percent, or the prime rate (base rate) plus 2.0
percent. After the lenders receipt of our audited
financial statements for the fiscal year ended September 30,
2003, the interest rate will equal the Eurodollar rate or the
prime rate (base rate) plus varying margins which will vary
depending on our leverage ratio.

Effective February 14, 2003, we exercised
our right to elect that the term note will bear interest at a
Eurodollar rate. This election does not affect the interest rate
applicable to amounts borrowed under the revolving line of
credit. As a result, interest under the term note is payable at
the prime rate (base rate) plus 2.0 percent until
February 14, 2003. Thereafter and until the lenders
receipt of our audited financial statements for fiscal year
ending September 30, 2003, the term note will bear interest
at the Eurodollar rate plus 3.5 percent.

We entered into an interest rate cap agreement
effective as of February 3, 2003 with one of our senior
lenders. Under this agreement, our maximum effective rate of
interest payable on the first $25 million of principal
under of our term note will not exceed 6 percent. Any interest
we pay on the first $25 million of principal in excess of
6 percent to the senior lenders pursuant to the terms of
the senior credit facility will be calculated and reimbursed to
us semiannually by the one senior lender pursuant to the cap
agreement. This cap agreement expires February 3, 2007.

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

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

On December 20, 2002, the Company entered
into a deferred compensation agreement with Dr. Atefi as a
condition to completing the IITRI acquisition. Under the
deferred compensation agreement, Dr Atefi is entitled to payment
from us of approximately $857,000 on December 20, 2008, plus 12%
cash interest per year.

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

8.     Commitments
& Contingencies

On September 16, 2002, IITRI, substantially
all of whose assets we acquired on December 20, 2002, filed
a lawsuit against Clyde Andrews and William Bewley in the U.S.
District Court for the Eastern District

9



---



##### 



of Virginia, which we refer to as the Court.
Messrs. Andrews and Bewley were formerly the shareholders
of AB Technologies, Inc. IITRI acquired substantially all of the
assets of AB Technologies in February 2000.


The lawsuit asks the Court to compel Messrs.
Andrews and Bewley to submit disputed issues to an independent
accounting firm, in accordance with the requirements of the
asset purchase agreement. The lawsuit also asks the Court to
make a declaratory judgment concluding that IITRI is entitled to
an approximately $1.1 million downward adjustment of the
purchase price paid under the asset purchase agreement, and that
IITRI properly computed the earnout in accordance with the
earnout formula in the asset purchase agreement.

Messrs. Andrews and Bewley filed a lawsuit
against IITRI in the Circuit Court for Fairfax County, Virginia
on September 12, 2002. The complaint filed by
Messrs. Andrews and Bewley alleges breach of the AB
Technologies asset purchase agreement, and claims damages of at
least $8.2 million. Their lawsuit does not explain how
Messrs. Andrews and Bewley calculate their damages figure.
Messrs. Andrews and Bewley have also asked the court to order an
accounting of their earnout. IITRI filed a Notice of Removal,
asking the U.S. District Court for the Eastern District of
Virginia to remove Messrs. Andrews and Bewleys
lawsuit from state court and assume jurisdiction over it in
federal court. That removal was granted. The federal court then
stayed the litigation and ordered both parties to submit the
dispute to an independent accounting firm to arbitrate the
dispute, as requested in IITRIs complaint. Grant Thornton
is the accounting firm that has been selected to arbitrate the
dispute.

At the closing of Alions acquisition of
IITRIs assets, Alion assumed responsibility for and
acquired all claims under both of these lawsuits.

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

In the compliant that Alion filed, Alion states
that:



| |   |                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | IITRI contracted with the U.S. Army to develop a
    mobile rescue device that would enable rescuers to safely attend
    to and support victims of chemical or biological attacks, which
    IITRI named the Emergency Personal Isolation and Containment (or
    EPIC) Pod;                                 
|
| |  | IITRI assembled a team of employees to conceive
    that device, including Messrs. Gauger, Stefanek and
    Petrovic;                                                                                                                                                                                           
|
| |  | In December 1998, IITRI filed a provisional
    patent application for the device;                                                                                                                                                                                                                              
|
| |  | In August 1999, Messrs. Gauger,
    Stefanek and Petrovic and IITRI employee Robert Mullins jointly
    filed a patent application, which assigned the patent to IITRI,
    that related back to IITRIs December 1998 provisional
    patent application. The patent was awarded to IITRI in
    November 2001;
|
| |  | Messrs. Gauger, Stefanek and Petrovic each
    signed agreements assigning to IITRI all intellectual property
    rights arising out of ideas conceived during their employment
    with IITRI;                                                                                                                 
|
| |  | IITRI assigned these intellectual property rights
    to Alion on December 20, 2002 as part of the acquisition of
    substantially all of IITRIs assets;                                                                                                                                                      
|
| |  | Messrs. Gauger, Stefanek and Petrovic each
    signed an acknowledgment of receipt of IITRIs Code of
    Ethics, which states that they may not engage in outside
    activities that conflict with IITRIs best interests;                                                                                    
|
| |  | Messrs. Gauger, Stefanek and Petrovic began
    a process starting in March 1999, while
    Messrs. Stefanek and Petrovic were still employed with
    IITRI, to form companies that would compete with IITRI using
    IITRIs trade secrets;                                                                  

10



---



##### 





| |   |                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Isovac Products, L.L.C., Inteledatics, Inc.,
    James R. Gauger, George L. Stefanek and Joseph J. Petrovic,
    which we refer to collectively as the defendants,
    misappropriated IITRIs trade secrets and filed a patent
    application on behalf of Isovac Products, L.L.C.;
|
| |  | Mr. Petrovic defamed IITRIs product in
    an interview with the New York Times for the Defendants
    pecuniary gain and to cause harm to the reputation of
    IITRIs products; and                                                                                             
|
| |  | IITRI assigned its rights to its claims against
    the defendants to Alion on December 20, 2002 as part of
    Alions acquisition of substantially all of IITRIs
    assets.                                                                                                      

The defendants have received an extension of
their deadline to file a responsive pleading until on or about
May 14, 2003.

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

Other than the foregoing actions, we are not
involved in any legal proceeding other than routine legal
proceedings occurring in the ordinary course of business. We
believe that these routine legal proceedings, in the aggregate,
are not material to our financial condition and results of
operations.

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



|   |                                                   
|-- | --------------------------------------------------
|9. | Segment Information and Customer
    Concentration

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

Revenues from services provided to various
agencies of the U.S. Government by the Company represented
$94.6 million or approximately 98%, and $85.9 million or
approximately 97%, of revenues for the pro forma 24-week
interim periods ended March 14, 2003 and March 15,
2002, respectively. Contract receivables from agencies of the
U.S. Government represented approximately $47.8 million, or
approximately 92%, of accounts receivable at March 14, 2003
and approximately 93% of the selected operations of IITRIs
accounts receivable at March 15, 2002.

In addition, during the pro forma 24-week
interim period ended March 14, 2003, there were no sales by
the Company to any customer within any other country other than
the United States, where the sales accounted for 10% or more of
total revenue. The Company treats sales to U.S. Government
customers as sales within the United States regardless of where
the services are performed. Substantially all of the
Companys assets were located within the United States for
the interim period ended March 14, 2003.



|    |                                          
|--- | -----------------------------------------
|10. | Acquisition and Pro Forma
    Information

On December 20, 2002, Alion acquired
substantially all of the assets and assumed certain of the
liabilities of IITRI, excluding the assets and liabilities of
IITRIs Life Sciences Operation, for approximately
$127.9 million which included cash and notes issued to
IITRI aggregating $119.4 million, the assumption of
$6.2 million of IITRI bank debt and reimbursement of
$2.3 million of IITRIs transaction costs included in
the liabilities assumed by Alion in the Transaction. In
connection with the acquisition, the Company formed

11



---



##### 



the KSOP, which has an ESOP component. The ESOP
trustee, State Street Bank and Trust Company, used the proceeds
from the ESOP aggregating approximately $25.8 million to
acquire approximately 2.58 million shares or 100% of the
Companys outstanding common stock. The Company used the
funds from the sale of common stock to the ESOP and proceeds
from the debt instruments described in Note 7, to fund the
Transaction. The acquisition was accounted for using the
purchase method. The acquisition occurred on the last day of the
Companys twelve-week interim period ended
December 20, 2002 and accordingly, the accompanying
consolidated statements of operations include the results of
operations of the acquired business subsequent to
December 20, 2002. The purchase price has been allocated to
the acquired assets and assumed liabilities based on their
estimated fair values at the date of acquisition. The purchase
price allocation is preliminary and subject to change. The
Company is currently completing its analysis of intangible
assets acquired and estimated fair values of certain fixed
assets acquired.


The pro forma consolidated statements of
operations for the 12-week interim period ended March 14,
2003 and the 12-week and 24-week interim periods ended
March 15, 2002 have been prepared by giving effect to the
following transactions as if those transactions had been
consummated on October 1, 2002 and 2001, respectively:



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

The pro forma consolidated statements of
operations include pro forma adjustments to reverse historical
amortization expense related to pre-Transaction goodwill and
deferred gain on sale of property, to record the depreciation
expense of acquired assets, to record the amortization of
identifiable intangible assets, to record interest expense on
debt issued to finance the Transaction, to record the
amortization of debt issuance costs, and to record the accretion
of debt to face value to reflect the discount for the estimated
fair value of Warrants issued.

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



|    |                           
|--- | --------------------------
|11. | Related Party Transactions

On March 28, 2003, an officer of the Company
purchased a portion of the Companys mezzanine notes and
detachable warrants owned by IITRI for a total amount of
$0.75 million. The purchased mezzanine notes have an
aggregate principal amount outstanding of $0.75 million.
The warrants to purchase 19,327 shares of Alions common
stock have an exercise price of $10.00 per share.



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

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

The factors that could cause actual results to
differ materially from those anticipated include, but are not
limited to, the following: changes to the ERISA laws related to
the Companys Employee Ownership, Savings and Investment
Plan; changes to the tax laws relating to the treatment and
deductibility of goodwill, the Companys subchapter S
status, or any change in the Companys effective tax rate;
additional costs associated with compliance with the
Sarbanes-Oxley Act of 2002, including any changes in the
SECs rules, and other

12



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corporate governance requirements; failure of
government customers to exercise options under contracts;
funding decisions relating to U.S. Government projects;
government contract procurement (such as bid protest) and
termination risks; competitive factors such as pricing pressures
and/or competition to hire and retain employees; the results of
current and/or future legal proceedings and government agency
proceedings which may arise out of our operations (including our
contracts with government agencies) and the attendant risks of
fines, liabilities, penalties, suspension and/or debarment;
material changes in laws or regulations applicable to the
Companys businesses; as well as other risk factors
discussed in Post-Effective Amendment No. 3 to the
Companys registration statement on Form S-1 filed with the
SEC on March 24, 2003.


Readers are cautioned not to place undue reliance
on these forward-looking statements, which reflect
managements view only as of April 28, 2003. The
Company undertakes no obligation to update any of the
forward-looking statements made herein, whether as a result of
new information, future events, changes in expectations or
otherwise.

Critical Accounting Estimates and
Policies

Our significant accounting policies are described
in Note 3 to the consolidated financial statements for the
interim period ended March 14, 2003, included herein and in
the Notes to the Consolidated Financial Statement of Selected
Operations of IITRI, the business we acquired, included in
Post-Effective Amendment No. 3 to the Companys
registration statement on Form S-1 (No. 333-89756)
filed with the SEC on March 24, 2003.

Critical accounting policies are defined as those
that are reflective of significant judgments and uncertainties,
which potentially 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 interim financial statements, which have
been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of
these consolidated interim financial statements requires
management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses.
Actual results may differ from these estimates under different
assumptions or conditions.

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 majority of our revenues are derived from
cost-plus-fixed-fee, cost-plus-award-fee, firm-fixed-price, or
time-and-materials contracts. Absent evidence to the contrary,
we recognize revenue as follows. Under cost-plus-fixed-fee or
cost-plus-award-fee contracts, revenues are recognized as costs
are incurred and include an estimate of applicable fees earned.
Under firm-fixed-price contracts, revenues are estimated on the
percentage of completion method, on the basis of costs incurred
in relation to estimated total costs, or upon

13



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delivery of specific products or services, as
appropriate. For time-and-materials contracts, revenues are
computed by multiplying the number of direct labor-hours
expended in the performance of the contract by the contract
billing rates and adding other billable direct costs.
Performance incentives are incorporated in certain contracts,
which provide increased and decreased revenues based on actual
performance compared to established targets. Incentives based
upon cost performance are recorded when earned and other
incentives and awards are recorded when the amounts are earned
and reasonably determined, or are awarded. In certain
circumstances, revenues are recognized when contract amendments
have not been finalized. Prior to agreeing to commence work
directed by the customer and before receipt of the written
modification or amendment to the existing contract, we require
the completion of an internal memo that assesses the probability
of the modification being executed in a timely fashion and our
ability to subsequently collect payment from the customer.


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

For the 24-week interim period ended
March 14, 2003, we derived approximately 64%, 19% and 17%
of our revenues from cost-plus, time-and-material and
fixed-price contracts, respectively. For the pro-forma 24-week
interim period ended March 15, 2002, we derived
approximately 60%, 22% and 18%, of our revenues from cost-plus,
time and material, and fixed-price contracts, respectively.

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

The majority of our 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 allocation methodologies 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 affecting both cost-type and fixed-price contracts.

Goodwill and Identifiable Intangible
Assets

Goodwill represents the excess of cost over the
fair value of net tangible and identifiable intangible assets of
acquired companies. As a result of the acquisition of
substantially all of the assets and certain of the liabilities
of IITRI on December 20, 2002, we recorded approximately
$60.9 million of goodwill and approximately $30.6 million
of intangible assets. In accordance with the provisions of SFAS
No. 142, we no longer amortize goodwill; however, goodwill is to
be reviewed at least annually for impairment. We have elected to
perform the annual review at the end of each fiscal year. If the
carrying value of our goodwill, which we estimated to be
approximately $60.9 million as of March 14, 2003,
exceeds the fair value at some time in the future, we would be
required to report goodwill impairment charges as an operating
expense in the income statement. In addition, we will assess the
impairment of goodwill and identifiable intangible assets

14



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##### 



whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors
considered important to possibly trigger an impairment review
consist of:




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

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

Pro Forma Comparisons of Results of Operations

As described in the notes to the accompanying
consolidated financial statements, Alion completed the
acquisition of substantially all of the assets and certain of
the liabilities of IITRI on December 20, 2002, the last day
of the Companys first interim period. The following
discussion and analysis of results of operations relates to pro
forma results of operations for the periods described, assuming
that the acquisition had been consummated on the first day of
each fiscal year. Results for the 12-week period ended
March 14, 2003, included in the following discussions
represent actual results of operations as the acquisition
occurred prior to the first day of the interim period.

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

|                           |       |                              |      |                |   |  |      |       |  
|-------------------------- | ----- | ---------------------------- | ---- | -------------- | - |  | ---- | ----- | -
|                           |       |                             
|                           |       | For the 24-week period ended
|                           |       |                             
|                           |       | March 14, 2003               |      | March 15, 2002
|                           |       |                              |      |               
|Department of Defense      |       |                              | 93.6 | %              |   |  | 89.2 | %    
|Federal Civilian Agencies  |       |                              | 4.7  |                |   |  | 7.8  |      
|Commercial / State / Local |       |                              | 1.7  |                |   |  | 3.0  |      
|                           | Total |                              |      | 100.0          | % |  |      | 100.0 | %

Results of Operations

For the 12-Week Interim Period Ended
March 14, 2003 Compared to Pro Forma 12-Week Interim Period
Ended March 15, 2002

Revenues.Revenues
increased $4.1 million, or 9.1%, to $49.0 million for
the interim period ended March 14, 2003, from
$44.9 million for the interim period ended March 15,
2002. This $4.1 million increase is attributable primarily
to additional work under contracts that were in existence during
the prior year. Additional services performed under the Modeling
and Simulation Information Analysis Center (MSIAC) contract
with the Department of Defense contributed approximately
$3.3 million of the revenue increase. An increase in our
demilitarization support services to the U.S. Armys
Newport Chemical Agent Disposal Facility (NECDF), under a
subcontract to Parsons Infrastructure and Technology Group,
Inc., accounted for approximately $1.4 million of increased
revenue, while our support to the Department of Defense Joint
Spectrum Center (JSC) accounted for approximately
$0.3 million of increased revenue. On the balance of our
contracts, revenue decreased approximately $0.9 million for
the interim period ended March 14, 2003, as compared to the
interim period ended March 15, 2002. Material and
subcontract revenue accounted for approximately 24.6% of our
revenue for the interim period ended March 14, 2003,
compared with 26.5% for the interim period ended March 15, 2002.

Direct Contract
Expenses.Direct contract expenses
increased $3.2 million, or 9.8%, to $36.0 million for
the interim period ended March 14, 2003, from
$32.8 million for the interim period ended March 15,
2002. As a percentage of revenue, direct contract expenses
increased to 73.5% for the interim period ended

15



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March 14, 2003 from 73.1% for the interim
period ended March 15, 2002. As a component of direct
contract expenses, direct labor costs for the interim period
ended March 14, 2003, increased by approximately 8.2% or
$1.8 million, while other direct costs increased by
approximately 15.0% or $0.2 million when compared to the
interim period ended March 15, 2002. Material and
subcontract costs decreased $0.3 million, or 2.7%, to
$10.9 million for the interim period ended March 14,
2003, compared to $11.2 million for the interim period
ended March 15, 2002. The increase in direct labor costs
was due to an increase in personnel, primarily in support of the
MSIAC, JSC, and NECDF contracts referenced above. Other direct
cost expenditures and material and subcontract costs occur as a
result of specific contract requirements.


Gross Profit.Gross
profit increased $1.0 million, or 8.3%, to $13.0 million
for the interim period ended March 14, 2003, from
$12.0 million for the period ended March 15, 2002.
Gross profit margin as a percentage of revenue decreased to
26.5% for the interim period ended March 14, 2003, from
26.7% for the interim period ended March 15, 2002 as a
result of a periodic shift in contract work from time and
materials and fixed-price contracts to cost-reimbursement
contracts which typically have lower profit margins.

Operating Expenses.Operating expenses, net of depreciation and amortization, and
non-recurring transaction-related expenses increased
approximately $1.5 million, or approximately 16.7%, to
$10.5 million for the interim period ended March 14,
2003, from $9.0 million for the interim period ended
March 15, 2002. Expenses for indirect personnel and rental
and occupancy increased approximately $0.7 million, or
approximately 16.8%, to $4.9 million for the interim period
ended March 14, 2003, from $4.2 million for the interim
period ended March 15, 2002. This was primarily driven by
additional infrastructure needs to support increased contract
requirements. As a component of our operating expenses, general
and administrative expenses increased approximately
$0.7 million, or 14.9%, to $5.4 million for the
interim period ended March 14, 2003, compared to $4.7
million for the interim period ended March 15, 2002. This
increase reflects costs associated with additional management
personnel and infrastructure to support the growth and increased
complexity of our business. As a percentage of revenues, general
and administrative expenses increased to approximately 11.0% for
the interim period ended March 14, 2003, compared to 10.5%
for the interim period ended March 15, 2002. Bad debt
expense increased approximately $0.2 million to
$0.2 million for the period ended March 14, 2003, from
zero for the period ended March 15, 2002. Research and
development expenses decreased to approximately zero for the
period ended March 14, 2003, from $0.1 million for the
period ended March 15, 2002.

Depreciation and
Amortization.Depreciation and
amortization expense remained constant at approximately
$2.8 million, for the interim periods ended March 14,
2003 and March 15, 2002. For each respective interim
period, approximately $2.4 million of total amortization
expense incurred was associated with the intangible asset value
assigned to purchased customer contracts. Additionally, for each
respective interim period, approximately $0.1 million of
depreciation expense incurred was associated with the fair
market value assigned to the purchased assets. The remainder
reflects increased depreciation expense associated with capital
expenditures in support of our growth.

Loss from
Operations.For the interim period
ended March 14, 2003, we sustained approximately
$0.8 million operating loss as compared with a $0.9 million
operating loss for the interim period ended March 15, 2002.
The operating losses included the non-recurring
transaction-related expenses and non-cash depreciation and
amortization expenses resulting from the transaction, for the
respective periods.

Other Income and
Expense.Other expenses remained
relatively constant at approximately $2.3 million and
$2.2 million for the interim periods ended March 14, 2003
and March 15, 2002, respectively. In each respective
interim period, approximately $2.1 million of interest
expense incurred was related to the debt financing associated
with the acquisition.

Income Tax Expense.Our wholly-owned subsidiary, HFA, had operating income of
approximately $0.2 million for the interim period ended
March 14, 2003, compared to $0.4 million for the
interim period ended March 15, 2002. HFA recorded income
tax provisions of approximately zero and $0.2 million,
respectively, for the interim periods ended March 14, 2003
and March 15, 2002. The Company has filed an election with
the IRS to treat HFA as a qualified Subchapter S subsidiary
exempt from federal income tax at the operating company level.

16



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Net Loss.The net
loss of $3.1 million for the interim period ended
March 14, 2003, as compared to net loss of
$3.2 million for the interim period ended March 15,
2002, is due to the factors discussed above.

Pro Forma 24-week Interim Period Ended
March 14, 2003 Compared to Pro Forma 24-week Interim Period
Ended March 15, 2002

Revenues.Revenues
increased $7.7 million, or 8.7%, to $96.3 million for
the interim period ended March 14, 2003, from
$88.6 million for the interim period ended March 15,
2002. This $7.7 million increase is attributable primarily
to our performance of additional work under contracts that were
in existence during the prior year. Additional services
performed under the MSIAC contract with the Department of
Defense contributed approximately $6.2 million of the
revenue increase. An increase in our demilitarization support
services to the U.S. Armys Newport Chemical Agent Disposal
Facility (NECDF), under a subcontract to Parsons Infrastructure
and Technology Group, Inc., accounted for approximately
$2.4 million of increased revenue, while our support to the
Department of Defense Joint Spectrum Center (JSC) accounted
for approximately $0.7 million of increased revenue. On the
balance of our contracts, revenue decreased approximately
$1.6 million for the interim period ended March 14,
2003 as compared to the interim period ended March 15,
2002. This included a $0.6 million reduction in revenue
related to certain additional costs on a fixed-price contract
and non-reimbursable fully-burdened direct costs on a
cost-reimbursement contract. Material and subcontract revenue
accounted for approximately 23.1% of our revenue for the interim
periods ended March 14, 2003 and March 15, 2002.

Direct Contract
Expenses.Direct contract expenses
increased $5.8 million, or 8.9%, to $70.7 million for
the interim period ended March 14, 2003, from
$64.9 million for the period ended March 15, 2002. As
a percentage of revenue, direct contract expenses increased to
73.4% for the interim period ended March 14, 2003 from
73.2% for the interim period ended March 15, 2002. As a
component of direct contract expenses, direct labor costs for
the interim period ended March 14, 2003, increased by
approximately 7.2% or $3.2 million, while other direct
costs increased by approximately 31.8% or $0.7 million when
compared to the interim period ended March 15, 2002.
Material and subcontract costs increased $1.8 million, or
9.7%, to $20.4 million for the interim period ended
March 14, 2003, compared to $18.6 million for the
interim period ended March 15, 2002. The increase in direct
labor costs was due to an increase in personnel, primarily in
support of the MSIAC, JSC and NECDF contracts referenced above.
Other direct cost expenditures and material and subcontract
costs occur as a result of specific contract requirements.

Gross Profit.Gross
profit increased $2.0 million, or 8.5%, to $25.6 million
for the interim period ended March 14, 2003, from
$23.6 million for the equivalent period in 2001. Gross
profit margin as a percentage of revenue remained relatively
stable at 26.6% for the interim period ended March 14,
2003, compared to 26.6% for the interim period ended
March 15, 2002.

Operating Expenses.Operating expenses, net of depreciation and amortization,
increased approximately $7.2 million, or approximately
37.1%, to $26.6 million for the interim period ended
March 14, 2003, from $19.4 million for the interim
period ended March 15, 2002. Of this $7.2 million
increase, approximately $5.8 million consisted of
transaction-related expenses (e.g., third party legal,
accounting, finance, etc.) incurred in connection with the
purchase of assets from IITRI. For the period ended
March 15, 2002, transaction-related expenses were
approximately $1.1 million. Expenses for indirect personnel
and facilities costs increased approximately $1.1 million,
or approximately 12.8%, to $9.7 million for the interim period
ended March 14, 2003, from $8.6 million for the
interim period ended March 15, 2002. This was primarily
driven by additional infrastructure needs to support increased
contract requirements. General and administrative expenses
increased approximately $1.3 million, or 13.8%, to
$10.7 million for the interim period ended March 14,
2003, compared to $9.4 million for the interim period ended
March 15, 2002. This increase reflects costs for additional
management personnel and infrastructure to support the growth
and increased complexity of our business. As a percentage of
revenues, general and administrative expenses were 11.1% and
10.6% for periods ended March 14, 2003 and March 15,
2002, respectively.

Depreciation and
Amortization.Depreciation and
amortization expense increased approximately $0.2 million,
or approximately 3.6%, to $5.7 million for the interim
period ended March 14, 2003, as

17



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compared to $5.5 million for the interim
period ended March 15, 2002. The increase in both
depreciation expense and amortization expense is due in part to
the acquisition of assets from Daedalic, Inc. This acquisition
was effective May 29, 2002. Depreciation expense also
increased due to implementation of the PeopleSoft human
resources and payroll system. This amortization began in
May 2002. For each interim period, approximately
$4.7 million of total amortization expense incurred was
associated with the intangible asset value assigned to contracts
purchased from IITRI. Additionally, for each respective interim
period, approximately $0.2 million of depreciation expense
incurred was associated with the fair market value assigned to
the purchased assets.


Income from
Operations.For the interim period
ended March 14, 2003, we sustained a $6.7 million loss
from operations compared with a $1.2 million operating loss
for the interim period ended March 15, 2002. The
$6.7 million operating loss for the period ended
March 14, 2003 included approximately $5.8 million of
non-recurring transaction-related expenses, referenced above.
For the period ended March 15, 2002, the operating loss of
$1.2 million included approximately $1.1 million in
non-recurring transaction-related expenses. The operating losses
for the respective periods also included non-cash depreciation
and amortization expenses resulting from the transaction.

Other Income and
Expense.Other expenses remained
relatively constant at approximately $4.5 million and
$4.4 million for the interim periods ended March 14, 2003
and March 15, 2002, respectively. For each respective
24-week interim period, approximately $4.2 million of
interest expense incurred was related to the debt financing
associated with purchase of the assets from IITRI.

Income Tax Expense.Our wholly-owned subsidiary, HFA, had operating income of
approximately $0.3 million for the interim period ended
March 14, 2003, compared to $0.7 million for the
interim period ended March 15, 2002. HFA recorded income
tax provisions of approximately zero and $0.4 million,
respectively, for the interim periods ended March 14, 2003
and March 15, 2002. The Company has filed an election with
the IRS to treat HFA as a qualified Subchapter S subsidiary
exempt from federal income tax at the operating level.

Net Loss.The net
loss of $11.2 million for the interim period ended
March 14, 2003 compared to net loss of $6.0 million
for the interim period ended March 15, 2002, is due to the
factors discussed above.

Liquidity and Capital Resources.

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

The following discussion relates to both the cash
flows of the business we acquired from IITRI through
December 20, 2002 and the cash flows of Alion subsequent to
that date which are reflected in Alions Consolidated
Statements of Cash Flows provided herein.

Net cash provided by operating activities of the
business we acquired on December 20, 2002 was approximately
$1.6 million for the interim period ended March 14,
2003, as compared to cash used in operations of approximately
$4.2 million for the interim period ended March 15, 2002.
The increase in cash flows is primarily due to a an improvement
in collecting accounts receivable.

Net cash used in investing activities was
$59.3 million for the period ended March 14, 2003. The
business we acquired on December 20, 2002 used
$2.0 million of cash for investing activities for the
interim period ended March 15, 2002. During the interim
period ended March 14, 2003, the cash Alion paid for
substantially all of the assets of IITRI was $58.9 million.
Cash of $25.8 million was generated from the sale of Alion
common stock to the ESOP Trust, and $33.0 million was
obtained from borrowings under the senior term note.

18



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Net cash provided by financing activities was
$58.6 million for the interim period ended March 14,
2003, compared to cash provided by financing activities of
$6.0 million for the interim period ended March 15,
2002. This increase of approximately $52.0 million in net cash
provided by financing activities results from the additional
financing required to complete the purchase of substantially all
of the assets of IITRI. The financing included a
$35.0 million senior term loan, a $20.3 million
Mezzanine Note (with warrants), a $39.9 million
Subordinated Note (with warrants), and the sale of
$25.8 million of common stock to the ESOP Trust.

Discussion of debt structure:

On December 20, 2002, we entered into a
senior credit agreement among LaSalle Bank National Association,
US Bank, National Cooperative Bank, Orix Financial Services,
Inc. and BB&T Bank to refinance and replace IITRIs
prior credit arrangements. The new agreement consists of a
$25.0 million revolving credit facility and a
$35.0 million term loan to finance, in part, the IITRI
acquisition. Principal repayments under the term loan will be
payable in quarterly installments yielding annual repayments in
the following amounts:

| |               |  |  |   |             | 
| | ------------- |  |  | - | ----------- | 
| | Year 1 (2003) |  |  | $ | 5.0 million | 
| | Year 2 (2004) |  |  | $ | 5.0 million | 
| | Year 3 (2005) |  |  | $ | 7.5 million | 
| | Year 4 (2006) |  |  | $ | 8.5 million | 
| | Year 5 (2007) |  |  | $ | 9.0 million | 

All principal obligations under the revolving
credit facility are to be repaid in full no later than
December 20, 2007. The senior credit facility is secured by
a first priority, perfected security interest in all of our
current and future tangible and intangible property.

For the periods until the receipt of the
compliance certificate and audited financial statements for the
fiscal year ended September 30, 2003, the term note and the
revolving line of credit under the senior credit facility will
bear interest at either of two floating rates: a per year rate
equal to the Eurodollar rate plus 3.5 percent, or the prime
rate (base rate) plus 2.0 percent. After the lenders
receipt of our audited financial statements for the fiscal year
ending September 30, 2003, the interest rate and commitment
fees will equal the Eurodollar rate or the prime rate (base
rate) plus the following margins which will vary depending upon
our leverage ratio, which is the ratio of our total funded debt,
excluding the subordinated note (described below), to our
earnings before interest, taxes, depreciation, amortization,
ESOP repurchase obligations and non-cash compensation expenses,
referred to as EBITDAE.

|                                                        |  |         |                      |          |  |                                                              |       |                                                              |  |                                     |       |  |  |  |       | 
|------------------------------------------------------- |  | ------- | -------------------- | -------- |  | ------------------------------------------------------------ | ----- | ------------------------------------------------------------ |  | ----------------------------------- | ----- |  |  |  | ----- | 
|Revolving Credit                                        |  |         |                      |          |  |                                                              |       |                                                             
|and Term Loan                                           |  | Level I |                      | Level II |  | Level III                                                    |       | Level IV                                                    
|                                                        |  |         |                      |          |  |                                                              |       |                                                             
|Leverage ratio                                          |  |         | Less than 2.0 to 1.0 |          |  | Less than 2.5 to 1.0 and greater than or equal to 2.0 to 1.0 |       | Less than 3.0 to 1.0 and greater than or equal to 2.5 to 1.0 |  | Greater than or equal to 3.0 to 1.0
|Base rate margin                                        |  |         | 1.25%                |          |  |                                                              | 1.50% |                                                              |  |                                     | 1.75% |  |  |  | 2.00% | 
|Eurodollar margin                                       |  |         | 2.75%                |          |  |                                                              | 3.00% |                                                              |  |                                     | 3.25% |  |  |  | 3.50% | 
|Commitment fee (usage less than 40%)                    |  |         | 1.00%                |          |  |                                                              | 1.00% |                                                              |  |                                     | 1.00% |  |  |  | 1.00% | 
|Commitment fee (usage greater than or equal to
    40%) |  |         | 0.50%                |          |  |                                                              | 0.50% |                                                              |  |                                     | 0.50% |  |  |  | 0.50% | 

Effective February 14, 2003, we exercised
our right to elect that the term note will bear interest at a
Eurodollar rate. This election does not affect the interest rate
applicable to amounts borrowed under the revolving line of
credit. As a result, interest under the term note is payable at
the prime rate (base rate) plus 2.0 percent until
February 14, 2003. Thereafter and until the lenders
receipt of our audited financial statements for fiscal year
ending September 30, 2003, the term note will bear interest
at the Eurodollar rate plus 3.5 percent.

19



---



##### 



We entered into an interest rate cap agreement
effective as of February 3, 2003 with one of our senior
lenders. Under this agreement, our maximum effective rate of
interest payable on the first $25 million of principal
under our term note will not exceed 6 percent. Any interest we
pay on the first $25 million of principal in excess of
6 percent to the senior lenders pursuant to the terms of
the senior credit facility will be calculated and reimbursed to
us semiannually by the one senior lender pursuant to the cap
agreement. This cap agreement expires February 3, 2007. The
first quarterly installment of $1.25 million was paid on
March 14, 2003. On March 14, 2003, we had
approximately $40.8 million in borrowings outstanding under
our senior credit facility ($33.8 million under the senior
term note and approximately $7.0 million under the
revolving credit facility).

As of March 14, 2003, the approximately
$7.0 million drawn under the revolving credit facility
bears interest at 6.25% (equal to the lenders prime plus
market-rate spread). The approximately $33.8 million
balance remaining under the senior term note bears interest at
4.75% (equal to LIBOR plus market-rate spread).

We may prepay our borrowings under the senior
credit facility in designated minimum amounts without premium or
penalty, other than (i) customary breakage costs related to
repayment of Eurodollar-based loans prior to the end of an
interest period, and (ii) breakage costs associated with
the early termination of any interest rate swap, cap or collar
entered into in relation to the senior credit facilities. We are
required to prepay our borrowings with proceeds of any permitted
debt or equity issuance or asset sale and with a portion of our
excess cash flow each year. As of March 14, 2003, the
aggregate principal amount borrowed under our senior credit
facility approximated $40.8 million.

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

On December 20, 2002, we entered into a
$0.9 million deferred compensation agreement with
Dr. Atefi, the payment terms of which are identical to
those of the mezzanine note previously described.

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

We also issued detachable warrants with the
mezzanine note and the subordinated note. The warrants
associated with the mezzanine note represent the right to buy
approximately 12 percent of our shares of common stock on a
fully diluted basis (assuming the exercise of all warrants
outstanding on December 20, 2002), at an exercise price of
$10 per share. These warrants are exercisable until the sixth
anniversary of the issue date. These warrants also contain a put
right whereby the warrantholder has the right, within thirty
days prior to the sixth anniversary date (or within thirty days
after delivery to the current holders of an appraisal of the per
share value of our common stock as of September 30, 2008,
if the ESOP still exists and no public market price exists for
our common stock) or within thirty days after a change in
control, to require us to purchase the warrants back at the then
current fair value of common stock, minus the warrants
exercise

20



---



##### 



price. The warrants associated with the
subordinated note represent the right to buy approximately
26 percent of our shares of common stock on a fully diluted
basis (assuming the exercise of all warrants outstanding on
December 20, 2002), at an exercise price of $10 per share.
These warrants are exercisable until the eighth anniversary of
the issue date. These warrants also contain a put right whereby
the warrantholder has the right to require us to purchase the
warrants back at the then current fair value of common stock,
minus the warrants exercise price. This put right applies
to up to 50 percent of these warrants within thirty days
prior to the seventh anniversary of the issue date (or within
thirty days after delivery to the warrantholders of an appraisal
of the per share value of our common stock as of
September 30, 2009, if the ESOP still exists and no public
market price exists for our common stock), and up to
100 percent of these warrants within thirty days prior to
the eighth anniversary of the issue date (or within thirty days
after delivery to the warrant holders of an appraisal of the per
share value of our common stock as of September 30, 2010,
if the ESOP still exists and no public market value exists for
our common stock). All put rights terminate upon one or more
underwritten public offerings of Alion common stock resulting in
aggregate gross proceeds of at least $30.0 million to the
sellers (excluding proceeds received from certain affiliates of
Alion).


Under the terms of the senior credit facility, we
are subject to covenants including financial covenants with
respect to minimum fixed charge coverage, maximum total senior
leverage, maximum total leverage, maximum capital expenditures
and minimum EBITDAE. EBITDAE means earnings before interest,
taxes, depreciation, amortization, ESOP repurchase obligations
and non-cash compensation expenses. The mezzanine note contains
financial covenants similar to those contained in the senior
credit facility, but relaxed on terms mutually agreed upon among
us, IITRI and the senior lenders. The subordinated note includes
customary covenants for deeply subordinated obligations,
including the timely payment of principal and interest.

We have earnout payment obligations to AB
Technologies, Inc. which will not exceed $11.5 million,
related to an earnout arrangement, which may be due with respect
to results of certain operations for fiscal years 2000 (partial
year), 2001, 2002, 2003, 2004 and 2005 (partial year). Due to
the legal proceedings associated with the earnout arrangement,
payment of obligations will be made into the registry of the
U.S. District Court, for allocation by the court following entry
of a final judgment of that court. A description of these
proceedings is provided in the Legal Proceedings
section of Part II of this filing.

In summary, during the next eight fiscal years,
at a minimum, we will have to make the estimated interest and
principal payments set forth below.

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



---



|    |                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We anticipate a continuing requirement to have in
    place a $25.0 million bank revolving credit facility to
    finance our ongoing working capital needs. In 2003, we
    anticipate the average balance drawn on the revolving credit
    facility to be $7.0 million, bearing interest at 6.25%. In
    subsequent years the balance on

21



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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | the revolving credit facility, and the amount of
    interest payable thereon, will depend upon our working capital
    needs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(2) | Effective February 14, 2003 and, pursuant to
    the terms under our senior credit facility, we elected that
    $25 million of the $35 million principal amount of the
    term note will bear interest at a Eurodollar interest rate.
    Effective as of February 3, 2003, we entered into an
    interest rate cap arrangement whereby the interest rate on the
    portion of the principal amount of the senior term note covered
    by the Eurodollar interest rate will be capped at 6.0%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(3) | The senior term note is subject to mandatory
    prepayments of principal depending upon whether there is excess
    cash flow generated in a given year. Based upon projected cash
    flow, it is anticipated that these mandatory prepayments may
    occur during the first three years of the facility. This
    assumption has been reflected in the table above. Should these
    prepayment conditions not occur, the five-year principal
    repayment schedule will apply as follows: $5.0 million in
    year 1, $5.0 million in year 2, $7.5 million in
    year 3, $8.5 million in year 4, and $9.0 million in
    year 5.                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(4) | The payment of interest and principal for the
    mezzanine note includes the $20.3 million (principal) for
    the mezzanine note plus the $0.9 million deferred
    compensation value of Dr. Atefis agreement. The
    stated payment terms and interest rates are identical for these
    arrangements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(5) | Interest expense on the subordinated note during
    the first six years (2003 to 2008) is 6% simple interest, paid-
    in-kind by the issuance of the PIK notes. These interest amounts
    accrue to principal during this period, thereby having the
    effect of increasing the principal value of the subordinated
    note; but because the PIK notes do not themselves bear interest,
    the interest obligations paid by issuance of the PIK notes will
    not be compounded. In other words, no interest will be paid on
    interest accrued under the subordinated note. In years one
    through six, the PIK interest on the subordinated note will be
    approximately $2.4 million in each year. These amounts are
    included in the principal payments in years seven and eight. In
    years seven and eight, interest will be 16% paid quarterly in
    cash. The principal, together with the outstanding balance of
    the PIK notes will be paid in equal amounts at the end of years
    seven and eight (2009 and 2010).

Our minimum lease payment obligations under
non-cancelable operating leases for years ending
September 30, 2003, 2004, 2005, 2006 and 2007, are
$8.5 million, $7.9 million, $7.5 million,
$5.6 million, and $5.7 million, respectively. The
remaining aggregate obligations on these leases thereafter are
$11.0 million. Commercial facility lease expenses are
included in these amounts. These commercial facility lease
obligations are currently reimbursable costs under our
government contracts, or may be cancelled upon termination of
the related contracts.

Other contingent liabilities which will impact
our cash flow relate to



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

We believe that cash flow from operations and
cash available under our revolving credit facility will provide
us with sufficient capital to fulfill our current business plan
and to fund our working capital needs for at least the next
48 months. Although we expect to continue to have positive
cash flow from operations, we will need to generate significant
additional revenues and net income beyond our current revenue
base in order to repay principal and interest on the
indebtedness we assumed to finance the acquisition of IITRI
assets. Additionally, our business plan calls for us to continue
to acquire companies with complementary technologies. If we do
not have sufficient cash on hand to fund such acquisitions, we
will be required to obtain financing to do so.

22



---



##### 



Given our significant obligations that become due
in years 2007, 2008, 2009, and 2010, we expect that we will need
to refinance a portion of our indebtedness at least by fiscal
year 2007. Our cash from operations will be insufficient to
satisfy all of our obligations and we cannot be certain that we
will be able to refinance at all or on terms that will be
favorable to us. Moreover, if our plans or assumptions change,
if our assumptions prove inaccurate, if we consummate
investments in or acquisitions of other companies, if we
experience unexpected costs or competitive pressures, or if our
existing cash and projected cash flow from operations prove
insufficient, we may need to obtain greater amounts of
additional financing and sooner than expected. While it is our
intention to enter only into new financing or refinancing that
we consider advantageous, we cannot be certain that such sources
of financing will be available to us in the future, or, if
available, that they could be obtained on terms acceptable to us.

ITEM
3.     QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

Our exposure to interest rate risk is primarily
due to the additional debt we incurred to finance the IITRI
acquisition. The mezzanine note and subordinated note have fixed
interest rates, and therefore present no risk of change to
interest charges as a result of increase in market interest
rates. The 25.0 million senior revolving credit facility
and $10.0 million of our #35.0 million senior term
note, however, bear interest at variable rates tied to the
Eurodollar rate. Such variable rates increase the risk that
interest charges will increase materially if market interest
rates increase. We have reduced in part the maximum total amount
of variable interest rate risk by entering into an interest rate
cap agreement which caps at 6 percent on the first
$25 million of principal borrowed under the term note
effective until February 3, 2007. For a description of the
arrangement, refer to Discussion of Debt Structure
in Managements Discussion and Analysis of Financial
Condition and Results of Operations.

Our exposure to foreign exchange risk related to
the limited use of forward contracts, entered into as a hedge
against currency commitments on a contract in the United
Kingdom. The notional amount of the contracts was approximately
$362,000 with the final contract maturing on May 7, 2002.
The contracts were marked to market, with gains and losses
recognized in the consolidated statements of income. No such
contracts were outstanding at March 14, 2003. We do not use
derivatives for trading purposes. The Company invests its excess
cash in short-term, investment grade, interest-bearing
securities.

Finally, because our expenses and revenues form
our international research contracts are generally denominated
in U.S. dollars, we do not believe that our operations are
subject to material risks associated with currency fluctuations.

ITEM 4.     CONTROLS
AND PROCEDURES

Our disclosure controls and procedures are
designed to ensure that information required to be disclosed in
reports that we file or submit under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the
Securities and Exchange Commission. The Chief Executive Officer
and the Chief Financial Officer have reviewed the effectiveness
of our disclosure controls and procedures within the last ninety
days and have concluded that the disclosure controls and
procedures are effective. There were no significant changes in
our internal controls or in other factors that could
significantly affect these controls subsequent to the last day
they were evaluated by our Chief Executive Officer and Chief
Financial Officer.

PART II  OTHER INFORMATION

ITEM 1.     LEGAL
PROCEEDINGS

On September 16, 2002, IITRI, substantially
all of whose assets we acquired on December 20, 2002, filed
a lawsuit against Clyde Andrews and William Bewley in the U.S.
District Court for the Eastern District of Virginia, which we
refer to as the Court. Messrs. Andrews and Bewley were
formerly the shareholders of AB Technologies, Inc. IITRI
acquired substantially all of the assets of AB Technologies in
February 2000.

23



---



##### 



The lawsuit asks the Court to compel Messrs.
Andrews and Bewley to submit disputed issues to an independent
accounting firm, in accordance with the requirements of the
asset purchase agreement. The lawsuit also asks the Court to
make a declaratory judgment concluding that IITRI is entitled to
an approximately $1.1 million downward adjustment of the
purchase price paid under the asset purchase agreement, and that
IITRI properly computed the earnout in accordance with the
earnout formula in the asset purchase agreement.

Messrs. Andrews and Bewley filed a lawsuit
against IITRI in the Circuit Court for Fairfax County, Virginia
on September 12, 2002. The complaint filed by
Messrs. Andrews and Bewley alleges breach of the AB
Technologies asset purchase agreement, and claims damages of at
least $8.2 million. Their lawsuit does not explain how
Messrs. Andrews and Bewley calculate their damages figure.
Messrs. Andrews and Bewley have also asked the court to order an
accounting of their earnout. IITRI filed a Notice of Removal,
asking the U.S. District Court for the Eastern District of
Virginia to remove Messrs. Andrews and Bewleys
lawsuit from state court and assume jurisdiction over it in
federal court. That removal was granted. The federal court then
stayed the litigation and ordered both parties to submit the
dispute to an independent accounting firm to arbitrate the
dispute, as requested in IITRIs complaint. Grant Thornton
is the accounting firm that has been selected to arbitrate the
dispute.

At the closing of Alions acquisition of
IITRIs assets, Alion assumed responsibility for and
acquired all claims under both of these lawsuits.

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

In the compliant that Alion filed, Alion states
that:



| |   |                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | IITRI contracted with the U.S. Army to develop a
    mobile rescue device that would enable rescuers to safely attend
    to and support victims of chemical or biological attacks, which
    IITRI named the Emergency Personal Isolation and Containment (or
    EPIC) Pod;                                 
|
| |  | IITRI assembled a team of employees to conceive
    that device, including Messrs. Gauger, Stefanek and
    Petrovic;                                                                                                                                                                                           
|
| |  | In December 1998, IITRI filed a provisional
    patent application for the device;                                                                                                                                                                                                                              
|
| |  | In August 1999, Messrs. Gauger,
    Stefanek and Petrovic and IITRI employee Robert Mullins jointly
    filed a patent application, which assigned the patent to IITRI,
    that related back to IITRIs December 1998 provisional
    patent application. The patent was awarded to IITRI in
    November 2001;
|
| |  | Messrs. Gauger, Stefanek and Petrovic each
    signed agreements assigning to IITRI all intellectual property
    rights arising out of ideas conceived during their employment
    with IITRI;                                                                                                                 
|
| |  | IITRI assigned these intellectual property rights
    to Alion on December 20, 2002 as part of the acquisition of
    substantially all of IITRIs assets;                                                                                                                                                      
|
| |  | Messrs. Gauger, Stefanek and Petrovic each
    signed an acknowledgment of receipt of IITRIs Code of
    Ethics, which states that they may not engage in outside
    activities that conflict with IITRIs best interests;                                                                                    
|
| |  | Messrs. Gauger, Stefanek and Petrovic began
    a process starting in March 1999, while
    Messrs. Stefanek and Petrovic were still employed with
    IITRI, to form companies that would compete with IITRI using
    IITRIs trade secrets;                                                                  
|
| |  | Isovac Products, L.L.C., Inteledatics, Inc.,
    James R. Gauger, George L. Stefanek and Joseph J. Petrovic,
    which we refer to collectively as the defendants,
    misappropriated IITRIs trade secrets and filed a patent
    application on behalf of Isovac Products, L.L.C.;                           

24



---



##### 





| |   |                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Mr. Petrovic defamed IITRIs product in
    an interview with the New York Times for the Defendants
    pecuniary gain and to cause harm to the reputation of
    IITRIs products; and
|
| |  | IITRI assigned its rights to its claims against
    the defendants to Alion on December 20, 2002 as part of
    Alions acquisition of substantially all of IITRIs
    assets.         

The defendants have received an extension of
their deadline to file a responsive pleading until on or about
May 14, 2003.

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

Other than the foregoing actions, we are not
involved in any legal proceeding other than routine legal
proceedings occurring in the ordinary course of business. We
believe that these routine legal proceedings, in the aggregate,
are not material to our financial condition and results of
operations.

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

ITEM 2.     CHANGES
IN SECURITIES AND USE OF PROCEEDS

On December 20, 2002, we raised
approximately $25.6 million in gross proceeds through a
private placement of our common stock, and we subsequently
raised an additional $.2 million, for a total of
$25.8 million in gross proceeds. A total of 2,575,408
shares of our common stock were sold to the ESOP at a price of
$10.00 per share. The shares of common stock were offered
pursuant to an exemption from registration provided under
Section 4(2) of the Securities Act of 1933.

As payment of a portion of the total purchase
price for the acquisition of substantially of all IITRIs
assets, as of December 20, 2002, we issued to IITRI the
Mezzanine Note together with 524,229 warrants to purchase shares
of our common stock. The warrants have an exercise price of $10
per share, subject to adjustments and are exercisable until the
sixth anniversary of the issue date. The warrants were offered
pursuant to an exemption from registration provided under
Section 4(2) of the Securities Act of 1933.

As payment of a portion of the total purchase
price for the acquisition of substantially all of IITRIs
assets, as of December 20, 2002, we issued to IITRI the
Subordinated Note together with 1,080,437 warrants to purchase
shares of our common stock. The warrants have an exercise price
of $10 per share, subject to adjustments, and are exercisable
until the eighth anniversary of the issuance date. The warrants
were offered pursuant to an exemption from registration provided
under Section 4(2) of the Securities Act of 1933.

In exchange for Dr. Atefis agreement
to waive his right to payment to him of $0.86 million from
his deferred compensation account with IITRI, as of
December 20, 2002, we entered into a deferred compensation
agreement with Dr. Atefi and issued 22,062 warrants to purchase
shares of our common stock. The warrants have an exercise price
of $10 per share, subject to adjustments. The warrants were
offered pursuant to an exemption from registration provided
under Section 4(2) of the Securities Act of 1933.

ITEM 3.     DEFAULTS
UPON SENIOR SECURITIES

None.

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

None.

25



---



##### 



ITEM 5.     OTHER
INFORMATION

None.

ITEM 6.     EXHIBITS
AND REPORTS ON FORM 8-K

(a) Exhibits:

|        |       |             |  |                                                                                                                                                                                                                           
|------- | ----- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|No.     |       | Description
|        |       |            
|        | 3.1   |             |  | Second Amended and Restated Certificate of
    Incorporation of Beagle Holdings, Inc.(3)                                                                                                                                  
|       
|        | 3.2   |             |  | Amended and Restated By-laws of Alion Science and
    Technology Corporation.(1)                                                                                                                                          
|       
|        | 4.1   |             |  | Amended and Restated Alion Science and Technology
    Corporation Employee Ownership, Savings and Investment Plan.(2)                                                                                                     
|       
|        | 4.2   |             |  | First Amendment to The Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan.(4)                                                                                               
|       
|        | 10.5  |             |  | Seller Note Securities Purchase Agreement by and
    between IITRI and Alion Science and Technology Corporation.(4)                                                                                                       
|       
|        | 10.8  |             |  | Rights Agreement.(4)                                                                                                                                                                                                      
|       
|        | 10.14 |             |  | Employment Agreement between Alion Science and
    Technology Corporation and Bahman Atefi.(4)                                                                                                                            
|       
|        | 10.15 |             |  | Employment Agreement between Alion Science and
    Technology Corporation and Stacy Mendler.(4)                                                                                                                           
|       
|        | 10.16 |             |  | Employment Agreement between Alion Science and
    Technology Corporation and Randy Crawford.(4)                                                                                                                          
|       
|        | 10.17 |             |  | Employment Agreement between Alion Science and
    Technology Corporation and Barry Watson.(4)                                                                                                                            
|       
|        | 10.18 |             |  | Employment Agreement between Alion Science and
    Technology Corporation and John Hughes.(4)                                                                                                                             
|       
|        | 10.23 |             |  | Alion Executive Deferred Compensation Plan.(4)                                                                                                                                                                            
|       
|        | 10.24 |             |  | Alion Director Deferred Compensation Plan.(4)                                                                                                                                                                             
|       
|        | 10.26 |             |  | Alion Science and Technology Corporation Phantom
    Stock Plan.(4)                                                                                                                                                       
|       
|        | 99.1  |             |  | Certification of Bahman Atefi, 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.  
|       
|        | 99.2  |             |  | Certification of John M. Hughes, Chief Financial
    Officer of Alion Science and Technology Corporation, pursuant to
    18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.



---



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

26



---



##### 



(b) Reports on Form 8-K:

The Company filed a Report on Form 8K
on December 24, 2002 with respect to Item 2.
Acquisition or Disposition of Assets and Item 7. Financial
Statements, Pro Forma Financial Information and Exhibits as a
result of the closing of Alions acquisition of
substantially all of IITRIs assets on December 20,
2002.

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: April 28, 2003

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

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

27



---



##### 



CERTIFICATION

I, Bahman Atefi, certify that:

1. I have reviewed this quarterly report on
Form 10-Q of Alion Science and Technology Corporation;

2. Based on my knowledge, this quarterly report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this quarterly report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this quarterly report whether
or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: April 28, 2003

| |     |                 
| | --- | ----------------
| | By: | /s/ Bahman Atefi

| |                        
| | -----------------------
| |                        
| | Bahman Atefi           
| | Chief Executive Officer

28



---



##### 



CERTIFICATION

I, John M. Hughes, certify that:

1. I have reviewed this quarterly report on
Form 10-Q of Alion Science and Technology Corporation;

2. Based on my knowledge, this quarterly report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this quarterly report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this quarterly report whether
or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: April 28, 2003

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

| |                        
| | -----------------------
| |                        
| | John M. Hughes         
| | Chief Financial Officer

29



---



##### 



EXHIBIT INDEX

|        |       |             |  |                                                                                                                                                                                                                           
|------- | ----- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|No.     |       | Description
|        |       |            
|        | 3.1   |             |  | Second Amended and Restated Certificate of
    Incorporation of Beagle Holdings, Inc.(3)                                                                                                                                  
|       
|        | 3.2   |             |  | Amended and Restated By-laws of Alion Science and
    Technology Corporation.(1)                                                                                                                                          
|       
|        | 4.1   |             |  | Amended and Restated Alion Science and Technology
    Corporation Employee Ownership, Savings and Investment Plan.(2)                                                                                                     
|       
|        | 4.2   |             |  | First Amendment to The Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan.(4)                                                                                               
|       
|        | 10.5  |             |  | Seller Note Securities Purchase Agreement by and
    between IITRI and Alion Science and Technology Corporation.(4)                                                                                                       
|       
|        | 10.8  |             |  | Rights Agreement.(4)                                                                                                                                                                                                      
|       
|        | 10.14 |             |  | Employment Agreement between Alion Science and
    Technology Corporation and Bahman Atefi.(4)                                                                                                                            
|       
|        | 10.15 |             |  | Employment Agreement between Alion Science and
    Technology Corporation and Stacy Mendler.(4)                                                                                                                           
|       
|        | 10.16 |             |  | Employment Agreement between Alion Science and
    Technology Corporation and Randy Crawford.(4)                                                                                                                          
|       
|        | 10.17 |             |  | Employment Agreement between Alion Science and
    Technology Corporation and Barry Watson.(4)                                                                                                                            
|       
|        | 10.18 |             |  | Employment Agreement between Alion Science and
    Technology Corporation and John Hughes.(4)                                                                                                                             
|       
|        | 10.23 |             |  | Alion Executive Deferred Compensation Plan.(4)                                                                                                                                                                            
|       
|        | 10.24 |             |  | Alion Director Deferred Compensation Plan.(4)                                                                                                                                                                             
|       
|        | 10.26 |             |  | Alion Science and Technology Corporation Phantom
    Stock Plan.(4)                                                                                                                                                       
|       
|        | 99.1  |             |  | Certification of Bahman Atefi, 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.  
|       
|        | 99.2  |             |  | Certification of John M. Hughes, Chief Financial
    Officer of Alion Science and Technology Corporation, pursuant to
    18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.



---



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

30