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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
   FORM 10-Q
 þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2004. COMMISSION FILE NUMBER 33389756    (ALION LOGO) Alion Science and Technology Corporation 
  DELAWARE
(State or Other Jurisdiction of
Incorporation of Organization)
    
    
    542061691
(I.R.S. Employer
Identification No.)10 West 35th Street
Chicago, IL 60616
(312) 5674000
    
    
    1750 Tysons Boulevard, Suite 1300
McLean, VA 22102
(703) 9184480(Address, including Zip Code and Telephone Number with
Area Code, of Principal Executive Offices)
    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.þ Yes o No Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b2 of the Exchange Act).
Yes o No þ The number of shares outstanding of Alion Science and Technology Corporation
common stock as of December 31, 2004, was:
Common Stock 3,329,381




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ALION SCIENCE AND TECHNOLOGY CORPORATION FORM 10-Q INDEX FOR THE QUARTER ENDED DECEMBER 31, 2004 PART I  FINANCIAL INFORMATION
    
    
    1ITEM 1. Financial Statements
    
    
    1Consolidated Balance Sheets
    
    
    1Consolidated Statements of Operations
    
    
    2Consolidated Statements of Cash Flows
    
    
    3Notes to Consolidated Financial Statements
    
    
    4ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    21ITEM 3. Quantiative and Qualitative Disclosures about Market Risk
    
    
    38ITEM 4. Controls and Procedures
    
    
    39PART IIOTHER INFORMATION
    
    
    40ITEM 1. Legal Proceedings
    
    
    40ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    41ITEM 3. Defaults Upon Senior Securities
    
    
    41ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    41ITEM 5. Other Information
    
    
    41ITEM 6. Exhibits
    
    
    45




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PART I  FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ALION SCIENCE AND TECHNOLOGY CORPORATION Consolidated Balance Sheets As of December 31, 2004 (Unaudited) and September 30, 2004
(In thousands, except share and per share information) December 31,
    
    
    September 30,2004
    
    
    2004Current assets:Cash
    
    $
    23
    
    
    $
    4,717Accounts receivable, less allowance of $3,211 and $2,896 at December 31, 2004
and September 30, 2004, respectively
    
    
    70,945
    
    
    
    68,949Stock subscriptions receivable
    
    
    
    
    
    
    1,556Receivable from Trust
    
    
    9
    
    
    
    Prepaid expenses
    
    
    1,885
    
    
    
    1,333Other current assets
    
    
    842
    
    
    
    1,008Total current assets
    
    
    73,704
    
    
    
    77,563Fixed assets, net
    
    
    10,552
    
    
    
    10,778Intangible assets, net
    
    
    13,298
    
    
    
    13,618Goodwill
    
    
    84,606
    
    
    
    83,075Other assets
    
    
    1,401
    
    
    
    1,688Deferred compensation assets
    
    
    2,193
    
    
    
    1,739Total assets
    
    
    185,754
    
    
    
    188,461Current liabilities:Note payable to bank
    
    $
    3,000
    
    
    $
    Current portion, Term B Senior Credit Facility note payable
    
    
    690
    
    
    
    468Acquisition obligations
    
    
    4,554
    
    
    
    3,059Trade accounts payable and accrued liabilities
    
    
    23,084
    
    
    
    23,420Accrued payroll and related liabilities
    
    
    14,769
    
    
    
    20,689ESOP liabilities
    
    
    1,427
    
    
    
    136Current portion of accrued loss on operating leases
    
    
    800
    
    
    
    832Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    890
    
    
    
    676Total current liabilities
    
    
    49,214
    
    
    
    49,280Term B Senior Credit Facility note payable, excluding current portion
    
    
    68,138
    
    
    
    46,367Mezzanine note payable
    
    
    
    
    
    
    17,503Subordinated note payable
    
    
    34,457
    
    
    
    34,247Agreements with officers
    
    
    
    
    
    
    1,514Deferred compensation liability
    
    
    2,193
    
    
    
    1,735Accrued postretirement benefit obligations
    
    
    3,439
    
    
    
    3,398Deferred rent and accrued loss on operating leases
    
    
    3,796
    
    
    
    3,892Redeemable common stock warrants
    
    
    21,666
    
    
    
    20,777Total liabilities
    
    
    182,903
    
    
    
    178,713Shareholders equity, subject to redemption:Common stock
(subject to redemption), $0.01 par value, 15,000,000 shares authorized, 3,376,197 shares and 3,376,197 shares issued, and 3,329,382
shares and 3,376,197 shares outstanding at December 31, 2004 and
September 30, 2004 , respectively
    
    
    34
    
    
    
    34Additional paid-in capital
    
    
    37,532
    
    
    
    37,532Treasury stock, 46,816 shares, at cost
    
    
    (933
    )Accumulated deficit
    
    
    (33,782
    )
    
    
    (27,818
    )Total shareholders equity, subject to redemption
    
    
    2,851
    
    
    
    9,748Total liabilities and shareholders equity, subject to redemption
    
    $
    185,754
    
    
    $
    188,461
 See accompanying notes to consolidated financial statements. 1




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ALION SCIENCE AND TECHNOLOGY CORPORATION Consolidated Statements of Operations Three Months Ended December 31, 2004 and 2003
(In thousands, except share and per share information)
(Unaudited) Three Months
    
    
    Three MonthsEnded
    
    
    EndedDecember 31,
    
    
    December 31,2004
    
    
    2003Contract revenue
    
    $
    69,221
    
    
    $
    58,591Direct contract expense
    
    
    50,192
    
    
    
    42,113Gross profit
    
    
    19,029
    
    
    
    16,478Operating expenses:Indirect contract expense
    
    
    4,479
    
    
    
    3,989Research and development
    
    
    87
    
    
    
    74General and administrative
    
    
    6,709
    
    
    
    7,385Rental and occupancy expense
    
    
    2,444
    
    
    
    2,513Depreciation and amortization
    
    
    3,488
    
    
    
    3,104Stock-based compensation (1)
    
    
    457
    
    
    
    417Bad debt expense
    
    
    292
    
    
    
    42Total operating expenses
    
    
    17,956
    
    
    
    17,524Operating income (loss)
    
    
    1,073
    
    
    
    (1,046
    )Other income (expense):Interest income
    
    
    19
    
    
    
    2Interest expense
    
    
    (6,994
    )
    
    
    (3,236
    )Other
    
    
    (11
    )
    
    
    (12
    )Loss before income taxes
    
    
    (5,913
    )
    
    
    (4,292
    )Income tax expense
    
    
    (51
    )
    
    
    Net loss
    
    
    (5,964
    )
    
    $
    (4,292
    )Basic and diluted loss per share
    
    $
    (1.77
    )
    
    $
    (1.45
    )Basic and
diluted weighted average common shares outstanding
    
    
    3,368,564
    
    
    
    2,966,743
   (1)
    Stock-based compensation is a separately reported component of general and
administrative expense. See accompanying notes to consolidated financial statements. 2




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ALION SCIENCE AND TECHNOLOGY CORPORATION Consolidated Statements of Cash Flows Three Months Ended December 31, 2004 and 2003
(In thousands) Three Months
    
    
    Three MonthsEnded
    
    
    EndedDecember 31,
    
    
    December 31,2004
    
    
    2003Cash flows from operating activities:Net loss
    
    $
    (5,964
    )
    
    $
    (4,292
    )Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    3,488
    
    
    
    3,104Accretion of debt to face value
    
    
    2,392
    
    
    
    413Amortization of debt issuance costs
    
    
    170
    
    
    
    106Decrease in value of interest rate cap agreement
    
    
    53
    
    
    
    Change in fair value of redeemable common stock warrants
    
    
    889
    
    
    
    693Stock-based compensation
    
    
    457
    
    
    
    417Gain on investments, net
    
    
    (28
    )
    
    
    Changes in assets and liabilities, net of effect of acquisitions:Accounts receivable, net
    
    
    (2,103
    )
    
    
    (1,643
    )Other assets
    
    
    1,006
    
    
    
    (185
    )Trade accounts payable and accruals
    
    
    (4,700
    )
    
    
    559Other liabilities
    
    
    91
    
    
    
    199Net cash used in operating activities
    
    
    (4,249
    )
    
    
    (629
    )Cash flows from investing activities:Cash paid for acquisitions, net of cash acquired
    
    
    (1,650
    )
    
    
    (3,703
    )Capital expenditures
    
    
    (600
    )
    
    
    (641
    )Purchase of investment securities
    
    
    
    
    
    
    (1,333
    )Net cash used in investing activities
    
    
    (2,250
    )
    
    
    (5,677
    )Cash flows from financing activities:Proceeds from Term B Senior Credit Facility note payable
    
    
    22,000
    
    
    
    Payment of debt issuance costs
    
    
    (58
    )
    
    
    Repayment of Term B Credit Facility note payable
    
    
    (180
    )
    
    
    Repayment of senior note payable
    
    
    
    
    
    
    (1,250
    )Repayment of mezzanine note payable
    
    
    (20,201
    )
    
    
    (750
    )Payment of agreements with officers
    
    
    (1,823
    )
    
    
    Borrowings under revolving credit facility
    
    
    3,000
    
    
    
    8,300Repayment of ITSC revolving credit facility
    
    
    
    
    
    
    (375
    )Cash paid for Daedalic acquisition earn out
    
    
    
    
    
    
    (18
    )Purchase of shares of common stock from ESOP Trust
    
    
    (933
    )
    
    
    (736
    )Cash received from issuance of common stock to Trust
    
    
    
    
    
    
    1,247Net cash provided by financing activities
    
    
    1,805
    
    
    
    6,418Net increase (decrease) in cash
    
    
    (4,694
    )
    
    
    112Cash at beginning of period
    
    
    4,717
    
    
    
    494Cash at end of period
    
    $
    23
    
    
    $
    606Supplemental disclosure of cash flow information:Cash paid for interest
    
    
    3,023
    
    
    $
    1,151Cash paid (received) for taxes
    
    
    51
    
    
    
    
 See accompanying notes to consolidated financial statements. 3




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ALION SCIENCE AND TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)  (1)
    Description and Formation of the Business Alion Science and Technology Corporation (Alion or the Company) provides scientific and
engineering expertise to research and develop technological solutions for problems relating to
national defense, public health and safety, and nuclear safety and analysis. The Company provides
these research services primarily to agencies of the federal government and, to a lesser extent, to
commercial and international customers. Alion, a for-profit S Corporation, was formed in October 2001 for the purpose of purchasing
substantially all of the assets and certain of the liabilities of IIT Research Institute (IITRI), a
not-for-profit membership corporation affiliated with and controlled by the Illinois Institute of
Technology. Prior to the acquisition of substantially all of the assets and liabilities of IITRI
(the Transaction), the Companys activities had been organizational in nature. On December 20,
2002, Alion acquired substantially all of the assets and liabilities of IITRI (Business), excluding
the assets and liabilities of IITRIs Life Sciences Operation, for aggregate total proceeds of
$127.3 million consisting of (in thousands):  
    $58,571 in cash, consisting of $56,721 paid to IITRI and $1,517 paid for certain
transaction expenses on behalf of IITRI, and $333 paid for other transaction expenses;
    $39,900 in seller notes to IITRI, with detachable warrants representing approximately
26% of the outstanding common stock of Alion at the closing date (on a fully diluted
basis). The seller notes bear interest at an effective interest rate of 6.71% per annum.
See notes 8 and 9;
    $20,343 in mezzanine notes to IITRI, with detachable warrants representing 12% of the
outstanding common stock of Alion at the closing date (on a fully diluted basis). The
mezzanine notes bear interest at 12% per annum. See notes 8 and 9;
    $2,300 in transaction costs less the $1,517 referenced above;
    $6,188 in assumed IITRI debt due to its bank; and
    $1,520 in additional amounts due to IITRI for purchase price adjustments related to the
Life Sciences Operation. The acquisition was accounted for using the purchase method. The purchase price has been
allocated to the acquired assets and assumed liabilities based on their estimated fair values at
the date of acquisition. As a result of the Transaction, the Company recorded goodwill of
approximately $63.6 million, which is subject to an annual impairment review, as discussed
below. In addition, the Company recorded intangible assets of approximately $30.6 million, 4




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comprised of purchased contracts. The intangible assets have an estimated useful life of three
years and are amortized using the straight-line method. The total purchase consideration of approximately $127.3 million was allocated to the fair
value of the net assets acquired as follows (in thousands): Cash and restricted cash
    
    $
    1,187Accounts receivable
    
    
    47,485Other current assets
    
    
    3,784Acquired contracts
    
    
    30,645Goodwill
    
    
    63,610Fixed assets
    
    
    9,094Liabilities assumed
    
    
    (28,500
    )$
    127,305
  (2)
    Summary of Significant Accounting Policies Basis of Presentation and Principles of Consolidation The consolidated financial statements are prepared on the accrual basis of accounting and
include the accounts of Alion and its wholly-owned subsidiaries: Human Factors Application, Inc.
(HFA), acquired at the time of the Transaction, and Innovative Technology Solutions Corporation
(ITSC) and Identix Public Sector (IPS), which were acquired during the year ended September 30,
2004. All significant intercompany accounts have been eliminated in consolidation. Operating
results for the three months ended December 31, 2004 are not necessarily indicative of the results
that may be expected for the fiscal year ending September 30, 2005. For further information, refer
to the consolidated financial statements and notes thereto included in the Post Effective Amendment
No. 5 to the Companys registration statement on
Form S-1 (No. 333-89756) filed with the Securities and
Exchange Commission [SEC] on
January 24, 2005. The preparation of financial statements, in conformity with generally accepted accounting
principles, requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosures of contingencies at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the reporting period.
Estimates have been prepared on the basis of the most current and best available information and
actual results could differ from those estimates. Reclassifications Where appropriate, certain items relating to prior years have been reclassified to conform to
the current year presentation. Revenue Recognition The Companys revenue results from contract research and other services under a variety of
contracts, some of which provide for reimbursement of cost plus fees and others of which are
fixed-price or time-and-material type contracts. The Company generally recognizes revenue 5




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when a contract has been executed, the contract price is fixed or determinable, delivery of the
services or products has occurred and collectibility of the contract price is considered probable. Revenue on cost-reimbursement contracts is recognized as costs are incurred and include a
proportionate share of the fees earned. The percentage of completion method is used to recognize revenue on fixed-price contracts
based on various performance measures. From time to time, facts develop that require the Company to
revise its estimated total costs or revenues expected. The cumulative effect of revised estimates
is recorded in the period in which the facts requiring revisions become known. The full amount of
anticipated losses on any type of contract are recognized in the period in which they become known. Under time-and-material contracts, labor and related costs are reimbursed at negotiated, fixed
hourly rates. Revenue on time-and-material contracts is recognized at contractually billable rates
as labor hours and direct expenses are incurred. Contracts with agencies of the federal government are subject to periodic funding by the
contracting agency concerned. Funding for a contract may be provided in full at inception of the
contract or ratably throughout the term of the contract as the services are provided. If funding is
not assessed as probable, revenue recognition is deferred until realization is probable. Contract costs on federal government contracts, including indirect costs, are subject to audit
by the federal government and adjustment pursuant to negotiations between the Company and
government representatives. All of the Companys federal contract indirect costs have been audited
and negotiated through fiscal year 2001. Government audit of fiscal year 2002 on indirect costs has
been completed pending final negotiation of the indirect rates. Audit for fiscal year 2003 is in
process. The Company will submit its fiscal year 2004 indirect cost submission on or about March
30, 2005. The results of the negotiation of the indirect rates for
fiscal year 2002 and the completion of the indirect rate audits and
indirect rate negotiations for fiscal years 2003 and 2004 are not expected to have a
material effect on the future results of operations. Contract revenues on federal government
contracts have been recorded in amounts that are expected to be realized upon final settlement. The Company recognizes revenue on unpriced change orders as expenses are incurred only to the
extent that the Company expects it is probable that such costs will be recovered. The Company
recognizes revenue in excess of costs on unpriced change orders only when management can also
reliably estimate the amount of excess and experience provides a sufficient basis for recognition.
The Company recognizes revenue on claims as expenses are incurred only to the extent that the
Company expects it is probable that such costs will be recovered and the amount of recovery can be
reliably estimated. Income Taxes The Company is an S corporation under the provisions of the Internal Revenue Code. For federal
and certain state income tax purposes, the Company is not subject to tax on its income. Such income
is allocated to the Companys shareholder, Alion Science and Technology Corporations Employee
Stock Ownership Savings and Investment Plan. The Company may be subject to state income taxes in
those states that do not recognize S corporations. Additionally, the Company may be subject to
additional types of taxes including franchise and business taxes. 6




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All of the Companys subsidiaries, HFA, IPS, and ITSC, are qualified subchapter S entities
which, for federal income tax purposes, are not treated as separate corporations. Accounts Receivable and Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts Accounts receivable include billed accounts receivable, amounts currently billable, and costs
and estimated earnings in excess of billings on uncompleted contracts which represent accumulated
project expenses and fees which have not been billed or are not currently billable as of the date
of the consolidated balance sheet. These amounts are stated at estimated realizable value and
aggregated $18.0 million and $14.5 million at December 31, 2004 and September 30, 2004,
respectively. Costs and estimated earnings in excess of billings on uncompleted contracts at
December 31, 2004 include $2.3 million related to costs incurred on projects for which the Company
has been requested by the customer to begin work under a new contract or extend work under an
existing contract, but for which formal contracts or contract modifications have not been executed.
The allowance for doubtful accounts is the Companys best estimate of the amount of probable losses
in the Companys existing billed and unbilled accounts receivable. The Company determines the
allowance using specific identification and historical write-off experience based on the age of the
population. Billings in excess of costs and estimated earnings and advance collections from customers
represent amounts received from or billed to commercial customers in excess of project revenue
recognized to date. Fixed Assets Leasehold improvements, software and equipment are recorded at cost. Expenditures for
maintenance and repairs are charged to current operations. Software and equipment are depreciated
over their estimated useful lives (2 to 15 years for the various classes of software and equipment)
generally using the straight-line method. Leasehold improvements are amortized on the straight-line
method over the shorter of the assets estimated useful life or the life of the lease. Upon sale or
retirement of an asset, costs and related accumulated depreciation are deducted from the accounts,
and the gain or loss is recognized in the consolidated statements of operations. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate fair value. It is impracticable for
the Company to estimate the fair value of its subordinated debt because the only market for this
financial instrument consists of principal to principal transactions.
For all of the following
items, the fair value is not materially different than the carrying value. Cash, Cash Equivalents, Accounts Payable and Accounts Receivable The carrying amount approximates fair value because of the short maturity of those
instruments. 7




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Marketable Securities The fair values of these investments are estimated based on quoted or market prices for these
or similar instruments. Senior Long-term Debt The carrying amount of the Companys senior debt approximates fair value which is estimated on
current rates offered to the Company for debt of the same remaining maturities. Interest Rate Cap The
fair value of the Companys interest rate cap agreement is estimated based on current rates offered
to the Company for contracts with similar terms and maturities. Redeemable Common Stock Warrants The Company uses an option pricing model to estimate the fair value of its redeemable common
stock warrants.  (3)
    Employee Stock Ownership Plan (ESOP) and Stock Ownership Trust On December 19, 2001, the Company adopted the Alion Science and Technology Corporation
Employee Ownership, Savings and Investment Plan (the Plan) and the Alion Science and Technology
Corporation Employee Ownership, Savings and Investment Trust (the Trust). The Plan, a tax
qualified retirement plan, includes an ESOP component and a non-ESOP component. In March 2003, the
Company filed an application for a determination letter from the Internal Revenue Service that the
Plan and Trust qualify under Sections 401(a) and 501(a) of the Internal Revenue Code of 1986, as
amended. The Company believes that the Plan and Trust have been designed and are currently being
operated in compliance with the applicable requirements of the IRC.  (4)
    Pensions and Postretirement Benefits The Company sponsors a medical benefits plan providing certain medical, dental, and vision
coverage to eligible employees and former employees. The Company has a self-insured funding policy
with a stop-loss limit under an insurance agreement. The Company also provides postretirement medical benefits for employees who meet certain age
and service requirements. Retiring employees may become eligible for those benefits at age 55 if
they have 20 years of service, or at age 60 with 10 years of service. The plan provides benefits
until age 65 and requires employees to pay one-quarter of their health care premiums. A small,
closed group of employees is eligible for coverage after age 65. These retirees contribute a fixed
portion of the health care premium. There were no plan assets as of December 31, 2004 and September 30, 2004. The Company uses an
October 1 measurement date. 8




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##### 



The Company provides a prescription drug benefit to a small, closed group of retirees after
age 65. Employers providing a retiree prescription drug benefit which is at least actuarially
equivalent to Medicare Part D can qualify for a federal subsidy. The Company has yet to determine
whether the benefit that it provides can meet this standard. The Company does not expect the effect of any
subsidy to be material. Accordingly, neither the accumulated postretirement benefit obligation nor
the net periodic postretirement benefit cost in the Companys financial statements reflect the
effect of any potential subsidy.  (5)
    Loss Per Share Basic and diluted loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding. Loss per share excludes the impact of warrants and stock
appreciation rights described herein as this impact would be anti-dilutive for all periods
presented.  (6)
    Shareholders Equity, Subject to Redemption The Companys common stock is owned by the Alion Science and Technology Corporation Employee
Ownership, Savings and Investment Trust (the Trust). The Company provides a put option to any
participant or beneficiary who receives a distribution of common stock which permits the
participant or beneficiary to sell such common stock to the Company during certain periods, at the
estimated fair value price per share. Accordingly, all of the Companys equity is classified as
subject to redemption in the accompanying consolidated balance sheets. Certain participants have the right to sell shares distributed from participant accounts that
were acquired on the closing date of the Transaction at a price equal to the greater of the
original purchase price and the estimated fair value price per share of common stock.  (7)
    Goodwill and Intangible Assets The Company accounts for goodwill and other intangible assets in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 142, which requires that
goodwill be reviewed at least annually for impairment. The Company has elected to perform this
review annually at the end of each fiscal year. As of December 31, 2004, the Company has recorded goodwill of approximately $84.6 million.
For the three months ended December 31, 2004, goodwill increased by approximately $1.5 million.
Approximately $1.3 million related to additional earnout obligations from historical acquisitions
and approximately $0.2 million related to purchase price allocation adjustments from acquisitions
described in Note 15. As of December 31, 2004, the Company has recorded net intangible assets of approximately $13.3
million comprised primarily of contracts purchased from IITRI of approximately $9.9 million and
approximately $3.4 million for contracts purchased in acquisitions described in Note 15. The
intangible assets have an estimated useful life of one to three years and are being amortized using
the straight-line method. 9




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##### 



(8)
    Long-Term Debt To fund the Transaction described in Note 1, the Company entered into various debt agreements
(i.e., Senior Credit Agreement, Mezzanine Note, and Subordinated Note) on December 20, 2002. On
August 2, 2004, the Company entered into a new Term B Senior Credit Facility with Credit Suisse
First Boston (CSFB)(Term B Senior Credit Facility), and used proceeds to extinguish the LaSalle
Bank senior term note, the LaSalle Bank revolving credit facility, and the Mezzanine Note. The discussion below describes the Term B Senior Credit Facility and the initial debt
agreements used to finance the Transaction. Term B Senior Credit Facility On August 2, 2004, the Company entered into the Term B Senior Credit Facility administered by
CSFB consisting of a $30.0 million revolving credit facility, a Senior Secured Term B Loan for
$100.0 million, and a $50.0 million uncommitted Incremental Term Loan accordion facility. The
total principal amount that may be borrowed under the Senior Credit Facility is $180.0 million. During the first four years of the term, principal under the Senior Secured Term B Loan is
payable quarterly in an amount equal to 0.25 percent of the principal amount then outstanding.
During the fifth and final year of the term, the Company is obligated to pay quarterly installments
of principal in an amount equal to 24 percent of the principal amount then outstanding. All
principal obligations under the senior revolving credit facility are to be repaid in full no later
than August 2, 2009. As of December 31, 2004, the outstanding balance drawn under the senior
revolving credit facility was $3.0 million. The Senior Secured Term B Loan and the revolving credit facility each may bear interest at
either of two floating rates. The Company may elect that interest be payable on our $100.0 million
Senior Secured Term B Loan at an annual rate equal to the prime rate charged by CSFB plus a maximum
spread of 225 basis points or at an annual rate equal to the Eurodollar rate plus a maximum spread
of 275 basis points. As of December 31, 2004, the applicable interest rate was 4.94%. The Term B Senior Credit Facility requires the Company to enter into an interest rate hedge
agreement acceptable to CSFB which fixes or caps the actual interest the Company will pay on no
less than 40 percent of our long-term indebtedness. On August 2, 2004, the Company elected to have
the Senior Secured Term B Loan bear interest at the Eurodollar rate, which was approximately 1.6
percent as of August 2, 2004, plus the applicable margin, which totaled approximately 4.35 percent
(i.e., LIBOR 1.6 percent plus 2.75 percent Eurodollar spread). On August 16, 2004, the Company
entered into an interest rate cap agreement effective September 30, 2004 with one of the Companys
senior lenders. Under this agreement, in exchange for the Companys payment to the senior lender of
approximately $319,000, the Companys maximum effective rate of interest payable with regard to a
portion of the outstanding principal balance of the Term B Senior Credit Facility is not to exceed
6.64 percent (i.e., LIBOR 3.39 percent cap plus maximum 2.75 percent Eurodollar spread) for the
period September 30, 2004 through September 29, 2005 and is not to exceed 7.41 percent (i.e., LIBOR
4.66 percent plus 2.75 10




---



##### 



percent maximum Eurodollar spread) for the period September 30, 2005 through September 29, 2007. The terms of borrowings under the Incremental Term Loan Facility will be established at the
time the borrowings, if any, are made. If the Company borrows under the Incremental Term Loan
facility and certain economic terms of the Incremental Term Loan, including applicable yields,
maturity dates and average life to maturity, are more favorable to the incremental term loan
lenders than the comparable economic terms under the Senior Secured Term B Loan or the revolving
credit facility, then the Term B Senior Credit Facility provides that the applicable interest rate
spread will be adjusted upward. The upward adjustment will take place if the yield payable under
the incremental term loan exceeds the yield under the Senior Secured Term B Loan or revolving
credit facility by more than 50 basis points. The effect of this provision is that if the Company
borrows under the Incremental Term Loan Facility, that borrowing may increase the cost of
borrowings under the Senior Secured Term B Loan and the revolving credit facility. Under the terms
of the Senior Secured Term B Loan, the Company is subject to certain financial covenants with
respect to the Companys maximum leverage ratio and our interest coverage ratio. The Company was in
compliance with these covenants in all material respects at December 31, 2004. On August 2, 2004, the Company borrowed $50.0 million under the Senior Secured Term B Loan to
retire its outstanding Senior Term Note and revolving credit facility under the Senior Credit
Agreement with LaSalle Bank. The Company paid approximately $47.2 million in principal
(approximately $23.2 million to redeem the senior term note and $24.0 million on the revolving
credit facility) and accrued and unpaid interest and approximately $3.3 million in transaction fees
associated with the refinancing. On October 1, 2004, the Company drew down approximately $22.0 million on the Senior Secured
Term B Loan to retire its existing Mezzanine Note in the approximate principal amount of $19.6
million, plus approximately $1.8 million prepayment premium, and $0.6 million for accrued and
unpaid interest. The Company is permitted to use any future proceeds it might receive from the currently
uncommitted Incremental Term Loan Facility to finance permitted acquisitions and to make certain
put right payments required under the Companys Mezzanine Warrant, if the put rights are exercised,
and for any other purpose permitted by Incremental Term Loans, as defined in the Term B Senior
Credit Facility, if and when they are funded. Senior Credit Agreement On December 20, 2002, the Company executed a Senior Credit Agreement among LaSalle Bank
National Association and other lenders to refinance and replace IITRIs prior credit arrangements
and to finance, in part, the Transaction. The Senior Credit Agreement consisted of a $35.0 million
Senior Term Note and a $25.0 million revolving credit facility. All principal obligations under the
Senior Credit Agreement were to be repaid in full no later than December 20, 2007. The Senior
Credit Agreement is secured by a first priority, perfected security interest in all of the
Companys current and future tangible and intangible property. Prior to the CSFB refinancing in August 2004, the Company had approximately $47.2 million in
borrowings under the Senior Credit Agreement (approximately $24.0 million 11




---



##### 



under the revolving credit facility and approximately $23.2 million under the Senior Term Note),
each of which bore interest at either of two floating rates: a per year rate equal to the
Eurodollar rate plus 350 basis points, or LaSalles prime rate (base rate) plus 200 basis points. Under the Senior Credit Agreement, balances drawn on the revolving credit facility bore
interest at the LaSalle Bank prime rate plus 200 basis points. Effective February 14, 2003, the Company exercised its right and elected that the Senior Term
Note bear interest at a Eurodollar rate. This election did not affect the interest rate applicable
to amounts borrowed under the revolving line of credit. Interest under the Senior Term Note was
payable at LaSalles prime rate (base rate) plus 200 basis points until February 14, 2003.
Thereafter, the Senior Term Note bore interest at the Eurodollar rate plus 350 basis points. On August 2, 2004, the revolving credit facility and senior term loan were extinguished with
proceeds from the Term B Senior Credit Facility. As of August 2, 2004, the Company had
approximately $24.0 million borrowed under the revolving credit facility at an interest rate equal
to approximately 6.25% (LaSalle Bank prime rate plus 200 basis points). The Company entered into an interest rate cap agreement effective as of February 3, 2003 with
one of its senior lenders. Under this agreement, the Companys maximum effective rate of interest
payable on the first $25 million of principal under its term note is not to exceed 6%. Any interest
the Company pays on the first $25 million of principal in excess of 6% will be reimbursed to the
Company semiannually by the senior lender pursuant to the cap agreement. As a result of the
aforementioned refinancing that occurred on August 2, 2004, the cap agreement was extinguished.
The value assigned to the cap agreement was recognized as interest expense in the period in which
the refinancing occurred. Mezzanine Note On December 20, 2002, the Company issued to IITRI a Mezzanine Note securities purchase
agreement (Mezzanine Note) with a face value of approximately $20.3 million. The Mezzanine Note
served as part of the consideration for the Transaction. On July 1, 2004, the Illinois Institute of
Technology (IIT) acquired all of IITRIs rights and interests in the Mezzanine Note and the related
Warrant Agreement. On March 28, 2003, an officer of the Company purchased a portion of the Companys Mezzanine
Note owned by IITRI for $750,000, its face value (as described below in Other Notes and
Agreements). On October 1, 2004, the Company borrowed $22.0 million under the Senior Secured Term B Loan.
The Company used the proceeds of the October 1, 2004, borrowing to redeem the Mezzanine Note for
approximately $19.6 million, to pay a prepayment penalty of approximately $1.8 million and to pay
approximately $0.6 million in accrued interest. The Company recognized an expense of approximately
$3.9 million on extinguishment of the Mezzanine Note, including approximately $2.1 million for
amortization of original issue discount in addition to the $1.8 million prepayment penalty. 12




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##### 



Subordinated Note On December 20, 2002, the Company issued a seller note to IITRI under a seller note securities
purchase agreement (Subordinated Note) with a face value of $39.9 million. The Subordinated Note
served as part of the consideration for the Transaction. On July 1, 2004, the Illinois Institute of
Technology (IIT) acquired all of IITRIs rights and interests in the Subordinated Note and the
related Warrant Agreement. The Subordinated Note bears interest at a rate of 6% per year through
December 2008 payable quarterly by the issuance of non-interest bearing notes (paid-in-kind notes
or PIK notes) maturing at the same time as the Subordinated Note. The issuance of the PIK notes
will have the effect of deferring the underlying cash interest expense on the Subordinated Note,
but because the PIK notes will not themselves bear interest, they will not have the effect of
compounding any interest on these interest payment obligations. Commencing December 2008, the
Subordinated Note will bear interest at 16% per year payable quarterly in cash through the time of
repayment in full of the Subordinated Note. Principal on the Subordinated Note will be payable in
equal installments of $19.95 million in December 2009 and December 2010; the PIK notes are also due
in equal installments of $7.2 million on these same dates. Other Notes and Agreements On December 20, 2002, the Company entered into a $0.9 million deferred compensation agreement
with Dr. Bahman Atefi, its President, CEO and Chairman, as a condition to completing the
Transaction, with payment terms substantially equivalent to those of the Mezzanine Note, and issued
Dr. Atefi detachable warrants representing the right to buy approximately 22,062 shares of Alion
common stock at an exercise price of $10.00 per share, with put rights similar to those contained
in the warrants accompanying the Mezzanine Note. On October 29, 2004, Dr. Atefi elected to redeem
the amount due under his deferred compensation agreement with Alion. Dr. Atefi was paid
approximately $0.9 million, plus $0.2 million in accrued interest. The warrants relating to the
deferred compensation agreement remain outstanding. On March 28, 2003, an officer of the Company purchased a portion of the Companys Mezzanine
Note owned by IITRI for $750,000, its face value, along with warrants to purchase 19,327 shares of
Alions common stock at an exercise price of $10.00 per share. On November 12, 2003, the Company
purchased the portion of the Mezzanine Note and warrants from the officer for an aggregate purchase
price of $1,034,020. On February 11, 2004, the Company borrowed $750,000 from an officer of the Company. In
exchange, on June 7, 2004, the Company issued a promissory note in the principal amount of $750,000
to the officer maturing on March 31, 2009. The promissory note bears interest at a rate of 15% per
year, payable quarterly. The annual interest period was effective beginning February 11, 2004. On
December 9, 2004, the Promissory Note was extinguished. An amount of $750,000 plus accrued interest
of $21,635 was paid to the officer. 13




---



##### 



As of December 31, 2004, for the aforementioned debt agreements, the remaining fiscal year
principal repayments (at face amount before debt discount) are as follows: 6-Fiscal Year Period ($ in millions)2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    TotalNote payable to bank(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.00
    
    
    
    
    
    
    
    3.00Senior Secured Term Loan B (2)
    
    
    0.54
    
    
    
    0.72
    
    
    
    0.72
    
    
    
    0.72
    
    
    
    69.10
    
    
    
    
    
    
    
    71.80Subordinated Seller Note (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19.95
    
    
    
    19.95
    
    
    
    39.90Subordinated Paid in Kind Note
(4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.20
    
    
    
    7.20
    
    
    
    14.40Total principal payments
    
    $
    0.54
    
    
    $
    0.72
    
    
    $
    0.72
    
    
    $
    0.72
    
    
    $
    99.25
    
    
    $
    27.15
    
    
    $
    129.10
   (1)
    The $3.0 million balance drawn under the senior revolving credit facility at
December 30, 2004, must be repaid no later than August 2, 2009.(2)
    The Term B Senior Credit Facility requires the Company to repay 1 percent of the
principal balance outstanding under the senior term loan during each of the first four years
(i.e., fiscal years 2005 through 2008) of the Term B Senior Credit Facilitys term and 96
percent of the principal balance outstanding during the fifth and final year of the term. As
of December 31, 2004, the Company paid approximately $0.18 million in principal.
The Company is required to pay at least $0.54 million in principal during the remainder of fiscal year
2005. The Term B Senior Credit Facility also requires the Company to make mandatory
prepayments of principal depending upon whether the Company generates certain excess cash flow
in a given fiscal year, issue certain equity, issue or incur certain debt or sell certain
assets. Due to the uncertainty of these payments, the table does not reflect any such
payments. The $71.8 million includes, as of December 31, 2004, approximately $3.0 million of
the remaining unamortized debt discount. Approximately $3.3 million of debt issuance costs
were originally recorded as debt discount.(3)
    Repayment of $39.9 million for the face value of the Subordinated Seller Note in
two equal payments of $19.95 million in years 2009 and 2010. The $39.9 million includes, as of
December 31, 2004, approximately $5.4 million of the remaining unamortized debt discount,
assigned to fair value of the detachable warrants. At date of issuance, December 20, 2002,
approximately $7.1 million was assigned as the fair value of the warrants in accordance with
Emerging Issues Task Force Issue No. 00-19, Accounting for Derivative Financial Instruments
Indexed to, and Potentially settled in, a Companys Own Stock.(4)
    During the eight-year term of the Subordinated Note, approximately $14.4 million
of principal accretes to the note through the PIK. These amounts are included in the principal
payments in fiscal years 2009 and 2010. In fiscal years 2009 and 2010, interest 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 fiscal years 2009 and 2010.  (9)
    Redeemable Common Stock Warrants With the issuance of the Mezzanine Note, Subordinated Note, and the Deferred Compensation
Agreement described in Note 8, the Company issued 524,229, 1,080,437, and 22,062, respectively,
detachable redeemable common stock warrants (the Warrants) to the holders of those instruments. As
of July 1, 2004, IITRI transferred all of its rights, title and interest in the warrants to the
Illinois Institute of Technology. The Warrants have an exercise price of $10 per share and are
exercisable until December 20, 2008 for the warrants associated with the Mezzanine Note and the
Deferred Compensation Agreement and until December 20, 2010 for the warrants associated with the
Subordinated Note. The Warrants enable the holders to sell the warrants back to the Company, at
predetermined times, at the then current fair value of the common stock less the exercise price.
Accordingly, the Warrants are classified as debt 14




---



##### 



instruments in accordance with Emerging Issues Task Force Issue No. 00-19, Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock.
On December 20, 2002, the date of issuance, the estimated fair value of the Warrants of
approximately $10.3 million was recorded as a discount to the face value of the notes issued and as
a liability in the accompanying consolidated balance sheet. The estimated fair value of the
Warrants was $21.7 million as of December 31, 2004. The change in the estimated fair value of
approximately $0.9 million was recorded as interest expense in the accompanying consolidated
statements of operations. (10) Leases Future minimum lease payments under non-cancelable operating leases for buildings, equipment
and automobiles at December 31, 2004 are set out below. Under these operating leases, the Company
subleased some excess capacity to subtenants under non-cancelable operating leases. In connection with the IPS acquisition, the Company assumed two operating leases at
above-market rates and recorded a loss accrual of $4.4 million based on the estimated fair value of
the lease liabilities assumed which is being amortized over the lease terms. The accrued loss was
$3.6 million at December 31, 2004. In connection with the IPS acquisition, the Company also
acquired a related sublease at above-market rates. Based on the estimated fair value of the
sublease, the Company recognized an asset of $0.6 million which is being amortized over the lease
term. The remaining asset value was $0.5 million at December 31, 2004. Fiscal years ending:
    
    (In thousands)2005 (for the remainder of fiscal year)
    
    
    9,4652006
    
    $
    12,3782007
    
    
    12,3342008
    
    
    11,8122009
    
    
    11,4752010
    
    
    8,263and thereafter
    
    
    3,989Gross lease payments
    
    
    69,716Less: non-cancelable subtenant receipts
    
    
    8,733Net lease payments
    
    $
    60,983
 Rent expense under operating leases was $2.7 million and $2.1 million for the quarters
ended December 31, 2004 and 2003, respectively. Sublease rental income under operating leases was
$0.4 million for the quarter ended December 31, 2004. 15




---



##### 



(11)
    Fixed Assets Fixed assets consisted of the following: December 31,
    
    
    September 30,2004
    
    
    2004(in thousands)Leasehold improvements
    
    $
    2,141
    
    
    $
    1,992Equipment and software
    
    
    13,808
    
    
    
    13,358Total cost
    
    
    15,949
    
    
    
    15,350Less accumulated depreciation and
amortization
    
    
    5,397
    
    
    
    4,572Net fixed assets
    
    $
    10,552
    
    
    $
    10,778
 Depreciation and leasehold amortization expense for fixed assets was approximately $0.8
million and $0.6 million for quarters ended December 31, 2004 and 2003, respectively.  (12)
    Stock Appreciation Rights Alions board of directors adopted a Stock Appreciation Rights (SAR) Plan in November 2002.
The SAR plan has a term of ten years. Awards may be granted under the plan to directors, officers,
employees, and consultants. Outstanding SAR awards cannot exceed the equivalent of 10% of the
Companys outstanding shares of common stock on a fully diluted basis. Upon exercise, a grantee has
the right to receive payment equal to the difference between the appraised value of a share of
Alion common stock as of the grant date and the appraised value of a share of Alion common stock as
of the exercise date per the most recent valuation of the shares of common stock held by the ESOP.
Awards vest at 20% per year for employees. Awards to members of the Companys board of directors,
other than Dr. Atefi, vest ratably over each members then-current term of office. SARs may be
exercised at any time after grant to the extent they have vested. As of December 31, 2004, the
Company had granted 242,350 outstanding SARs summarized as follows: Number of
    
    
    Number of
    
    
    
    
    
    
    
    
    
    
    CumulativeSARs
    
    
    SARs granted
    
    
    Total Number
    
    
    
    
    
    
    Number ofEffective Date of
    
    Granted to
    
    
    to Board of
    
    
    of SARs
    
    
    Exercise
    
    
    SARsGrant
    
    Employees
    
    
    Directors
    
    
    Granted
    
    
    Price/Share
    
    
    GrantedDecember 23, 2002
    
    
    68,550
    
    
    
    29,400
    
    
    
    97,950
    
    
    $10.00/share
    
    
    97,950May 15, 2003
    
    
    300
    
    
    
    
    
    
    
    300
    
    
    $11.13/share
    
    
    98,250June 5, 2003
    
    
    300
    
    
    
    
    
    
    
    300
    
    
    $11.13/share
    
    
    98,550December 21, 2003
    
    
    131,200
    
    
    
    12,600
    
    
    
    143,800
    
    
    $14.71/share
    
    
    242,350
 As of December 31, 2004, 12,600 SARs have been exercised and 8,850 SARs have been
forfeited. For each quarter ended December 31, 2004 and 2003, the Company recognized approximately
$0.1 million in compensation expense associated with this plan. 16




---



##### 



(13)
    Phantom Stock Program In February 2003, the compensation committee of Alions board of directors approved, and the
board of directors subsequently adopted, the Companys phantom stock plan. Phantom stock refers to
hypothetical shares of Alion common stock. Upon vesting, recipients are entitled to receive an
amount of money equal to the product of the number of hypothetical shares vested and the
then-current value of Alion common stock, based on the most recent valuation of the shares of
common stock held by the ESOP. The phantom stock plan has a term of ten years. The board of directors and the compensation
committee may each grant key management employees awards of phantom stock. The phantom stock awards
vest according to the following schedule: Vested Amount for Grant inFebruary
    
    NovemberAnniversary from Grant Date
    
    2003
    
    20031st
    
    
    -
    
    
    
    20
    %2nd
    
    
    -
    
    
    
    20
    %3rd
    
    
    50
    %
    
    
    20
    %4th
    
    
    25
    %
    
    
    20
    %5th
    
    
    25
    %
    
    
    20
    %
 As of December 31, 2004, the Company had 223,685 shares of phantom stock outstanding
which may be summarized as follows: Shares of
    
    
    CumulativePhantom Stock
    
    
    Shares ofawarded to
    
    
    Phantom StockEffective date of Grant
    
    employees
    
    
    awardedFebruary 11, 2003
    
    
    171,000
    
    
    
    171,000November 11, 2003
    
    
    52,685
    
    
    
    223,685
 For each quarter ended December 31, 2004 and 2003, the Company recognized approximately
$0.3 million in compensation expense associated with this plan.  (14)
    Segment Information and Customer Concentration The Company operates in one segment, delivering a broad array of scientific and engineering
expertise to research and develop technological solutions for problems relating to national
defense, public health and safety, and nuclear safety and analysis under contracts with the federal
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. 17




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##### 



Contract receivables from agencies of the federal government represented approximately $71.0
million, or 96%, of accounts receivable at December 31, 2004 and $68.6 million, or 96%, of accounts
receivable at September 30, 2004. Contract revenues from agencies of the federal government
represented approximately 98% of total contract revenues during each of the quarters ended December
31, 2004 and 2003. During the quarter ended December 31, 2004, Alion had no sales to any customers within a
single country (except for the United States) where the sales accounted for 10% or more of total
revenue. The Company treats sales to U.S. Government customers as sales within the United States
regardless of where services are performed. Substantially all of the Companys assets were located
within the United States for the quarter ended December 31, 2004.  (15)
    Business Combinations Acquisition of Innovative Technologies Solutions Corporation On October 31, 2003, Alion acquired 100% of the outstanding stock of Innovative Technologies
Solutions Corporation (ITSC) for $4.0 million. The transaction is subject to an earn out provision
not-to-exceed $2.5 million. ITSC is a New Mexico corporation with approximately 53 employees, the
majority of whom are located in New Mexico. ITSC provided nuclear safety and analysis services to
the U.S. Department of Energy (DOE) as well as to the commercial nuclear power industry. As of
December 31, 2004, the Company has recorded approximately $3.8 million of goodwill relating to this
acquisition. ITSCs results of operations are included in Alions operations from the date of
acquisition. The pro forma impact of this acquisition was not significant. Acquisition of Identix Public Sector, Inc. On February 13, 2004, Alion acquired 100% of the outstanding stock of Identix Public Sector,
Inc. (IPS) for $8.0 million in cash. Founded in 1980, IPS is based in Fairfax, Virginia and
provides program and acquisition management, integrated logistics support, and foreign military
support primarily to U.S. Navy customers. IPS, formerly ANADAC, was a wholly-owned subsidiary of
Identix Incorporated. In the three months following closing, the Company paid IPSs parent company approximately
$2.6 million for intercompany payables. Per the agreement, the Company placed a contingent payment
of $0.5 million in escrow. The payment is contingent on the Company having the opportunity to
compete or bid for services on certain government solicitations. As of December 31, 2004, the Company has recorded approximately $6.3 million of goodwill
relating to the IPS acquisition and approximately $1.0 million of purchased contracts being
amortized over three years. The allocation of purchase price is preliminary as the Company
completes its valuation of the fair value of assets acquired and liabilities assumed. The results
of operations for IPS are included in Alions operations from the date of acquisition. The table below sets out the unaudited pro forma effects of the IPS acquisition on the
Companys revenue, net income and earnings per share as though the IPS acquisition had taken place
on first day of fiscal year 2004. The unaudited pro forma information does not purport to be
indicative of the results of operations that would have actually been achieved if the 18




---



##### 



transaction had occurred on the date indicated or the results of operations that will be reported
in the future. Quarter Ended
    
    
    Quarter EndedDecember 31, 2004
    
    
    December 31, 2003IPS
    
    
    AlionAlion
    
    
    Alion
    
    
    Pro forma
    
    
    Pro formaRevenue
    
    $
    69,221
    
    
    $
    58,591
    
    
    $
    7,845
    
    
    $
    66,436Net loss
    
    $
    (5,964
    )
    
    $
    (4,292
    )
    
    $
    (66
    )
    
    $
    (4,358
    )Weighted average shares outstanding
    
    
    3,368,564
    
    
    
    2,966,743
    
    
    
    2,966,743
    
    
    
    2,966,743Loss per share
    
    $
    (1.77
    )
    
    $
    (1.45
    )
    
    $
    (0.02
    )
    
    $
    (1.47
    )
 Acquisition of Countermeasures, Inc. On October 28, 2004, Alion purchased substantially all of the assets of Countermeasures, Inc.,
maker of the Buddy SystemTM Vulnerability Assessment and Management Software, for
approximately $2.4 million. Alion acquired technology for identifying, quantifying and managing
physical, infrastructure, program and electronic security risks. The technology can also recommend
countermeasures that may significantly reduce the exposure to threats. Countermeasures, Inc. has
two employees and is located in Hollywood, Maryland. The pro forma impact of this acquisition was
not significant. The allocation of purchase price is preliminary as the Company completes its valuation of the
fair value of assets acquired and liabilities assumed. The results of operations for
Countermeasures, Inc. are included in Alions operations from the date of acquisition.  (16)
    Related Party Transactions On October 29, 2004, Dr. Atefi elected to redeem the amount due under his Deferred
Compensation Agreement with Alion. Dr. Atefi was paid
approximately $1.1 million including accrued interest of
approximately $0.2 million. Dr. Atefis
related warrants remain outstanding. On December 9, 2004, the Company extinguished a Promissory Note with an officer. Alion paid
the officer $750,000 plus accrued interest of $21,635.  (17)
    Commitments and Contingencies Earn Out Commitments The Company has earn out commitments related to the following acquisitions: AB Technologies (AB Tech)  Earn out is based on an agreed-upon formula applied to net income
of the business units that formerly comprised AB Tech. The earn out obligation continues through
February 7, 2005, the fifth anniversary of the original acquisition date. ITSC  Earn out is based on a portion of the gross revenue of the business units that formerly
comprised ITSC. The obligation continues through September 30, 2005. 19




---



##### 



In the opinion of management, the realization of the amounts due under these arrangements will
not have a material adverse effect upon the financial position, results of operations, or the
liquidity of the Company. Legal Proceedings On December 23, 2004, the estate of Joseph Hudert filed an action against Grunley-Walsh Joint
Venture, L.L.C. (Grunley-Walsh) and the Company in the District of Columbia Superior Court for
damages in excess of $80 million. On January 6, 2005, the estate of Frank Stotmeister filed an
action against the Company in the same court on six counts, some of which are duplicate causes of
action, claiming $30 million for each count. Several other potential defendants may be added to
these actions in the future. The suits arose in connection with a steam pipe explosion that occurred on or about April 23,
2004 on a construction site at 17th Street, N.W. in Washington, D.C. The plaintiffs died,
apparently as a result of the explosion. They were employees of the prime contractor on the site,
Grunley-Walsh, and the subcontractor, Cherry Hill Construction Company Inc., respectively.
Grunley-Walsh had a contract with the U.S. Government Services Administration (GSA) for
construction on 17th Street N.W. near the Old Executive Office Building in Washington, D.C.
Sometime after the award of Grunley-Walshs construction contract, Alion was awarded a separate
contract by GSA. Alions responsibilities on this contract were to monitor Grunley-Walshs
activities and report to GSA any deviations from contract requirements. The Company intends to defend these lawsuits vigorously, and based on the facts currently
known to the Company, the Company does not believe that these lawsuits will have a materially
adverse effect upon the Company, its operations or its financial condition. Alions primary provider of general liability insurance, St. Paul Travelers, has assumed
defense of these lawsuits subject to a reservation of rights to deny coverage. American
International Group, the Companys excess insurance carrier, has also been notified regarding these
lawsuits. Other than the foregoing action, the Company is not involved in any legal proceeding other
than routine legal proceedings occurring in the ordinary course of business. The Company believes
that these routine legal proceedings, in the aggregate, are not material to its financial condition
and results of operations. Government Audits The amount of government contract revenue and expense reflected in the consolidated financial
statements attributable to cost reimbursement contracts is subject to audit and possible adjustment
by the Defense Contract Audit Agency (DCAA). The government considers the Company to be a major
contractor and DCAA maintains an office on site to perform its various audits throughout the year.
DCAA has concluded its audits of the Companys indirect costs and cost accounting practices through
fiscal year 2001. There were no significant disallowances for
fiscal years ended September 31, 2000 and 2001. The results of
the negotiation of the indirect rates for fiscal year 2002 and the
completion of the indirect rate audits and indirect rate negotiations for 2003 and 2004
are not expected to have a material effect on the results of future operations. 20




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##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read
together with the consolidated financial statements and the notes to those statements. This
discussion contains forward-looking statements that involve risks and uncertainties. These
statements relate to our future plans, objectives, expectations and intentions and are for
illustrative purposes only. These statements may be identified by the use of words such as
believe, expect, intend, plan, anticipate, likely, will, pro forma, forecast,
projections, could, estimate,
may, potential, should,
would, and similar expressions. The factors that could cause actual results to differ materially from those anticipated
include, but are not limited to, the following: changes to the ERISA laws related to the Companys
Employee Ownership, Savings and Investment Plan; changes to the tax laws relating to the treatment
and deductibility of goodwill, the Companys subchapter S status, or any change in the Companys
effective tax rate; additional costs associated with compliance with the Sarbanes-Oxley Act of
2002, including any changes in the SECs rules, and other corporate governance requirements;
failure of government customers to exercise options under contracts; funding decisions relating to
U.S. Government projects; government contract procurement (such as bid protest) and termination
risks; competitive factors such as pricing pressures and/or competition to hire and retain
employees; the results of current and/or future legal proceedings and government agency proceedings
which may arise out of our operations (including our contracts with government agencies) and the
attendant risks of fines, liabilities, penalties, suspension and/or debarment; undertaking
acquisitions that could increase our costs or liabilities or be
disruptive; taking on additional debt to fund acquisitions; failure to adequately
integrate acquired businesses; material changes in laws or regulations applicable to the Companys
businesses; as well as other risk factors discussed in Post-Effective Amendment No. 5 to the Companys registration statement on
Form S-1 (No. 333-89756) filed with the SEC on January 24, 2005. Readers are cautioned not to place undue reliance on these forward-looking statements, which
reflect managements view only as of February 15, 2005. The Company undertakes no obligation to
update any of the forward-looking statements made herein, whether as a result of new information,
future events, changes in expectations or otherwise. This discussion addresses only our continuing
operations. Critical Accounting Estimates and Policies Our significant accounting policies are described in Note 2 to the consolidated financial
statements included in Post-Effective Amendment No. 5 to the Companys registration statement on
Form S-1 (No. 333-89756) filed with the SEC on January 24, 2005. Critical accounting policies are defined as those that are reflective of significant judgments
and uncertainties, which potentially result in materially different results under different
assumptions and conditions. Application of these policies is a critical element in the portrayal of
our financial condition and results of operations. The discussion and analysis of our financial
condition and results of operations are based on our consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United
States of America. The preparation of these quarterly consolidated financial statements requires
management to make estimates and judgments that affect the reported amount of assets, 21




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##### 



liabilities,
revenues and expenses. Actual results may differ from these estimates under different assumptions
or conditions. Our critical accounting policies are set forth below: Revenue Recognition, Cost Estimation and Payment We recognize revenue when persuasive evidence of an arrangement exists, services have been
rendered, the contract price is fixed or determinable, and collectibility is reasonably assured. We
have a standard internal process that we use to determine whether all required criteria for revenue
recognition have been met. This standard internal process includes a monthly review of contract
revenues and expenses by several levels of management. This review covers, among other matters,
progress against schedule, project staffing and levels of effort, risks and issues, subcontract
management, incurred and estimated costs, and disposition of prior action items. This monthly
internal review is designed to determine whether the overall progress on a contract is consistent
with the effort expended and revenue recognized to date. Our revenues consist primarily of payments for the work of our employees, and to a lesser
extent, related costs for materials and subcontract efforts under contracts with our customers.
Cost of services consists primarily of compensation expenses for program personnel, the fringe
benefits associated with this compensation, and other direct expenses incurred to complete
programs, including cost of materials and subcontract efforts. The Companys revenue results from contract research and other services under a variety of
contracts, some of which provide for reimbursement of cost plus fees and others of which are
fixed-price or time-and-material type contracts. Absent evidence to the contrary, we recognize
revenues as follows:  
    Cost-reimbursement contracts  revenue is recognized as costs are incurred and
include an estimate of applicable fees earned.
    Fixed-price contracts  revenue is recognized using the percentage-of-completion
method based on various performance measures. From time to time, facts develop that
require the Company to revise its estimated total costs or revenues expected. The
cumulative effect of revised estimates is recorded in the period in which the facts
requiring revisions become known. The full amount of anticipated losses on any type of
contract are recognized in the period in which they become known.
    Time-and-material contracts  revenue is recognized at contractually billable rates
as labor hours and direct expenses are incurred. Labor and related costs are reimbursed
at negotiated, fixed hourly rates. 22




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##### 



The following table summarizes the percentage of revenues attributable to each contract type
for the periods indicated. For the Three Months Ended December 31,Contract Type
    
    2004
    
    
    2003(in millions)Cost-reimbursement
    
    $
    41
    
    
    
    59
    %
    
    $
    38
    
    
    
    64
    %Fixed-price
    
    $
    13
    
    
    
    18
    %
    
    $
    13
    
    
    
    13
    %Time-and-material
    
    $
    15
    
    
    
    23
    %
    
    $
    7
    
    
    
    23
    %Total
    
    $
    69
    
    
    
    100
    %
    
    $
    59
    
    
    
    100
    %
 Contracts with agencies of the federal government are subject to periodic funding by the
contracting agency concerned. Funding for a contract may be provided in full at inception of the
contract or ratably throughout the term of the contract as the services are provided. If funding is
not assessed as probable, revenue recognition is deferred until realization is probable. Contract costs on federal government contracts, including indirect costs, are subject to audit
by the federal government and adjustment pursuant to negotiations between the Company and
government representatives. All of the Companys federal government contract indirect costs have
been audited and negotiated through fiscal year 2001. Contract revenues on federal government
contracts have been recorded in amounts that are expected to be realized upon final settlement.
Government audit of fiscal year 2002 on indirect costs has been completed pending final negotiation
of the indirect rates. Audit for fiscal year 2003 is in process. The Company will submit its
fiscal year 2004 indirect cost submission on or about March 30, 2005. The Company recognizes revenue on unpriced change orders as expenses are incurred only to the
extent that the Company expects it is probable that such costs will be recovered. The Company
recognizes revenue in excess of costs on unpriced change orders only when management can also
reliably estimate the amount of excess and experience provides a sufficient basis for recognition.
The Company recognizes revenue on claims as expenses are incurred only to the extent that the
Company expects it is probable that such costs will be recovered and the amount of recovery can be
reliably estimated. 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. 23




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##### 



Our most significant expense is our cost of services, which consists primarily of direct labor
costs for program personnel and direct expenses incurred to complete contracts, including cost of
materials and subcontract efforts. Our ability to accurately predict personnel requirements,
salaries and other costs, as well as to manage personnel levels and successfully redeploy
personnel, can have a significant impact on our cost of services. Overhead costs consist primarily
of indirect costs such as facility lease expenses, indirect labor expenses, supplies and other
office expenses in support of our direct contract activities. General and administrative expenses
consist primarily of costs associated with our management, finance and administrative groups;
personnel training; sales and marketing expenses which include bid and proposal efforts; and
certain occupancy, travel and other corporate costs. The majority of our revenue is earned under contracts with various departments and agencies,
or prime contractors, of the federal government. Certain revenues and payments we receive are based
on provisional billings and payments that are subject to adjustment under audit. Federal government
agencies and departments have the right to challenge our cost estimates and allocations with
respect to government contracts. Also, contracts with such agencies are subject to audit and
possible adjustment to account for unallowable costs under cost-type contracts or other regulatory
requirements that affect both cost-type and fixed-price contracts. The following table sets forth, for each period indicated, the percentage of our revenues
derived from each of our major types of customers. Three Months
    
    
    Three MonthsEnded
    
    
    EndedDecember 31, 2004
    
    
    December 31, 2003U.S. Department of Defense (DoD)
    
    
    93
    %
    
    
    93
    %Other Federal Civilian Agencies
    
    
    5
    
    
    
    5Commercial / State / Local and International
    
    
    2
    
    
    
    2Total
    
    
    100
    %
    
    
    100
    %
 Goodwill and Identifiable Intangible Assets The Company accounts for goodwill and other intangible assets in accordance with the
provisions of SFAS No. 142. The Company does not amortize goodwill; it reviews goodwill for
impairment at least annually at the end of each fiscal year. The Company assesses the impairment of
goodwill and identifiable intangible assets whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. Factors that could trigger an impairment review
include:  
    Significant underperformance relative to expected historical or projected future
operating results;
    Significant changes in the manner of use of acquired assets or overall business
strategy; 24




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##### 




    Significant negative industry or economic trends; and
    Significant decline in Alions stock price for a sustained period. If the Company determines the carrying value of intangibles or goodwill may not be
recoverable, management measures any impairment using a projected discounted cash flow or other
appropriate measure of fair value, including independent valuation. As of December 31, 2004, the Company has goodwill of approximately $84.6 million, subject to
an annual impairment review. As of December 31, 2004, the Company has recorded approximately $13.3
million of intangible assets comprised primarily of the value assigned to purchased contracts. The
intangible assets have an estimated useful life of one to three years and are amortized using the
straight-line method. Results of Operations Three Months Ended December 31, 2004 Compared to Three Months Ended December 31, 2003 The table below reflects the approximate impact of the following events and circumstances as
they relate to the financial performance of Alion for the three months ended December 31, 2004 and
2003. The discussion of the results of operations includes references to the selected financial
information in the table below in conjunction with the Companys consolidated financial statements
provided elsewhere in this document. The selected financial information in the table is based on
estimates of Alion management.  
    Alion completed the acquisition of Integrated Technology Solutions Corporation
(ITSC) on October 31, 2003. The operating results for ITSC are separately identifiable
within the consolidated results of operations.
    Alion completed the acquisition of Identix Public Sector, Inc. (IPS) on February 13,
2004. The operating results for IPS are separately identifiable within the
consolidated results of operations.
    On October 28, 2004, Alion purchased substantially all of the assets of
Countermeasures, Inc., makers of the Buddy System"TM Vulnerability
Assessment and Management Software, for approximately $2.4 million. The operating
results for Countermeasures, Inc. are not separately identifiable within the
consolidated results of operations.
    References to the acquired operations includes the operating
results of ITSC and IPS. 25




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##### 



Quarter Ended December 31, 2004
    
    
    Quarter Ended December 31, 2003Consolidated
    
    
    
    
    
    
    
    
    
    
    ConsolidatedOperations of
    
    
    
    
    
    
    
    
    
    
    Operations ofConsolidated
    
    
    
    
    
    
    
    
    
    
    Acquired
    
    
    Alion less the
    
    
    Consolidated
    
    
    
    
    
    
    Alion less theOperations of
    
    
    ITSC
    
    
    IPS
    
    
    Operations
    
    
    Acquired
    
    
    Operations of
    
    
    ITSC
    
    
    AcquiredFinancial
information (in thousands)
    
    Alion
    
    
    Operation*
    
    
    Operation*
    
    
    (ITSC and IPS)
    
    
    Operations
    
    
    Alion
    
    
    Operation*
    
    
    OperationsTotal revenue
    
    $
    69,221
    
    
    $
    2,345
    
    
    $
    4,792
    
    
    $
    7,136
    
    
    $
    62,085
    
    
    $
    58,591
    
    
    $
    1,406
    
    
    $
    57,185Material and subcontract revenue
    
    
    16,865
    
    
    
    282
    
    
    
    2,228
    
    
    
    2,510
    
    
    
    14,356
    
    
    
    13,944
    
    
    
    436
    
    
    
    13,421Total direct contract expenses
    
    
    50,192
    
    
    
    1,614
    
    
    
    3,770
    
    
    
    5,385
    
    
    
    44,807
    
    
    
    42,112
    
    
    
    1,093
    
    
    
    41,020Major components of direct contract expenseDirect labor cost
    
    
    31,815
    
    
    
    1,265
    
    
    
    1,589
    
    
    
    2,854
    
    
    
    28,960
    
    
    
    26,896
    
    
    
    642
    
    
    
    26,254Other direct cost (ODC)
    
    
    2,019
    
    
    
    76
    
    
    
    20
    
    
    
    96
    
    
    
    1,923
    
    
    
    1,779
    
    
    
    30
    
    
    
    1,749Material and subcontract (M&S) cost
    
    
    16,358
    
    
    
    274
    
    
    
    2,161
    
    
    
    2,434
    
    
    
    13,924
    
    
    
    13,437
    
    
    
    420
    
    
    
    13,017Gross profit
    
    
    19,029
    
    
    
    730
    
    
    
    1,021
    
    
    
    1,752
    
    
    
    17,278
    
    
    
    16,478
    
    
    
    314
    
    
    
    16,164Total operating expense
    
    
    17,956
    
    
    
    614
    
    
    
    858
    
    
    
    1,472
    
    
    
    16,484
    
    
    
    17,524
    
    
    
    371
    
    

    
    17,153Major components of operating expenseIndirect personnel and facilities
    
    
    6,923
    
    
    
    361
    
    
    
    407
    
    
    
    768
    
    
    
    6,155
    
    
    
    6,502
    
    
    
    204
    
    
    
    6,297Non-recurring expense
    
    
    0
    
    

    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0General and administrative
    
    
    6,709
    
    
    
    246
    
    
    
    341
    
    
    
    587
    
    
    
    6,122
    
    
    
    7,385
    
    
    
    167
    
    
    
    7,218Depreciation and amortization
    
    
    3,488
    
    
    
    7
    
    
    
    110
    
    
    
    117
    
    
    
    3,371
    
    
    
    3,104
    
    
    
    0
    
    
    
    3,104Income (loss) from operations
    
    
    1,073
    
    
    
    116
    
    
    
    163
    
    
    
    280
    
    
    
    794
    
    
    
    (1,046
    )
    
    
    (57
    )
    
    
    (988
    )Other income and expense
    
    
    (6,986
    )
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (6,986
    )
    
    
    (3,246
    )
    
    
    0
    
    
    
    (3,246
    )Income tax benefit / (expense)
    
    
    (51
    )
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (51
    )
    
    
    0
    
    
    
    0
    
    
    
    0Net income (loss)
    
    $
    (5,964
    )
    
    $
    116
    
    
    $
    163
    
    
    $
    280
    
    
    $
    (6,243
    )
    
    $
    (4,292
    )
    
    $
    (57
    )
    
    $
    (4,235
    )
   *
    
    The operations of the acquired entities, ITSC and IPS, have been fully integrated within
Alion on a consolidated basis. The financial information attributed to these entities are the
estimates of management. Revenues.Revenues increased $10.6 million to $69.2 million, or 18.1%, from $58.6
million for the three months ended December 31, 2004, and 2003, respectively. Acquired operations
generated approximately $5.8 million of the increase and $4.8 million came primarily from work on
contracts that were in existence during the prior year. For the three months ended December 31, 2004, our performance of additional work under
contracts that were in existence during the prior year includes an increase in our services under
the U.S. Army Night Vision Lab Hightech Omnibus contract of approximately $2.3 million, and an
increase in our decommissioning and 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., of approximately $0.5 million. On the balance of our contracts, revenue
increased approximately $2.0 million for the three months ended December 31, 2004 as compared to
the three months ended December 31, 2003. As a component of revenue, material and subcontract (M&S) revenue increased approximately $3.0
million to $16.9 million, or 21.7%, from $13.9 million for the three months ended December 31, 2004
and 2003, respectively. Approximately $2.1 million of this increase was generated by acquired
operations and approximately $0.9 million was generated by contracts that were in existence during
the prior year. As a percentage of total revenue, M&S revenue increased approximately 0.5% to
24.3% from 23.8% for the three months ended December 31, 2004 and 2003, respectively. The increase
comes from acquired operations which have a greater level of M&S revenue from subcontractor support
to ITSC commercial utility customers and IPS support to the Department of the Navy. Direct Contract Expenses.Direct contract expenses increased approximately $8.1 million to
$50.2 million, or 19.2%, from $42.1 million for the three months ended December 31, 2004, and 2003,
respectively. Acquired operations generated approximately $4.3 million of this increase and
approximately $3.8 million was generated by contracts that were in existence during the prior year. 26




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##### 



As a percentage of revenue, direct contract expenses were 72.4% for the three months ended
December 31, 2004 as compared to 71.9% for the three months ended December 31, 2003. The changes
in specific components of direct contract expenses are:  
    Direct labor costs for the three months ended December 31, 2004 increased by $4.9
million, or 18.2%, to $31.8 million from $26.9 million for the three months ended
December 31, 2003. The increase is attributable to the growth in contract
revenues from the work performed by the acquired operations and for
work performed under existing contracts. As a percentage of revenue, direct labor cost
was 45.9% for each of the
three-month periods ended December 31, 2004 and 2003.
    M&S cost increased approximately $3.0 million, or 22.4%, to $16.4 million for the
three months ended December 31, 2004, compared to $13.4 million for the three months
ended December 31, 2003. As a percentage of revenue, M&S cost was 23.6% for the year
ended December 31, 2004 as compared to 22.9% for the three months ended December 31,
2003. The percentage increase in M&S cost is directly associated with the relative
percentage increase in M&S cost of the contracts performed by acquired operations, as
described above. As a percentage of M&S revenue, M&S cost was approximately 97.0%
during the three months ended December 31, 2004, as compared to 96.4% for the three
months ended December 31, 2003. Gross Profit.Gross profit increased $2.5 million, or 15.1%, to $19.0 million for the three
months ended December 31, 2004, from $16.5 million for the three months ended December 31, 2003.
The $2.5 million increase is attributable to the following: 
    
    Gross profit increase generated by the activities of the acquired
operations
    
    $1.4 million
    
    Gross profit increase generated primarily by work performed under
contracts that were in existence during the prior year
    
    $1.1 millionTotal:
    
    $2.5 million
 As a percentage of revenue, gross profit was 27.5% for three months ended December 31, 2004 as
compared to 28.1% for the three months ended December 31, 2003. For the three months ended
December 31, 2004, we experienced an increased proportion of M&S contract revenue due to the
acquired operations which have a greater level of M&S contract revenue. M&S contracts typically
generate lower profit margins. Operating Expenses.Operating expenses increased $0.5 million, or 2.9% to $18.0 million for
the three months ended December 31, 2004, from $17.5 million for the three months ended December
31, 2003. The $0.5 million increase is attributable to the following: 
    
    Operating expense increase incurred by the activities of the acquired
operations
    
    $1.1 million
    
    Decrease in operating expenses incurred by the activities of the
existing operations
    
    $(0.6) millionTotal:
    
    $0.5 million
 27




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##### 



As a percentage of revenue, operating expense was 25.9% for the three months ended December
31, 2004 as compared to 29.9% for the three months ended December 31, 2003. The changes in other
specific components of operating expenses are:  
    Operating expenses, net of depreciation and amortization expense, increased
approximately $0.1 million, or 0.7%, to $14.5 million for the three months ended
December 31, 2004, from $14.4 million for the three months ended December 31, 2003. As
a percentage of revenue, operating expense, net of depreciation and amortization
expense, was 20.9% for the three months ended December 31, 2004 as compared to 24.6%
for the three months ended December 31, 2003. Approximately 2.9 percentage points of
the 3.7 percentage point decrease is attributable to the decrease in general and
administrative expense, as described below.
    Overhead expenses for indirect personnel and facilities costs related to rental and
occupancy expenses increased approximately $0.4 million, or 6.2%, to $6.9 million for
the three months ended December 31, 2004, from $6.5 million for the three months ended
December 31, 2003. As a percentage of revenue, operating expense relating to indirect
personnel and facilities expense was 10.0% for the three months ended December 31, 2004
as compared to 11.1% for the three months ended December 31, 2003. The decrease, as a
percentage of revenue, is partially attributable to the cost control initiatives put in
place by line management.
    General and administrative (G&A) expense decreased approximately $0.7 million, or
9.5%, to $6.7 million for the three months ended December 31, 2004, compared to $7.4
million for the three months ended December 31, 2003. During the three months ended
December 30, 2003, third-party legal and accounting expenses were incurred in support
of the ITSC and IPS acquisitions and for support of the AB Technologies arbitration.
There were no such significant third-party G&A support expenses for the three months
ended December 31, 2004. As a percentage of revenues, G&A expenses were 9.7% for the
three months ended December 31, 2004, compared to 12.6% for the three months ended
December 31, 2003. The decrease in third-party expenses, in conjunction with
integrating and partially absorbing the G&A support costs of the acquired operations of
ITSC and IPS, resulted in a decrease in overall G&A expense when expressed as a
percentage of revenue.
    Stock-based compensation and deferred compensation relate primarily to the SAR and
phantom stock plans. This expense increased approximately $0.1 million, or 25% to $0.5
million for the three months ended December 31, 2004, from approximately $0.4 million
for the three months ended December 31, 2003. As a percentage of revenue, operating
expense relating to stock-based compensation and deferred compensation expense was 0.4%
for each of the three-month periods ended December 31, 2004 and 2003. The increase in stock-based
compensation and deferred compensation is a result of the increase in the value of
Alions common stock.
    Depreciation and amortization expense increased approximately $0.4 million, or
12.9%, to $3.5 million for the three months ended December 31, 2004, as compared to
$3.1 million for the three months ended December 31, 2003. 28




---



##### 



For each three-month quarter ended December 31, 2004 and 2003, approximately $2.6
million of amortization expense was incurred associated with the intangible asset value
assigned to purchased customer contracts of IITRI. For the three months ended December
31, 2004, approximately $0.1 million of amortization expense was incurred associated
with intangible asset value assigned to the purchased contracts of ITSC and IPS. Also,
for each respective three-month quarter ended December 31, 2004 and 2003, approximately
$0.1 million of depreciation expense was incurred associated with the fair value
assigned to the purchased fixed assets of IITRI. As a percentage of revenue, operating
expense relating to depreciation and amortization expense was 5.0% for the three months
ended December 31, 2004 as compared to 5.3% for the three months ended December 31,
2003.
    Bad debt expense increased approximately $0.3 million to $0.3 million for the three
months ended December 31, 2004 as compared to zero for the three months ended December
31, 2003. As a percentage of revenue, bad debt expense was 0.4% for the three months
ended December 31, 2004. Operating Income (Loss).For the three months ended December 31, 2004, operating income was
approximately $1.1 million compared with $1.0 million operating loss for the three months ended
December 31, 2003. The $2.1 million increase is associated with factors discussed above and is
attributable to the following: 
    
    Operating income increase generated from the activities of the acquired
operations
    
    $0.3 million
    
    Decrease in operating loss
generated from the existing operations
    
    $1.8 millionTotal:
    
    $2.1 million
 Other Income (Expense).Other income and expense increased approximately $3.8 million to
approximately $7.0 million, or 118.8%, from $3.2 million for the three months ended December 2004,
and 2003, respectively. Interest expense increased approximately
$3.7 million in October 2004 to $6.9 million for the three months ended December 31, 2004, as
compared to $3.2 million for the three months ended
December 31, 2003 primarily related to redemption of The
Mezzanine Note, in October 2004. The Company recorded
additional interest of $1.8 million for a prepayment penalty and an additional $1.9 million to
accrete the remaining debt discount upon extinguishment of the Mezzanine Note. Interest on senior
debt increased approximately $0.6 million to $1.1 million from approximately $0.5 million for the
three months ended December 31, 2004 and 2003, respectively due to an increased average outstanding
principal balance. Income Tax (Expense) Benefit.The Company has filed qualified subchapter-S elections for all
of its subsidiaries to treat them as disregarded entities for federal income tax purposes. Some
states do not recognize the effect of these elections or Alions S-corporation status. As a
result, the Company recorded approximately $0.05 million in state income tax expense for the three
months ended December 31, 2004. 29




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##### 



Net Loss.The Companys net loss increased approximately $1.7 million or 37.2% to $6.0 million
for the three months ended December 31, 2004, from $4.3 million for the three months ended December
31 2003. The increased loss is due to factors discussed above. Approximately $0.4 million of the
increased loss was generated by acquired operations and approximately $1.3 million in additional
loss was generated by existing operations. Liquidity and Capital Resources. The Companys primary liquidity requirements are for debt service, working capital, capital
expenditures, and acquisitions. The principal working capital need is to fund accounts receivable,
which increases with the growth of the business. We are funding our present operations, and we
intend to fund future operations, primarily through cash provided by operating activities and
through use of our revolving credit facility. Net cash used in operating activities of Alion was approximately $4.2 million for the three
months ended December 31, 2004, compared to cash used in operations of approximately $0.6 million
for the three months ended December 31, 2003. Of the $3.6 million difference, $1.7 million arises
from decreased net income. Approximately $5.3 million in reduced cash flow was attributable to a
decrease in accounts payable offset by an increase of approximately $2.6 million in non-cash
depreciation and non-cash interest-related expenses associated with amortization of debt issuance
costs, the expense for the accretion of debt to face value, and the expense for the decrease in
value of the Company's interest rate cap agreement. Net cash used in investing activities was approximately $2.3 million for the three months
ended December 31, 2004. The most significant component of the Companys investing activities is
the strategic acquisitions of, or investments in, other companies. During the three months ended
December 31, 2004, the Company paid approximately $1.7 million for the Countermeasures, Inc.
acquisition. The Company spent approximately $0.6 million for capital
expenditures unrelated to its acquisitions. Net cash provided by financing activities was approximately $1.8 million for the three months
ended December 31, 2004, compared to net cash provided by financing activities of approximately
$6.4 million for the three months ended December 31, 2003. The most significant components of the
Companys financing activities are: 1) net proceeds from (or repayment of) short term borrowings
and 2) net proceeds from (or repayment of) long term debt securities. During the quarter ended
December 31, 2004, Alion borrowed $22.0 million in proceeds under the Term B Senior Credit Facility
and borrowed approximately $3.0 million on the revolving line credit facility. Proceeds from these
borrowings and from operating cash flows were used to redeem the Mezzanine Note for approximately $19.6 million, pay
approximately $1.8 million in prepayment penalty for early redemption of the Mezzanine Note, and
pay approximately $1.8 million for the redemption of agreements with company officers. Discussion of Debt Structure On August 2, 2004, the Company entered into a new Term B Senior Credit Facility, that resulted
in the extinguishment of the LaSalle Bank senior term note, the LaSalle Bank revolving credit
facility and the Mezzanine Note. The discussion below describes the new Term B Senior Credit
Facility followed by a description of the remaining debt agreements which were used to 30




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##### 



fund the Transaction, as described in Note 1 to Alions Consolidated Financial Statements
(unaudited) provided above. Term B Senior Credit Facility.On August 2, 2004, we entered into a new Term B senior credit
facility for an amount up to $180.0 million with a syndicate of financial institutions for which
Credit Suisse First Boston (CSFB) serves as arranger, administrative agent and collateral agent.
LaSalle Bank serves as syndication agent under the Term B senior credit facility. The new Term B
senior credit facility consists of a committed $100.0 million term loan, a committed $30.0 million
revolving credit facility and provides for an additional $50.0 million (uncommitted) incremental
term loan in which funding is available subject to lender syndication approval. The term of the
facility is five years. During the first four years of the term, principal under the senior term
loan is payable quarterly in an amount equal to 0.25 percent of the principal amount then
outstanding. During the fifth and final year of the term, we are obligated to pay quarterly
installments of principal in an amount equal to 24 percent of the principal amount then
outstanding. All principal obligations under the senior revolving credit facility are to be repaid
in full no later than August 2, 2009. As of December 31, 2004, the outstanding balance drawn under
the senior revolving credit facility was $3.0 milion. At our option, the Term B senior term loan and the senior revolving credit facility each may
bear interest at either of two floating rates. We may elect that interest be payable on our $100.0
million senior term loan at an annual rate equal to the prime rate charged by CSFB plus a maximum
spread of 225 basis points or at an annual rate equal to the Eurodollar rate plus a maximum spread
of 275 basis points. If we elect a prime rate borrowing under our senior revolving credit facility,
interest would be payable at an annual rate equal to the prime rate charged by CSFB plus the
additional basis points reflected in the table below under the column ABR Spread corresponding to
our leverage ratio at the time. If we elect a Eurodollar borrowing under our senior revolving
credit facility, interest would be payable at an annual rate equal to the Eurodollar rate plus the
additional basis points reflected in the table below under the column Eurodollar Spread
corresponding to our leverage ratio at the time. ABR Spread
    
    Eurodollar SpreadLeverage Ratio
    
    (in basis points)
    
    (in basis points)Category 1
    
    225
    
    275Greater than or equal to 3.00 to 1.00Category 2
    
    200
    
    250Greater than or equal to 2.50 to
1.00 but less than 3.00 to 1.00Category 3
    
    175
    
    225Greater than or equal to 2.00 to
1.00 but less than 2.50 to 1.00Category 4
    
    150
    
    200Less than 2.00 to 1.00
 If we borrow under the incremental term loan facility and certain economic terms of the
incremental term loan, including applicable yields, maturity dates and average life to maturity,
are more favorable to the incremental term loan lenders than the comparable economic terms under
the senior term loan or the senior revolving credit facility, then the Term B senior credit 31




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facility provides that the applicable interest rate spread will be adjusted upward. The upward
adjustment will take place if the yield payable under the incremental term loan exceeds the yield
under the senior term loan or senior revolving credit facility by more than 50 basis points. The
effect of this provision is that if we borrow an incremental term loan, that borrowing may make our
borrowings under the senior term loan and the senior revolving credit facility more expensive. The Term B senior credit facility requires us to enter into an interest rate hedge agreement
acceptable to CSFB which fixes or caps the actual interest we will pay on no less than 40 percent
of our long-term indebtedness. On August 2, 2004, we elected to have the senior term loan bear
interest at the Eurodollar rate, which was approximately 1.6 percent as of August 2, 2004, plus the
applicable margin, which totaled approximately 4.35 percent (i.e., LIBOR 1.6 percent plus 2.75
percent Eurodollar spread). On August 16, 2004, we entered into an interest rate cap agreement
effective September 30, 2004 with one of our senior lenders. Under this agreement, in exchange for
our payment to the senior lender of approximately $0.3 million our maximum effective rate of
interest payable with regard to a portion of the outstanding principal balance of the Term B senior
credit facility is not to exceed 6.64 percent (i.e., LIBOR 3.39 percent cap plus maximum 2.75
percent Eurodollar spread) for the period September 30, 2004 through September 29, 2005 and is not
to exceed 7.41 percent (i.e., LIBOR 4.66 percent plus 2.75 percent maximum Eurodollar spread) for
the period September 30, 2005 through September 29, 2007. The maximum principal balance, by
quarter, to which this interest rate cap agreement applies, is as follows: Principal BalanceQuarter
    
    (in millions)September 30, 2004 through December 31, 2004
    
    $
    37.5January 1, 2005 through March 31, 2005
    
    $
    37.4April 1, 2005 through June 30, 2005
    
    $
    37.3July 1, 2005 through September 30, 2005
    
    $
    37.2October 1, 2005 through December 31, 2005
    
    $
    37.1January 1, 2006 through March 31, 2006
    
    $
    37.0April 1, 2006 through June 30, 2006
    
    $
    36.9July 1, 2006 through September 30, 2006
    
    $
    36.8October 1, 2006 through December 31, 2006
    
    $
    36.8January 1, 2007 through March 31, 2007
    
    $
    36.7April 1, 2007 through June 30, 2005
    
    $
    36.6July 1, 2007 through September 30, 2007
    
    $
    34.5
 Each quarter, the senior lender counter party to this interest rate cap agreement is
required to calculate and reimburse us for all interest payments under the Term B senior credit
facility in excess of the applicable cap. This cap agreement expires September 30, 2007. Under the terms of the senior credit facility, we are subject to certain financial covenants
with respect to our maximum leverage ratio and our interest coverage ratio. The Term B senior 32




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##### 



credit facility is secured by a first priority, perfected security interest in all of our current
and future tangible and intangible property. On August 2, 2004, the Company borrowed $50.0 million under the new Term B senior secured loan
to retire its outstanding Senior Term Note and revolving credit facility under the Senior Credit
Agreement with LaSalle Bank. The Company paid approximately $47.2 million in principal
(approximately $23.2 million to redeem the Senior Term Note and approximately $24.0 million to pay
the revolving credit facility), accrued and unpaid interest, and approximately $3.2 million in
transaction fees associated with the refinancing. On October 1, 2004, the Company drew down approximately $22.0 million on the Term B senior
term loan to retire the Mezzanine Note (see below) in the approximate principal amount of $19.6
million, plus approximately $1.8 million for prepayment penalty, and $0.6 million for accrued and
unpaid interest. The Company is permitted to use any future proceeds it might receive from the currently
uncommitted Incremental Term Loan Facility to finance permitted acquisitions; to make certain put
right payments required under the Companys Mezzanine Warrant, if the put rights are exercised;
and, for any other purpose permitted by incremental term loans, as defined in the Senior Credit
Facility. Mezzanine Note. On December 20, 2002, the Company issued a Mezzanine Note to IITRI with a
face value of approximately $20.3 million, as part of the consideration for the IITRI acquisition.
The Mezzanine Note was junior to the senior credit facility, but ranked senior to the Subordinated
Note. The outstanding Mezzanine Note principal was payable in a lump sum on December 20, 2008.
Prepayment penalties applied for early redemption. Each quarter, the Company paid interest on the
Mezzanine Note, in cash, at a rate of 12% per year. In July 2004, IITRI transferred all of its
rights, title and interest in the Mezzanine Note to the Illinois Institute of Technology. On
October 1, 2004, Alion redeemed the Mezzanine Note with proceeds from the Term B Senior Credit
Facility including a prepayment penalty of approximately $1.8 million. Subordinated Note.On December 20, 2002, the Company issued the Subordinated Note to IITRI,
with a face value of $39.9 million, as part of the consideration for the IITRI acquisition. The
Subordinated Note bears interest at a rate of 6% per year through December 2008, payable quarterly
by the issuance of non-interest bearing notes, called paid-in-kind or (PIK) notes, which mature at
the same time as the Subordinated Note. Issuance of the PIK notes defers the underlying cash
interest expense on the Subordinated Note. The PIK notes do not bear interest and do not compound
any interest on these payment obligations. Commencing December 2008, the Subordinated Note will
bear interest at 16% per year payable quarterly in cash until the Subordinated Note has been repaid
in full. Principal on the Subordinated Note is payable in equal installments of $19.95 million in
December 2009 and December 2010. The PIK notes are also due in equal $7.2 million installments on
these same dates. In July 2004, IITRI transferred all of its rights, title and interest in the
Subordinated Note to the Illinois Institute of Technology. Warrants. The Company issued detachable warrants with the Mezzanine Note and the Subordinated
Note. The outstanding warrants associated with the Mezzanine Note represent the right to buy
approximately 504,900 shares of Alion common stock at an exercise price of $10.00 33




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##### 



per share. These warrants are exercisable until December 20, 2008 and contain a put right giving
the holder the right to require the Company to purchase the warrants back at the then-current fair
value of the Companys common stock, minus the warrants exercise price. The put right can be
exercised within thirty days after a change in control, or within thirty days prior to December 20,
2008, or within thirty days after delivery to the current holders of an appraisal of the per share
value of the Companys common stock as of September 30, 2008, if the ESOP still exists and no
public market price exists for the Companys common stock. Although the Mezzanine Note was redeemed
on October 1, 2004, the detachable warrants remain outstanding. The warrants associated with the Subordinated Note represent the right to buy approximately
1,080,400 shares of Alion common stock at an exercise price of $10.00 per share. These warrants are
exercisable until December 20, 2010 and also contain a put right giving the holder the right to
require the Company to purchase the warrants back at the then-current fair value of the Companys
common stock, minus the warrants exercise price. This put right applies to up to 50% of these
warrants within thirty days prior to December 20, 2009 (or within thirty days after delivery to the
warrantholders of an appraisal of the per share value of the Companys common stock as of September
30, 2009, if the ESOP still exists and no public market price exists for its common stock), and up
to 100% of these warrants within thirty days prior to December 20, 2010 (or within thirty days
after delivery to the warrant holders of an appraisal of the per share value of its common stock as
of September 30, 2010, if the ESOP still exists and no public market value exists for its common
stock). All put rights terminate upon one or more underwritten public offerings of Alion common stock
resulting in aggregate gross proceeds of at least $30.0 million to the sellers (excluding proceeds
received from certain affiliates of Alion). In July 2004, IITRI transferred all of its rights, title and interest in the warrants to the
Illinois Institute of Technology. Other Notes and Agreements.On December 20, 2002, the Company entered into a $0.9 million
Deferred Compensation Agreement with Dr. Atefi, with payment terms substantially equivalent to
those of the Mezzanine Note. The Company also issued Dr. Atefi detachable warrants representing
the right to buy approximately 22,062 shares of Alion common stock at an exercise price of $10.00
per share, with put rights similar to those contained in the warrants accompanying the Mezzanine
Note. On October 29, 2004, Dr. Atefi elected to redeem the amount due under his Deferred
Compensation Agreement., The Company paid Dr. Atefi approximately $0.9 million, plus approximately
$0.2 million in accrued interest. Although the note was redeemed, the warrants remain outstanding. On February 11, 2004, the Company borrowed $750,000 from an officer of the Company. On June 7,
2004, the Company issued the officer a Promissory Note with interest at a rate of 15% per annum
effective February 11, 2004 to March 31, 2009. The Company extinguished the Promissory Note on
December 9, 2004, and paid $750,000 plus accrued interest of $21,635 to the officer. As of December 31, 2004 and for the remainder of fiscal year 2005, and for the next five
fiscal years, at a minimum, we expect that we will have to make the estimated interest and
principal payments set forth below. 34




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6-Fiscal Year Period ($ in thousands)2005*
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010Bank revolving credit facility- Interest(1)
    
    $
    389
    
    
    $
    606
    
    
    $
    686
    
    
    $
    768
    
    
    $
    854
    
    
    $
    Principal(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,215
    
    
    
    Term B senior term loan- Interest(3)
    
    
    6,709
    
    
    
    9,903
    
    
    
    10,780
    
    
    
    12,363
    
    
    
    12,819
    
    
    
    - Principal(4)
    
    
    935
    
    
    
    1,250
    
    
    
    1,250
    
    
    
    1,250
    
    
    
    120,000
    
    
    
    Subordinated note- Interest(5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,384
    
    
    
    3,192- Principal(5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,132
    
    
    
    27,132Total cash  -  Pay interest
    
    
    7,098
    
    
    
    10,509
    
    
    
    11,466
    
    
    
    13,131
    
    
    
    20,057
    
    
    
    3,192Total cash  -  Pay principal
    
    
    935
    
    
    
    1,250
    
    
    
    1,250
    
    
    
    1,250
    
    
    
    154,347
    
    
    
    27,132Total
    
    $
    8,033
    
    
    $
    11,759
    
    
    $
    12,716
    
    
    $
    14,381
    
    
    $
    174,404
    
    
    $
    30,324
     1)
    
    We anticipate a continuing requirement to have in place a $30.0 million bank
revolving credit facility to finance our ongoing working capital needs. In 2005, we anticipate
the average balance drawn on the revolving credit facility to be approximately $5.0 million,
bearing an effective interest rate of approximately 7.9%. For fiscal years 2006, 2007, 2008,
and 2009, the average balance is estimated to be approximately $5.5 million, $6.0 million,
$6.6 million and $7.2 million, respectively. For years 2005, 2006, 2007, 2008, and 2009, the
projected effective CSFB prime rate interest rate is estimated to be approximately 7.9%, 8.8%,
9.4%, 9.9%, and 10.2%, respectively. The effective interest rate takes into account an
interest rate cap agreement which caps the interest rate we will pay on a portion, but not
all, of the outstanding principal balance of the Term B Senior Credit Facility. The current
cap agreement expires in August 2007. Outstanding principal balances not under the cap
agreement have interest expense based on the alternative CSFB prime rate. The term of the
revolving credit facility is five years. The estimated interest expense value includes an
estimate for the unused balance fee on the $30.0 million revolving credit facility.(2)
    
    Estimated balance drawn and repayment of the revolving credit facility at
termination of the revolving credit facility.(3)
    
    The projected balance which we estimate will be drawn under the Term B senior term
loan is as follows: $125.0 million, $123.7 million, $122.5 million, $121.2 million, and
$120.0 million for fiscal years 2005, 2006, 2007, 2008, and 2009, respectively. The effective
annual interest rate for fiscal years 2005, 2006, 2007, 2008, and 2009 is estimated to be
approximately 7.0%, 7.7%, 8.4%, 9.9%, and 10.7%, respectively. The effective interest rate
takes into account an interest rate cap agreement which caps the interest rate we will pay on
a portion, but not all, of the outstanding principal balance of the Term B Senior Credit
Facility. The current cap agreement expires in August 2007. Outstanding principal balances
not under the cap agreement have interest expense based on the alternative CSFB prime rate.
The term of the Term B senior term loan is five 35




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##### 



years. The approximate impact of a 1% increase in the interest rate, as applied to principal
balances drawn under the Term B not covered by the current interest rate cap agreement would
be $1.2 million, $1.2 million, $1.2 million, $1.2 million, and $1.2 million for fiscal years
ending September 30, 2005, 2006, 2007, 2008, and 2009, respectively. The estimated interest
expense value includes an estimate for the commitment fee on the Term B senior loan.(4)
    
    The Term B senior credit facility requires us to repay 1 percent of the principal
balance outstanding under the senior term loan during each of the first four years (i.e.,
fiscal years 2005 through 2008) of the Term B Senior Credit Facilitys term and 96 percent of
the principal balance outstanding during the fifth and final year of the term. The table
assumes that we will have drawn $125.0 million by the end of fiscal year 2005, resulting in
expected annual principal payments of approximately $1.25 million in each of fiscal years
2005, 2006, 2007, and 2008. During the fifth year, or 2009, we expect to pay principal in the
amount of $120.0 million. The Term B Senior Credit Facility also requires us to make
mandatory prepayments of principal depending upon whether we generate certain excess cash flow
in a given fiscal year, we issue certain equity, we issue or incur certain debt or we sell
certain assets. As of December 31, 2004, no mandatory prepayments are due.(5)
    
    Interest expense on the subordinated note during the four fiscal years from 2005 to
2008 is 6% simple interest, paid-in-kind by the issuance of the PIK notes. These interest
amounts accrue to principal increasing the principal value of the subordinated note. PIK notes
do not bear interest. Interest obligations paid by issuance of the PIK notes will not be
compounded. In the years 2005 through 2008, the PIK interest on the Subordinated Note will be
approximately $2.4 million in each year. During the eight-year term of the Subordinated Note,
approximately $14.2 million of principal accretes to the note through the PIK. These amounts
are included in the principal payments in fiscal years 2009 and 2010. In years 2009 and 2010,
interest 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 fiscal years 2009 and
2010. Other Obligations.The Company has a maximum earn out payment obligation of $11.5 million to
the former shareholders of AB Technologies arising from IITRIs acquisition of their company. The
earn out arrangement applies to results of certain operations for part of fiscal year 2000, all of
fiscal years 2001 through 2004, and part of fiscal year 2005. For the three months ended December
31, 2004, the Company recorded approximately $1.1 million in earn out obligation. As of December
31, 2004, a total of approximately $11.4 million in earn out obligation has been recorded. As of December 31, 2004, the Companys remaining minimum lease payment obligations under
non-cancelable operating leases for the fiscal years ending 2006, 2007, 2008, 2009, and 2010 are
$12.4 million, $12.3 million, $11.8 million, $11.5 million and $8.3 million, respectively. The
remaining aggregate obligations on these leases thereafter are approximately $4.0 million.
Commercial facility lease expenses are included in these amounts. These commercial facility lease
obligations are currently reimbursable costs under the Companys government contracts. 36




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Other contingent obligations which will impact the Companys cash flow relate to:  
    Repurchase obligations under the KSOP;
    Obligations related to the holders put rights associated with the Mezzanine Note
warrants;
    Obligations related to the holders put rights associated with the Subordinated Note
warrants;
    Obligations relating to our stock appreciation rights and phantom stock programs;
and
    Obligations relating to our deferred compensation programs for senior managers. Through December 31, 2004, the Company has spent a cumulative total of $2.6 million to
repurchase shares of its common stock from the ESOP Trust to satisfy obligations under the KSOP to
terminated employees. Number of Shares
    
    
    
    
    
    
    Total ValueDate
    
    Repurchased
    
    
    Share Price
    
    
    RepurchasedJune 2003
    
    
    5,248
    
    
    $
    11.13
    
    
    $
    58,412July 2003
    
    
    2,696
    
    
    $
    11.13
    
    
    $
    30,000December 2003
    
    
    50,031
    
    
    $
    14.71
    
    
    $
    735,956May 2004
    
    
    117
    
    
    $
    16.56
    
    
    $
    1,938June 2004
    
    
    727
    
    
    $
    16.56
    
    
    $
    12,039June 2004
    
    
    743
    
    
    $
    16.56
    
    
    $
    12,304July 2004
    
    
    48,309
    
    
    $
    16.56
    
    
    $
    799,997December 2004
    
    
    46,816
    
    
    $
    19.94
    
    
    $
    933,505
 The Company believes that cash flow from operations and cash available under its
revolving credit facility will provide it with sufficient capital to fulfill its current business
plan and to fund its working capital needs for at least the next 30 months. Although the Company
expects to have positive cash flow from operations, it will need to generate significant additional
revenues and earn net income in order to repay principal and interest on the indebtedness assumed
under the new Term B Senior Credit Facility, and the remaining outstanding indebtedness incurred to
fund the Transaction. The Companys business plan calls for it to continue to acquire companies with complementary
technologies. The Term B senior credit facility allows the Company to make certain permitted
acquisitions. The Company intends to use a portion of the financing available to it under the Term
B Senior Credit Facility to make permitted acquisitions. Given the structure of the Term B senior credit facility, the Company expects that it will
need to refinance the Term B Senior Credit Facility before the end of fiscal year 2008. The
Companys cash from operations will be insufficient to satisfy all of its obligations and it cannot 37




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##### 



be certain that it will be able to refinance on terms that will be favorable to the Company, if at
all. Moreover, if the Companys plans or assumptions change, if its assumptions prove inaccurate,
if it consummates additional or larger investments in or acquisitions of other companies than are
currently planned, if it experiences unexpected costs or competitive pressures, or if its existing
cash and projected cash flow from operations prove insufficient, it may need to obtain greater
amounts of additional financing and sooner than expected. While it is the Companys intention only
to enter into new financing or refinancing that it considers advantageous, it cannot be certain
that such sources of financing will be available to the Company in the future, or, if available,
that financing could be obtained on terms favorable to the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Companys exposure to interest rate risk is primarily due to the debt it incurred to
finance the Transaction and the subsequent refinancing of a portion of that debt in August 2004.
The Subordinated Note has a stated fixed interest rate, and therefore presents no risk of change to
interest charges as a result of an increase in market interest rates. The balance drawn under the
$30.0 million senior revolving credit facility and the balance on the Term B senior term loan bear
interest at variable rates tied to the Eurodollar rate. Such variable rates increase the risk that
interest charges will increase materially if market interest rates increase. The Company has
reduced, in part, the maximum total amount of variable interest rate risk by entering into an
interest rate cap agreement on the first $37.5 million of principal borrowed under the Term B
senior credit facility. Under this agreement, in exchange for our payment to the senior lender of
approximately $0.3 million, our maximum effective rate of interest payable with regard to a portion
of the outstanding principal balance of the Term B Senior Credit Facility will not exceed 6.64
percent (i.e., LIBOR 3.39 percent cap plus maximum 2.75 percent Eurodollar spread) for the period
September 30, 2004 through September 29, 2005 and is not to exceed 7.41 percent (i.e., LIBOR 4.66
percent plus 2.75 percent maximum Eurodollar spread) for the period September 30, 2005 through
September 29, 2007. For a description of the arrangement, refer to Discussion of Debt Structure
in Managements Discussion and Analysis of Financial Condition and Results of Operations. The Company does not use derivatives for trading purposes. It invests its excess cash in
short-term, investment grade, and interest-bearing securities. Because the Companys expenses and revenues from its international research contracts are
generally denominated in U.S. dollars, the Company does not believe that its operations are subject
to material risks associated with currency fluctuations. The Companys exposure to change in the fair market value of Alions stock as the economic
basis for the estimate of contingent liabilities relate to:  
    Repurchase obligations under the KSOP; 38




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##### 




    Obligations related to the holders put rights associated with the Mezzanine Note
warrants;
    Obligations related to the holders put rights associated with the Subordinated Note
warrants; and
    Obligations relating to its stock appreciation rights and phantom stock programs. ITEM 4. CONTROLS AND PROCEDURES (a) Disclosure Controls and Procedures.The Companys management, with the participation of
the Companys Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Companys disclosure controls and procedures (as such term is defined in Rule 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the Exchange Act) as of the end of the
period covered by this quarterly report. Based on such evaluation, the Companys Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of such period, the
Companys disclosure controls and procedures are effective in recording, processing, summarizing
and reporting, on a timely basis, information required to be disclosed by us in the reports that
the Company file or submit under the Exchange Act. (b) Internal Control Over Financial Reporting.There have not been any changes in the
Companys internal control over financial reporting (as such term is defined in Rule 15d-15(f)
under the Exchange Act) during the fiscal quarter to which this report relates that have materially
affected, or are reasonably likely to materially affect, the Companys internal control over
financial reporting. 39




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PART IIOTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On December 23, 2004, the estate of Joseph Hudert filed an action against Grunley-Walsh Joint
Venture, L.L.C. (Grunley-Walsh) and the Company in the District of Columbia Superior Court for
damages in excess of $80 million. On January 6, 2005, the estate of Frank Stotmeister filed an
action against the Company in the same court on six counts, some of which are duplicate causes of
action, claiming $30 million for each count. Several other potential defendants may be added to
these actions in the future. The suits arose in connection with a steam pipe explosion that occurred on or about April 23,
2004 on a construction site at 17th Street, N.W. in Washington, D.C. Frank Stotmeister
and Joseph Hudert died, apparently as a result of the explosion. The deceased were employees of
the prime contractor on the site, Grunley-Walsh, and the subcontractor, Cherry Hill Construction
Company Inc., respectively. Grunley-Walsh had a contract with the U.S. Government Services
Administration (GSA) for construction on 17th Street N.W. near the Old Executive
Office Building in Washington, D.C. Sometime after the award of Grunley-Walshs construction
contract, Alion was awarded a separate contract by GSA. Alions responsibilities on this contract
were to monitor Grunley-Walshs activities and report to GSA any deviations from contract
requirements. The Company intends to defend these lawsuits vigorously, and based on the facts currently
known to the Company, the Company does not believe that these lawsuits will have a materially
adverse effect upon the Company, its operations or its financial condition. Alions primary provider of general liability insurance, St. Paul Travelers, has assumed
defense of these lawsuits subject to a reservation of rights to deny coverage. American
International Group, the Companys excess insurance carrier, has also been notified regarding these
lawsuits. Other than the foregoing actions, the Company is not involved in any legal proceeding other
than routine legal proceedings occurring in the ordinary course of business. The Company believes
that these routine legal proceedings, in the aggregate, are not material to its financial condition
and results of operations. As a government contractor, the Company may be subject from time to time to federal government
inquiries relating to its operations and audits by the Defense Contract Audit Agency. Contractors
found to have violated the False Claims Act, or which are indicted or convicted of violations of
other federal laws, may be suspended or debarred from federal government contracting for some
period. Such an event could also result in fines or penalties. Given the Companys dependence on
federal government contracts, suspension or debarment could have a material adverse effect on the
Company. The Company is not aware of any such pending federal government claims or investigations. 40




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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION The Companys board of directors adopted the Alion Science and Technology Corporation 2004
Stock Appreciation Rights Plan (the 2004 SAR Plan) on or about January 13, 2005 to comply with
the deferred compensation provisions of the American Jobs Creation Act of 2004. The 2004 SAR Plan has a 10-year term and provides that the Company can award stock
appreciation rights, which we refer to as SAR awards, to Alion directors, officers, employees
and/or consultants. Awards under the 2004 SAR Plan may not exceed 10% of the shares of Alion common
stock on a fully diluted basis, assuming the exercise of all outstanding warrants, options, rights
and convertible securities. Under the 2004 SAR Plan, the chief executive officer, with the approval
of the board of directors or its compensation committee, has the authority to grant awards as he
deems appropriate. A SAR award provides a grantee with the right to receive payment for the increase in appraised
value of a share of Alion common stock from the grant date to the exercise date. The 2004 SAR Plan
contains a provision to prevent an award to a person who is or would become (if the award were
made) a disqualified person. For this purpose, disqualified person means any individual who
directly or beneficially holds at least 10% of Alion equity, including outstanding common stock and
synthetic equity, such as warrants, SARs or phantom stock. Any award that violates this provision
is void. Under the 2004 SAR Plan, awards to employees vest over four years at 25% per year. Awards to
directors under the 2004 SAR Plan vest ratably over each directors term of service. The 2004 SAR Plan contains a provision for accelerated vesting. Under the 2004 SAR Plan, upon
a change in control during the initial award period, all outstanding grants automatically become
100% vested. Under the 2004 SAR Plan, unless a grantee makes an election to defer payment, payment
occurs 60 days after the fifth year from date of grant. If a grantee dies or becomes disabled, the
payment of vested SARs will be made 60 days after the date of death or disability. In each case,
payments are determined by the number of SARs vested 41




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multiplied by the difference between the share price at date of grant and the share price at date
of payment. Under the 2004 SAR Plan, awards to directors are paid out 60 days after the expiration
of their term of service. Phantom Stock As of November 9, 2004, the Companys first phantom stock plan was amended to require payment
of awards made on or before December 31, 2004 that vest on or after January 1, 2005 within 60 days
of the date the employee is fully vested in the original grant, unless the board or the
compensation committee exercises its discretion to delay payment up to an additional five years,
with interest. In addition, under limited circumstances, an employee may make an election to defer
payment for at least five years. During fiscal year 2004, the compensation committee of Alions board of directors commissioned
a study by Hewitt Associates to assess the long-term incentives and retention bonuses of the senior
management at Alion compared to their peer group at other companies. The results indicated that the
senior management at Alion has a much lower retention and long-term incentive compensation than
their peer group. To rectify this situation, Hewitt Associates recommended to the compensation
committee specific levels of phantom stock awards for the senior managers. As a consequence, Alion
has two phantom stock plans in place, The Alion Science and Technology Corporation Employee Phantom
Stock Plan and The Alion Science and Technology Corporation Performance Shares and Retention
Phantom Stock Plan, as described below. On November 9, 2004, the Companys compensation committee approved, and the full board
adopted, The Alion Science and Technology Corporation Performance Shares and Retention Phantom
Stock Plan (the Second Phantom Stock Plan) to comply with the requirements of the American Jobs
Creation Act of 2004 as well as to respond to the recommendations of the study by Hewitt
Associates. The shares of common stock that may be used for reference purposes with respect to
awards granted under the Second Phantom Stock Plan may not exceed 2.0 million shares of Alion
common stock outstanding on a fully diluted basis, assuming the exercise of all outstanding
warrants, options, rights and convertible securities Awards under the Second Phantom Stock Plan vest three years from date of grant (unless
otherwise provided in an individual award agreement), provided that the grantee is still employed
by the Company. Grants are to be paid out sixty days following the full vesting of a grant (unless
otherwise provided in an applicable award agreement). Under limited circumstances, a grantee may
defer an award payout beyond the original date. The Second Phantom Stock Plan contains provisions
for acceleration of vesting and payouts in connection with an employees death, disability,
involuntary termination of employment without cause or a change in control of the Company. The Second Phantom Stock Plan contains a provision to prevent an award to a person who is or
would become (if the award were made) a disqualified person for as long as we maintain the ESOP.
For this purpose, disqualified person means any individual who directly or beneficially (such as
under the Alion ESOP) holds at least 10% of Alion equity, including outstanding common stock and
synthetic equity, such as warrants, SARs or phantom stock. Any award that violates this provision
is void. 42




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Under the Second Phantom Stock Plan, the compensation committee, or our full board, may:  
    Select which employees are to be awarded phantom stock and determine when it will be
awarded;
    Determine the number of shares of common stock to be covered by or used for
reference purposes for a grant of phantom stock;
    Adjust the number and price of shares as a result of special circumstances or
certain business actions, including but not limited to mergers, reorganizations and the
like;
    Determine, modify, and waive from time to time the terms and conditions, including
without limitation vesting and other restrictions, of any grant of phantom stock;
    Impose limitations on grants of phantom stock, including limitations on transfer
provisions;
    Modify, extend, or renew outstanding awards of phantom stock, or accept the
surrender of outstanding awards of phantom stock and substitute new awards of phantom
stock;
    Administer and interpret the provisions of the plan;
    Terminate the plan;
    Decide all questions of fact arising in the application of the plan; and
    Prescribe, amend, and rescind rules and regulations relating to the plan. Under the Second Phantom Stock Plan, members of our compensation committee who are eligible to
receive phantom stock or who have been granted phantom stock may vote on any matters affecting the
administration of the plan or the grant of phantom stock, except that a member cannot act upon the
granting of phantom stock to himself or herself. These voting provisions also apply to members of
our board of directors when the board resolves to act under the plan. The board of directors may
amend the plan, and may terminate the plan in whole or in part at any time. When granted, phantom stock provides the employee with the right to receive payment upon
exercise of the phantom stock. The terms of each phantom stock grant are evidenced in a phantom
stock agreement which determines the:  
    Date of grant;
    Number of shares of the phantom stock awarded; and
    Provisions governing vesting of the phantom stock awarded. 43




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The Second Phantom Stock Plan also provides that phantom stock awarded at different times need
not contain similar provisions. Other events, such as if we experience a change in control (as defined in the plan) or if an
employee becomes disabled, or dies, may entitle the affected employee to vest immediately in 100%
of all phantom stock that has been awarded. Terminated employees will usually forfeit their rights to all unvested phantom stock. In
certain instances, however, an employee may receive a pro rata portion of his or her unvested
phantom stock upon termination. For example, when an employee voluntarily terminates for good
reason or when he or she is involuntarily terminated for any reason other than cause or just cause,
as defined in his or her employment agreement with us, then that employee will receive a pro rata
portion of his or her unvested phantom stock based on a ratio:  
    the numerator of which is the number of months from the date of grant of the phantom
stock through the end of the month of such termination; and
    the denominator of which is 60. Under the Second Phantom Stock Plan, if the employee is involuntarily terminated, awards may
be fully or partially vested as set forth in an individual award agreement. Under the Second Phantom Stock Plan, the payment we will make upon the vesting of phantom
stock is intended to be made in one lump sum within 60 days of the date of vesting unless a later
date is set forth in an individual award agreement. The compensation committee, or our board of
directors if it resolves to do so, may delay payment for five years. If the payment is delayed, it
will include interest accrued at the prime rate as of the date of vesting until the payment date.
In general, we expect that the compensation committee, or the board if it resolves to do so, will
examine our available cash and anticipated cash needs in determining whether to delay payment.
Under limited circumstances, payments from the exercise of phantom stock may be rolled over into
any non-qualified deferred compensation plan available to the employee. No voting or other rights associated with ownership of our common stock is given to phantom
stockholders. References to shares of common stock under the plan are for accounting and valuation
purposes only. As a result, an employee who receives phantom stock does not have any of the rights
of a stockholder as a result of a grant of phantom stock. The Second Phantom Stock Plan permits awards of retention phantom shares and performance
incentive phantom shares. A retention incentive award is for a fixed number of shares determined at
the date of grant. A performance incentive award is for an initial number of shares subject to
change at the vesting date. Performance incentive phantom shares are subject to forfeiture for
failure to achieve a specified threshold value for a share of Alion common stock as of the vesting
date. If the value of a share of Alion common stock equals the threshold value but does not exceed
the target value, the number of performance incentive shares in a given grant may be decreased by a
specified percentage (generally up to 50%). If, instead, the value of a share of Alion common stock
exceeds a pre-established target price on the vesting date, the number of performance incentive
shares in a given grant may be increased by a specified percentage (generally up to 20%). As of February 15, 2005, the Company had granted 98,399 shares of retention incentive
phantom stock and 207,788 shares of performance based phantom stock to executive
officers of the Company pursuant to the Second Phantom Stock Plan. In accordance with
the provisions of the Second Phantom Stock Plan, and depending on the future financial
performance of the Company, the grantees may vest in performance based phantom shares
at a greater (up to 20% more) or lesser (up to 50% less) number of shares than the
target number of shares disclosed above. 44




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ITEM 6. EXHIBITS Exhibit No.
    
    Description3.1
    
    Second Amended and Restated Certificate of Incorporation of
Beagle Holdings, Inc.(3)3.2
    
    Amended and Restated By-laws of Alion Science and Technology
Corporation.(1)4.1
    
    Amended and Restated Alion Science and Technology Corporation
Employee Ownership, Savings and Investment Plan.(2)4.2
    
    First Amendment to The Alion Science and Technology
Corporation Employee Ownership, Savings and Investment
Plan.(4)4.3
    
    Second Amendment to The Alion Science and Technology
Corporation Employee Ownership, Savings and Investment
Plan.(5)4.4
    
    Third Amendment to The Alion Science and Technology
Corporation Employee Ownership, Savings and Investment
Plan.(5)4.5
    
    Fourth Amendment to The Alion Science and Technology
Corporation Employee Ownership, Savings and Investment
Plan.(5)4.6
    
    Fifth Amendment to The Alion Science and Technology
Corporation Employee Ownership, Savings and Investment
Plan.(7)4.7
    
    Sixth Amendment to The Alion Science and Technology
Corporation Employee Ownership, Savings and Investment Plan.
(7)4.8
    
    Seventh Amendment to The Alion Science and Technology
Corporation Employee Ownership, Savings and Investment Plan.
(7)4.9
    
    Eighth Amendment to The Alion Science and Technology
Corporation Employee Ownership, Savings and Investment Plan.
(7)4.10
    
    Ninth Amendment to The Alion Science and Technology
Corporation Employee Ownership, Savings and Investment Plan.
(8)10.37
    
    First Amendment to the Mezzanine Warrant Agreement.(9)10.38
    
    First Amendment to the Seller Warrant Agreement.(9)10.39
    
    First Amendment to the Alion Mezzanine Warrant Agreement between Alion Science and Technology Corporation, Alion Science and Technology Corporation Employee Ownership, Savings and Investment Trust, and Bahman Atefi.(9)10.40
    
    Third Amendment to the Alion Science and Technology Corporation Phantom Stock Plan(10)10.41
    
    Alion Science and Technology Corporation Performance Shares and Retention Phantom Stock Plan (10).10.42
    
    Second Amendment to the Alion Science and Technology Corporation 2002 Stock Appreciation Rights Plan. (10)10.43
    
    Alion Science and Technology Corporation 2004 Stock Appreciation Rights Plan. (10)10.44
    
    Second Amendment to the Alion Science and Technology Corporation Directors Deferred Compensation Plan (10)10.45
    
    Second Amendment to the Alion Science and Technology Corporation Executive Deferred Compensation Plan. (10)10.46
    
    Second Amendment to the Seller Warrant Agreement (10)10.47
    
    Second Amendment to the Mezzanine Warrant Agreement (10)10.48
    
    Second Amendment to the Alion Mezzanine Warrant Agreement between Alion Science and Technology Corporation, Alion Science and Technology Corporation Employee Ownership, Savings and Investment Trust, and Bahman Atefi (10)31.1
    
    Certification of Chief Executive Officer of Alion Science and
Technology Corporation pursuant to Rule 15d-14(a) promulgated
under the Securities Exchange Act of 1934, as amended.31.2
    
    Certification of Chief Financial Officer of Alion Science and
Technology Corporation pursuant to 15d-14(a) promulgated under
the Securities Exchange Act of 1934, as amended.
 45




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##### 



32.1
    
    Certification of Chief Executive Officer of Alion Science and
Technology Corporation, pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.32.2
    
    Certification of Chief Financial Officer of Alion Science and
Technology Corporation, pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
   (1)
    
    Incorporated by reference to the corresponding exhibit previously filed as an
exhibit to the Companys Post-Effective Amendment No. 2 to the Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on December 9, 2002 (File no.
950133-2-4018).(2)
    
    Incorporated by reference to the corresponding exhibit previously filed as an
exhibit to the Companys Pre-Effective Amendment No. 3 to the Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on October 7, 2002 (File no.
950133-2-3343).(3)
    
    Incorporated by reference to the corresponding exhibit previously filed as an
exhibit to the Companys Pre-Effective Amendment No. 2 to the Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on September 17, 2002 (File no.
950133-2-3224).(4)
    
    Incorporated by reference to the corresponding exhibit previously filed as an
exhibit to the Companys Post-Effective Amendment No. 3 to the Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on March 24, 2003 (File no.
950133-3-862).(5)
    
    Incorporated by reference to the corresponding exhibit previously filed as an
exhibit to the Companys quarterly report on Form 10-Q for the quarterly period ended July 4,
2003, filed with the Securities and Exchange Commission on August 15, 2003.(6)
    
    Incorporated by reference to the corresponding exhibit previously filed as an
exhibit to the Companys Registration Statement on Form S-8 filed with the Securities and
Exchange Commission on April 28, 2004 (File no. 950133-04-001602).(7)
    
    Incorporated by reference to the corresponding exhibit previously filed as an
exhibit to the Companys quarterly report on Form 10-Q for the quarterly period ended December
31, 2003, filed with the Securities and Exchange Commission on February 17, 2003 (File no.
950133-04-000432).(8)
    
    Incorporated by reference to the corresponding exhibit previously filed as an
exhibit to the Companys annual report on Form 10-K for the fiscal year ended September 30,
2004, filed with the Securities and Exchange Commission on December 28, 2004 (File no.
950133-04-003228).(9)
    
    Incorporated by reference to the corresponding exhibit previously
filed as an exhibit to the Companys annual report Form 10-K for
the fiscal year ended September 30, 2004, filed with the
Securities and Exchange Commission on December 28, 2004 (File no.
950133-04-004768).(10)
    
    Incorporated by reference to the corresponding exhibit previously
filed as an exhibit to the Companys Post-effective Amendment No.
5 to the Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on December 24, 2005 (File no.
950133-05-000203).


46



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##### 



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALION SCIENCE AND TECHNOLOGY CORPORATION Date: February 15, 2005 Name: John M. HughesTitle: Chief Financial Officer(Principal Financial and Accounting Officerand Duly Authorized Officer)
 47




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EXHIBIT INDEX ExhibitNo.
    
    Description3.1
    
    Second Amended and Restated Certificate of Incorporation of
Beagle Holdings, Inc.(3)3.2
    
    Amended and Restated By-laws of Alion Science and Technology
Corporation.(1)4.1
    
    Amended and Restated Alion Science and Technology Corporation
Employee Ownership, Savings and Investment Plan.(2)4.2
    
    First Amendment to The Alion Science and Technology
Corporation Employee Ownership, Savings and Investment
Plan.(4)4.3
    
    Second Amendment to The Alion Science and Technology
Corporation Employee Ownership, Savings and Investment
Plan.(5)4.4
    
    Third Amendment to The Alion Science and Technology
Corporation Employee Ownership, Savings and Investment
Plan.(5)4.5
    
    Fourth Amendment to The Alion Science and Technology
Corporation Employee Ownership, Savings and Investment
Plan.(5)4.6
    
    Fifth Amendment to The Alion Science and Technology
Corporation Employee Ownership, Savings and Investment
Plan.(7)4.7
    
    Sixth Amendment to The Alion Science and Technology
Corporation Employee Ownership, Savings and Investment Plan.
(7)4.8
    
    Seventh Amendment to The Alion Science and Technology
Corporation Employee Ownership, Savings and Investment Plan.
(7)4.9
    
    Eighth Amendment to The Alion Science and Technology
Corporation Employee Ownership, Savings and Investment Plan.
(7)4.10
    
    Ninth Amendment to The Alion Science and Technology
Corporation Employee Ownership, Savings and Investment Plan.
(8)10.37
    
    First Amendment to the Mezzanine Warrant Agreement.(9)10.38
    
    First Amendment to the Seller Warrant Agreement.(9)10.39
    
    First Amendment to the Alion Mezzanine Warrant Agreement between Alion Science and Technology Corporation, Alion Science and Technology Corporation Employee Ownership, Savings and Investment Trust, and Bahman Atefi.(9)10.40
    
    Third Amendment to the Alion Science and Technology Corporation Phantom Stock Plan(10)10.41
    
    Alion Science and Technology Corporation Performance Shares and Retention Phantom Stock Plan (10).10.42
    
    Second Amendment to the Alion Science and Technology Corporation 2002 Stock Appreciation Rights Plan. (10)10.43
    
    Alion Science and Technology Corporation 2004 Stock Appreciation Rights Plan. (10)10.44
    
    Second Amendment to the Alion Science and Technology Corporation Directors Deferred Compensation Plan (10)10.45
    
    Second Amendment to the Alion Science and Technology Corporation Executive Deferred Compensation Plan. (10)10.46
    
    Second Amendment to the Seller Warrant Agreement (10)10.47
    
    Second Amendment to the Mezzanine Warrant Agreement (10)10.48
    
    Second Amendment to the Alion Mezzanine Warrant Agreement between Alion Science and Technology Corporation, Alion Science and Technology Corporation Employee Ownership, Savings and Investment Trust, and Bahman Atefi (10)31.1
    
    Certification of Chief Executive Officer of Alion Science and
Technology Corporation pursuant to Rule 15d-14(a) promulgated
under the Securities Exchange Act of 1934, as amended.
 48




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31.2
    
    Certification of Chief Financial Officer of Alion Science and
Technology Corporation pursuant to 15d-14(a) promulgated under
the Securities Exchange Act of 1934, as amended.32.1
    
    Certification of Chief Executive Officer of Alion Science and
Technology Corporation, pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.32.2
    
    Certification of Chief Financial Officer of Alion Science and
Technology Corporation, pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
   (1)
    
    Incorporated by reference to the corresponding exhibit previously filed as an
exhibit to the Companys Post-Effective Amendment No. 2 to the Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on December 9, 2002 (File no.
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).(5)
    
    Incorporated by reference to the corresponding exhibit previously filed as an
exhibit to the Companys quarterly report on Form 10-Q for the quarterly period ended July 4,
2003, filed with the Securities and Exchange Commission on August 15, 2003.(6)
    
    Incorporated by reference to the corresponding exhibit previously filed as an
exhibit to the Companys Registration Statement on Form S-8 filed with the Securities and
Exchange Commission on April 28, 2004 (File no. 950133-04-001602).(7)
    
    Incorporated by reference to the corresponding exhibit previously filed as an
exhibit to the Companys quarterly report on Form 10-Q for the quarterly period ended December
31, 2003, filed with the Securities and Exchange Commission on February 17, 2003 (File no.
950133-04-000432). 49




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(8)
    
    Incorporated by reference to the corresponding exhibit previously filed as an
exhibit to the Companys annual report on Form 10-K for the fiscal year ended September 30,
2004, filed with the Securities and Exchange Commission on December 28, 2004 (File no.
950133-04-003228).(9)
    
    Incorporated by reference to the corresponding exhibit previously
filed as an exhibit to the Companys annual report Form 10-K for
the fiscal year ended September 30, 2004, filed with the
Securities and Exchange Commission on December 28, 2004 (File no.
950133-04-004768).(10)
    
    Incorporated by reference to the corresponding exhibit previously
filed as an exhibit to the Companys Post-effective Amendment No.
5 to the Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on December 24, 2005 (File no.
950133-05-000203). 50