##### 









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K


| |  |                                                                                         
| |  | ----------------------------------------------------------------------------------------
| |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|
| |  | For the fiscal year ended September 30, 2005                                            







Alion Science and Technology Corporation


(Exact name of Registrant as Specified in its Charter)


|                                                                   |  |                          |  |                                      
|------------------------------------------------------------------ |  | ------------------------ |  | -------------------------------------
|Delaware                                                           |  | 333-89756                |  | 54-2061691                           
|(State or Other Jurisdiction of
    Incorporation or Organization) |  | (Commission File Number) |  | (IRS Employer
    Identification No.)

|                       |  |                                    
|---------------------- |  | -----------------------------------
|10 West
    35thStreet |  | 1750 Tysons Boulevard              
|Chicago, IL 60616      |  | Suite 1300                         
|(312) 567-4000         |  | McLean, VA 22102
    (703) 918-4480

(Address, including Zip Code and Telephone Number,
including


Area Code, of Principal Executive Offices)





Securities registered pursuant to Section 12(b) or 12(g)
of the Act:


None


o þ


S-K 10-K 10-K. o þ


12b-2). o þ


12b-2 o þ






Documents Incorporated by Reference:


None










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EXPLANATORY NOTE








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ALION SCIENCE AND TECHNOLOGY CORPORATION


FORM 10-K


TABLE OF CONTENTS


|         |  |                                                                                                                     |  |  |     |  |  | 
|-------- |  | ------------------------------------------------------------------------------------------------------------------- |  |  | --- |  |  | 
|PART I  
|Item 1.  |  | Business                                                                                                            |  |  | 2   | 
|Item 2.  |  | Properties                                                                                                          |  |  | 26  | 
|Item 3.  |  | Legal Proceedings                                                                                                   |  |  | 27  | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                                             |  |  | 28  | 
|        
|PART II 
|Item 5.  |  | Market for Registrants Common Equity,
    Related Stockholders Matters and Issuer Purchases of Equity
    Security |  |  | 28  | 
|Item 6.  |  | Selected Financial Data                                                                                             |  |  | 29  | 
|Item 7.  |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                           |  |  | 34  | 
|Item 7a. |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                      |  |  | 61  | 
|Item 8.  |  | Financial Statements and Supplementary
    Data                                                                     |  |  | 63  | 
|Item 9.  |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                            |  |  | 114 | 
|Item 9a. |  | Controls and Procedures                                                                                             |  |  | 114 | 
|Item 9b. |  | Other Information                                                                                                   |  |  | 114 | 
|        
|PART III
|Item 10. |  | Directors and Executive Officers of the
    Registrant                                                              |  |  | 115 | 
|Item 11. |  | Executive Compensation                                                                                              |  |  | 120 | 
|Item 12. |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholders Matters                 |  |  | 132 | 
|Item 13. |  | Certain Relationships and Related
    Transactions                                                                  |  |  | 133 | 
|Item 14. |  | Principal Accountant Fees and Services                                                                              |  |  | 133 | 
|        
|PART IV 
|Item 15. |  | Exhibits and Financial Statement
    Schedules                                                                      |  |  | 135 | 



1



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##### 






PART I







|        |         
|------- | --------
|Item 1. | Business

10-K








| |                         
| | ------------------------
| | Pro Forma Financial Data



Overview






2



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Estimated Revenue by Fiscal Year*


|                                                            |  |               |     |  |      |  |     |      |  |   |     |  |  |  |     |   |  |   |     |  |  |  |     |  
|----------------------------------------------------------- |  | ------------- | --- |  | ---- |  | --- | ---- |  | - | --- |  |  |  | --- | - |  | - | --- |  |  |  | --- | -
|Core Business Area                                          |  | 2005          |     |  | 2004 |  |     | 2003 | 
|                                                            |  |               |     |  |      |  |     |      | 
|                                                            |  | (In millions) |    
|- Defense Operations                                        |  | $             | 131 |  |      |  | 36  | %    |  | $ | 105 |  |  |  | 39  | % |  | $ | 84  |  |  |  | 39  | %
|- Wireless Communications                                   |  | $             | 56  |  |      |  | 15  | %    |  | $ | 38  |  |  |  | 14  | % |  | $ | 45  |  |  |  | 21  | %
|- Industrial Technology Solutions                           |  | $             | 52  |  |      |  | 14  | %    |  | $ | 36  |  |  |  | 13  | % |  | $ | 28  |  |  |  | 13  | %
|- Naval Architecture/ Marine Engineering                    |  | $             | 51  |  |      |  | 14  | %    |  | $ | 1   |  |  |  | 0   | % |  | $ | 0   |  |  |  | 0   | %
|- Modeling and Simulation                                   |  | $             | 35  |  |      |  | 9   | %    |  | $ | 22  |  |  |  | 8   | % |  | $ | 13  |  |  |  | 6   | %
|- Chemical, Biological, Nuclear, and Environmental Sciences |  | $             | 33  |  |      |  | 9   | %    |  | $ | 33  |  |  |  | 12  | % |  | $ | 23  |  |  |  | 11  | %
|- Information Technology                                    |  | $             | 11  |  |      |  | 3   | %    |  | $ | 35  |  |  |  | 13  | % |  | $ | 20  |  |  |  | 10  | %
|                                                            |  |               |     |  |      |  |     |      |  |   |     |  |  |  |     |   |  |  
|                                                            |  | $             | 369 |  |      |  | 100 | %    |  | $ | 270 |  |  |  | 100 | % |  | $ | 213 |  |  |  | 100 | %
|                                                            |  |               |     |  |      |  |     |      |  |   |     |  |  |  |     |   |  |  






|  |                                                                                                                                                                                                                                                                                                                                                
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Beginning 2005, the descriptions of the Core Business Areas were
    modified as compared to descriptions used in our
    Form 10-Ks for
    2004 and 2003. The results for 2004 and 2003, have been
    re-categorized using the modified Core Business Area
    descriptions. Revenues and percentages are based on management
    estimates.

Defense Operations.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Military transformation: we identify and analyze issues
    and programs of major importance for the Office of the Secretary
    of Defense (OSD) and related U.S. military services
    transformation initiatives such as joint warfare
    experimentation. We also integrate command, control,
    communication and computer intelligence (C4I) initiatives and
    develop net-centric initiatives.                                    
|
| |  | Logistics management: we provide support to the
    U.S. Army on a broad range of requirements including
    infrastructure assessment, reserve force mobilization, defense
    industrial base assessment, financial management, cost analysis,
    and base realignment, from planning to implementation.                                                                                                                                  
|
| |  | Readiness assessments and operational support: we deliver
    strategic planning and decision-making process improvements by
    providing technical assistance and decision support tools, such
    as Full Spectrum Analysis and Distributed Information System
    Collaboration Architecture (DISCATM).                                                                                                                                  
|
| |  | Training and education services: we assist the
    U.S. Department of Defense in the development of its
    department-wide education and training policies. We develop the
    necessary technology, compile the information to be used in the
    courseware, and then translate this into an electronic or
    web-based advanced distant learning medium so that the student
    can interact with the courseware from a remote location.
|
| |  | Critical infrastructure protection (CIP), risk and
    vulnerability analysis: we provide techniques, tools, and
    operational support to assess vulnerabilities and defend
    infrastructure, including ports, power plants and communications
    nodes.                                                                                                                                                                                
|
| |  | Ordnance management: we provide inventory management,
    inspection and distribution of ordnance for the U.S. Navy.                                                                                                                                                                                                                                                                                                                         

Wireless Communications.


3



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Wireless and communications-electronics engineering: we
    perform work for the government
    communications-electronics and commercial wireless
    communities. The term communications-electronics
    refers to all devices or systems that use the radio frequency
    spectrum. Our work for the government sector includes such tasks
    as conducting modeling and simulation of communications
    networks, testing and evaluating navigational systems, and
    analyzing radar and space systems performance. For our
    commercial customers, both foreign and domestic, we determine
    whether wireless communication networks have the geographic
    coverage the customers desire, and whether the systems operate
    free of interference, and we make recommendations designed to
    improve network performance. We also evaluate and make
    recommendations for the design of radio transmitters, receivers
    and antennas for our commercial customers. In the area of
    net-centric operations, we design next generation wireless
    networks and devices, including frequency and bandwidth-adaptive
    systems.
|
| |  | Spectrum management: we perform studies and analyses
    related to the manner in which the radio frequency spectrum may
    be utilized without interruption or interference by both new and
    existing users and technologies. In addition, we assess existing
    and new technologies for their ability to utilize the radio
    frequency spectrum efficiently  in other words, to
    accomplish designated tasks without using too much of the
    available radio frequency spectrum. Our services, which include
    providing spectrum policy advice, are used to support decisions
    of senior government officials in the U.S. and abroad.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | C4ISR system engineering: we deliver Command, Control,
    Communication and Computer Intelligence, Surveillance, and
    Reconnaissance (C4ISR) engineering and analysis support for
    radio frequency communications, radar, Identification Friend or
    Foe (IFF), and navigation systems to the U.S. Department of
    Defense system developers and integrators. We also develop
    automated spectrum management software to assign frequencies to
    multiple users of the radio frequency spectrum in an effort to
    minimize interference. Our software tool, Spectrum XXI, is the
    automated spectrum management system used worldwide by the
    U.S. Department of Defense, and it is now also being used
    by other agencies of the federal government. We also design,
    integrate and deploy spectrum monitoring software to locate and
    track violators of the rules and regulations of spectrum usage.                                                                                                                                                                                                                     
|
| |  | Electromagnetic environmental effects: we perform studies
    and analyses to measure and predict electromagnetic
    environmental effects for both government and commercial
    customers. Our work has involved building automated tools
    designed to predict the effects of potential hazards of
    electromagnetic radiation to ordnance, fuel and personnel. We
    also analyze electronic components in automotive parts such as
    brakes and airbags for electromagnetic interference issues on
    behalf of various commercial customers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Industrial Technology Solutions.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Reliability, material and manufacturing engineering: we
    apply technology to enhance production, improve performance,
    reduce cost and extend life of complex engineered products.                                                                                                                                                                                                                          
|
| |  | Sensor technology development: we develop, evaluate,
    adapt and integrate sensor technologies and provide support to
    the U.S. Department of Defenses Night Vision
    Electronic Sensors Laboratory.                                                                                                                                                                                                      
|
| |  | Facilities engineering/construction management: we
    provide expertise in engineering, architecture and related
    disciplines (e.g., construction management, logistics, design
    oversight and inspection).                                                                                                                                                                                                
|
| |  | Research and analysis center management: we manage
    numerous U.S. Department of Defense information analysis
    centers such as the: Advanced Materials and Processes Technology
    Information Analysis Center (AMPTIAC), Manufacturing Technology
    Information Analysis Center (MTIAC), Electronic Packaging and
    Interconnection Technology Center and the DuPage Manufacturing
    Research Center.

4



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| |   |                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Acoustic engineering: we test and evaluate various
    components for sound transmission, absorption and intensity;
    field measurement testing; equipment vibration and isolation;
    noise abatement; and active silencing.
|
| |  | Aerospace coating production and application: we develop
    and apply coatings to protect government and commercial
    satellites as well as the International Space Station.                                                 
|
| |  | Innovative manufacturing technologies: we develop and
    integrate systems for low-volume productivity (e.g., laser
    cladding of parts), micro-machines and rapid manufacturing
    systems.                                

Naval architecture/marine engineering.




| |   |                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Ship design: we provide total ship design services for
    military and commercial customers. The services encompass whole
    ship systems engineering including requirements definition,
    concept analysis, feasibility studies and contract design,
    detail design and production support.                                                      
|
| |  | Naval architecture: we provide systems engineering/design
    integration, hull form development and performance analysis,
    structural design and analysis, weight engineering, and intact
    and damage stability analysis.                                                                                                                         
|
| |  | Marine engineering: we design and engineer ship systems
    including propulsion, electrical, fluids/piping, auxiliary,
    HVAC, deck machinery, and machinery automation and control
    systems. We provide expertise for machinery integration, test
    and trials, failure analysis, modeling and simulation, and
    integrated logistics support.
|
| |  | Combat systems engineering: we provide services including
    mission and threat analysis, evaluation of candidate warfare and
    combat systems, development of specifications and installation
    drawings for topside and below-deck interface requirements, and
    ship modernizations.                                                           

Modeling and Simulation.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Wargaming, experimentation, scenario design and
    execution: we design and conduct strategic and operations
    analytic wargames to evaluate future operational concepts and
    force transformation initiatives, create and implement training
    scenarios for 2 dimensional and 3 dimensional simulation
    systems, support Joint Forces Commands
    (JFCOM) Millennium Challenge, and we support Joint Conflict
    and Tactical Simulation (JCATS) scenarios.                                                                                                                                                                                     
|
| |  | C4I integration: for the U.S. Department of Defense,
    we design and develop policies to enable standard automated
    interfaces between simulation and Command, Control,
    Communication and Computer Intelligence systems which support
    improved planning, training and military operations.                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Analysis and visualization: we develop terrain modeling
    databases and realistic 3D visual systems for flight simulation
    and other training systems. We manage the Modeling and
    Simulation Information Analysis Center (MSIAC) for the
    U.S. Department of Defense (DoD).                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Phenomenological modeling: we develop phenomenological
    models for nuclear, chemical, biological and electromagnetic
    environments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Locomotive simulators: we design and build railroad car
    simulators and complementary training programs for railway
    carriers to train their employees. Participation in our
    simulation training is designed to improve safety and to
    minimize fuel consumption for carriers. Our training tools range
    from training simulators based on desktop computers to full
    motion simulators for both electric and diesel-electric
    locomotives. We have delivered our training tools and services
    to domestic government and commercial customers and to customers
    in the U.K., Brazil, Turkey, India, Australia and
    South Africa.

5



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Chemical, biological, nuclear and environmental sciences.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Chemical/biological agent detection, destruction, and
    decontamination: we develop, test and evaluate safe methods
    for detection, destruction and chemical decontamination of
    chemical, biological and other toxic agents; and operate a
    chemical agent surety laboratory. We provide technical expertise
    to branches of the U.S. military, the FBI, police
    departments, hospitals, fire departments, and other federal
    government and commercial customers to reduce the threat of
    chemical-biological terrorism. We provide analytical methods to
    enhance safe handling of chemical substances and design methods
    to convert harmful chemical and biological materials into
    harmless materials.                                                                                                                                                                                                                                                                                                                            
|
| |  | Laboratory support: using our laboratory facilities we
    analyze materials, wastes and effluents to determine
    constituents and/or properties; develop and validate analytical
    methods and instruments; and develop, test and implement methods
    for measuring air quality.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Life sciences: we provide analysis, testing, operational
    and laboratory support in the areas of: biotechnology,
    biomedical sciences, drug development and toxicology.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Detection, recovery and disposal of unexploded ordnance and
    explosives: we demilitarize conventional, toxic/radioactive
    and chemical warfare material; decontaminate and demolish
    buildings and equipment contaminated with explosives. We provide
    these services through our wholly-owned subsidiary, Human
    Factors Applications, Inc. (HFA).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Environmental sciences: we provide analysis, operational
    and laboratory support in: air pollution research, toxicology,
    ecology and habitat, and quality assurance program support;
    underwater, airborne and radiated noise analysis; exhaust plume
    dispersion calculations and modeling; alternative fuels and fuel
    additives testing; emissions modeling; air and water pollution
    equipment evaluations; and technology evaluations of waste
    streams.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Nuclear Safety and Analysis: we provide nuclear safety
    and analysis services to the U.S. Department of Energy
    (DOE) and its National Laboratories as well as to the
    commercial nuclear power industry. Our services include:
    modeling and simulation in the areas of computational fluid
    dynamics, structural response, materials behavior, and
    neutronics; safety and risk performance analysis in the areas of
    probabilistic safety assessments, accident consequence analysis,
    and source term dose assessment; design and performance
    assessment services to nuclear power facilities in the areas of
    control room habitability, power rate analysis, and license
    extension; management systems and technical program services in
    the areas of compliance (e.g., regulatory analysis, policy
    development, and audits), project management, and training; and
    regulatory compliance technical support services in the areas of
    nuclear plant operational readiness reviews and conduct of
    operations.

Information Technology.




| |   |                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Enterprise architecture development and integration: we
    design, develop and implement enterprise information systems.                                                                                                                         
|
| |  | Applications development: we develop web-based and
    stand-alone solutions, as well as decision support tools.                                                                                                                                  
|
| |  | Knowledge management: we deliver solutions for data
    warehousing/mining, decision support, and information analysis.                                                                                                                           
|
| |  | Network design and secure network operations: we provide
    information assurance, business continuity and disaster
    planning, network planning, call center modeling and
    re-engineering, and designs for virtual private networks (VPNs).

6



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| |   |                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Independent verification and validation: we implement
    modeling and simulation, test and evaluation, and database
    monitoring.                                      
|
| |  | Medical informatics: we develop and integrate
    technologies for acquisition, storage and use of information,
    including decision support, in-health and biomedicine.

Software Tools and Technology Products.




| |   |                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Frequency Assignment & Certification Engineering
    Tool
    (FACETtm):
    this software tool automates the assignment of radio
    frequencies, which we refer to as spectrum management, in a way
    that is designed to minimize interference between multiple users
    of the radio frequency spectrum.
|
| |  | Advanced Cosite Analysis Tool
    (ACATtm):
    this software tool is designed to permit co-location of numerous
    antennas on towers, rooftops and other platforms by predicting
    interference between the various systems and informing the user
    how to minimize interference.                      
|
| |  | Spectrum Monitoring Automatic Reporting and Tracking System
    (SMARTtm):
    this system characterizes the frequency usage in a given
    geographic area, allowing the customer to remotely monitor the
    spectrum to identify unauthorized users and to look for gaps in
    the spectrum usage.         
|
| |  | X-IGtm:
    this software provides
    3-D images for managing
    and displaying visuals of terrain and environment used in flight
    simulation and other training systems.                                                                                                                                 
|
| |  | MobSimtm/
    SimViewertm:
    this software provides for tracking components across multiple
    modes of transportation (e.g., air, sea, rail and truck).                                                                                                                                                    
|
| |  | Virtual Ocean: this software provides visualization of
    ship motions based on analytically correct representation of the
    seaway.                                                                                                                                                                        
|
| |  | Countermeasurestm:
    we provide vulnerability/risk assessment software used to
    analyze and quantify physical or electronic security.                                                                                                                                                                     
|
| |  | Cave Dog: this product is a small, remote-controlled
    hemispherical, multi-spectral vision robot vehicle used for
    surveillance and reconnaissance.                                                                                                                                                      
|
| |  | Real Time Location System (RTLS): this product is
    designed to enable customers to track thousands of users in a
    defined area, such as a seaport, a football stadium or an office
    building, using low cost antennas and badges.                                                                     
|
| |  | Isis-
    3Dtm:
    we provide fire code software with specific models for weapon
    thermal hazard response, including aerosol and radiation models.                                                                                                                                                         
|
| |  | PRISMtm:
    we provide software used for system level failure rate modeling
    with the ability to model both operating and non-operating
    failure rates. The system considers non-component failure causes
    through process assessment.                                                               

Corporate History




7



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| |                                                                                             
| | --------------------------------------------------------------------------------------------
| | The Acquisition and Deal Terms for the Purchase of Assets
    from IITRI (The Transaction)

Acquired Business.


Purchase Price.


|                                                                                                                                                                                                                                        |                                                                                                                                  |                                |                               |                                                             |  |  | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------- | ------------------------------ | ----------------------------- | ----------------------------------------------------------- |  |  | 
| a $57.0 million cash component, which consisted
    of:                                                                                                                                                                               |                                                                                                                                  |                                |                               |                                                             |  | 
|                                                                                                                                                                                                                                        | - approximately $25.8 million from the sale of our common
    stock to the ESOP;                                                 |                                | $25.8 million (approximately) |                                                             |  |  | 
|                                                                                                                                                                                                                                        | - approximately $31.2 million in proceeds from a loan to
    Alion arranged by LaSalle Bank National Association;                |                                | $31.2 million (approximately) |                                                             |  |  | 
| an approximate $60.2 million debt component,
    which consisted of:                                                                                                                                                                  |                                                                                                                                  |                                |                               |                                                             |  | 
|                                                                                                                                                                                                                                        | - issuance of a promissory note, the mezzanine note, by Alion
    to IITRI with a face value of approximately
    $20.3 million; |                                | $20.3 million (approximately) |                                                             |  |  | 
|                                                                                                                                                                                                                                        | - issuance of a promissory note, the subordinated note, by Alion
    to IITRI with a face value of $39.9 million;                |                                | $39.9 million (approximately) |                                                             |  |  | 
| the payment by Alion at closing of approximately
    $6.2 million for IITRIs outstanding bank debt,
    $2.3 million for IITRIs cost related to the
    transaction, and $1.6 million for purchase price
    adjustments due IITRI; |                                                                                                                                  | $10.1 million (approximately)  |                               |                                                             |  | 
| warrants issued to IITRI to purchase up to
    approximately 38% of our common stock, on a fully diluted basis
    (assuming the exercise of all outstanding warrants), at the
    closing date.                                      |                                                                                                                                  | Warrants                       |                               |                                                             |  | 
|                                                                                                                                                                                                                                        |                                                                                                                                  |                                |                               |                                                             | 
|                                                                                                                                                                                                                                        |                                                                                                                                  | $127.3 million (approximately) |                               | Plus warrants and the assumption of additional liabilities.

Assumption of Liabilities.


Indemnification.


8



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##### 





| |                                                 
| | ------------------------------------------------
| | The Purchase of Alion Common Stock by ESOP Trust



Representations and Warranties.




| |   |                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Alions and HFAs organization and corporate standing,
    their authority to enter into the stock purchase agreement and
    the binding effect of the agreement on us;                                                        
|
| |  | the accuracy, compliance with U.S. generally accepted
    accounting principles and consistency with past practice of the
    financial statements with respect to the portion
    of IITRIs business transferred to Alion; and
|
| |  | our obligation to repurchase any shares of our common stock
    distributed to ESOP participants.                                                                                                                               
|
| |  | the ESOP trustee, on behalf of the ESOP trust, made
    representations and warranties to us, including, but not limited
    to:                                                                                                



| |   |                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |  | the trustees authority to enter into the stock purchase
    agreement and the binding effect of the agreement on the ESOP
    trust; and
|
| |  | the investment intent of the ESOP trust.                                                                                                 

Covenants.




| |   |                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we will not take any steps without the ESOP trusts consent
    to change our status as an S corporation;                                                                                                       
|
| |  | we will not enter into any transactions with any of our officers
    or directors without approval from our board of directors or
    compensation committee;                                                   
|
| |  | we will enforce our obligations under the asset purchase
    agreement with IITRI and other related agreements;                                                                                                 
|
| |  | we will obtain the ESOP trusts consent before effecting
    our first public offering of stock to be listed on any
    securities exchange;                                                                    
|
| |  | we will not take actions that would prevent the ESOP trust from
    acquiring any additional shares of our stock under the control
    share acquisition provisions of the Delaware General Corporation
    Law;
|
| |  | we will repurchase any shares of common stock distributed to
    participants in the ESOP component of the KSOP, to the extent
    required by the ESOP, any ESOP related documents and applicable
    laws;    
|
| |  | we will maintain the KSOP and the ESOP trust so that they will
    remain in compliance with the qualification and tax exemption
    requirements under the Internal Revenue Code; and                          
|
| |  | we will use our best efforts to ensure that the ESOP trust fully
    enjoys its right to elect a majority of our board of directors
    and to otherwise control Alion.                                         



Indemnification.


9



---



##### 





| |               
| | --------------
| | The Alion ESOP







| |   |                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | rolling over their eligible retirement account balances into the
    ESOP component of the KSOP by making an individual one-time ESOP
    investment election available to new hires; and/or
|
| |  | directing a portion of their pre-tax payroll income to be
    invested in the ESOP component of the KSOP.                                                                                   









Growth Strategy






| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | To build on our experience in wireless communications. We
    anticipate that U.S. Department of Defense budgets for the
    next few years will reflect continued emphasis on communications
    and spectrum issues in which we have established expertise. For
    example, we expect to play a significant role for the
    U.S. Department of Defense in the development of Global
    Electromagnetic Spectrum Information (GEMSIS) as part of
    the Department of Defenses move toward net-centric
    warfare. In addition, civilian agencies of the federal
    government are interested in the communications solutions we
    have developed for the U.S. Department of Defense. We also
    intend to try to expand our communications research base to
    include more foreign and commercial customers.
|
| | To support the nation in homeland security. Alion has a
    long history of research and development in defense and
    destruction of chemical and biological agents. We have also
    developed a suite of software tools to support first responders
    in training to deal with potential release of chemical,
    biological, or nuclear material. We plan to expand our support
    to the Department of Homeland Security (DHS) and state and
    local governments in these areas.                                                                                                                                                                                                                                                                                                                               
|
| | To expand our defense operations research. We will seek
    to provide new services to the U.S. Department of Defense.
    We intend to expand our military planning, operations, readiness                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

10



---



##### 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | assessment, and distance learning services to the Navy;
    historically, more of our services in the defense arena have
    been provided to the Army and Air Force. We also intend to use
    our technical capabilities to develop modeling and simulation
    systems for all branches of the U.S. armed forces.                                                                                                                                                                                                                                                                                                                                                                                               
|
| | To expand our support to the United States Navy. Through
    a strategy of internal growth and acquisition, we are a
    significant support contractor to the United States Navy and its
    prime contractors. Our support to the U.S. Navy includes
    both ship design (from conceptual studies to detail design) and
    programmatic support. Utilizing the depth of our engineering and
    programmatic talent, we anticipate expanding our support to the
    U.S. Navy in new ship systems such as DD(x) and LCS.                                                                                                                                                                                       
|
| | To expand our information technology research. We intend
    to promote our specialized information technology expertise to a
    broader range of customers, including the civilian agencies of
    the federal government, primarily by applying technology
    research and solutions originally developed for military use.                                                                                                                                                                                                                                                                                                                                                                                    
|
| | To develop new software tool and technical products. We
    will seek to capture some of our intellectual property in the
    form of stand-alone tools and products to increase revenue. We
    intend to develop these tools and products to better serve
    existing customers, and to offer them separately as stand-alone
    tools and products for new customers.                                                                                                                                                                                                                                                                                                                                          
|
| | To recruit and retain highly skilled employees. We will
    seek to recruit and retain engineers, scientists, and technical
    experts with the experience, skills and innovation necessary to
    design and implement solutions to the complex problems our
    customers face. We will also seek to attract and retain other
    motivated professionals who have the qualities necessary to
    assist us in implementing our future business strategy and
    meeting our future business goals. As an employee-owned company,
    we believe we will be able to provide enhanced financial
    incentives to our employees, and that those incentives will be
    important recruitment and retention tools.
|
| | To pursue strategic acquisitions and investments. We
    intend to broaden our customer base and our capabilities in our
    core research fields by pursuing strategic acquisitions from
    companies with talent and technologies complementary to our
    current fields and to our future business goals in order to add
    new clients and expand our core competencies. During fiscal year
    2005, Alion completed the following four acquisitions and one
    strategic investment:                                                                                                                                                                                                                     



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Countermeasures, Inc.  On October 28, 2004,
    Alion purchased substantially all of the assets of
    Countermeasures, Inc. Alion acquired technology and software
    (e.g. Buddy
    Systemtm),
    used in vulnerability assessment) for identifying, quantifying
    and managing physical, infrastructure, program and electronic
    risks. Countermeasures, Inc. had two employees and was located
    in Hollywood, Maryland.
|
| |  | Mantech Environmental Technology, Inc. (METI)  On
    February 11, 2005, Alion acquired 100 percent of the
    outstanding stock of ManTech Environmental Technology, Inc.,
    (now known as Alion  METI Corporation), an
    environmental and life sciences research and development
    company. METI had approximately 110 employees and was
    headquartered in Research Triangle Park, North Carolina.                         
|
| |  | Carmel Applied Technologies, Inc. (CATI)  On
    February 25, 2005, Alion acquired 100 percent of the
    outstanding stock of Carmel Applied Technologies, Inc. (now
    known as Alion  CATI Corporation), a flight training
    software and simulator development company. CATI had
    approximately 55 employees and was headquartered in Seaside,
    California.                                                               
|
| |  | VectorCommand, Ltd  On March 22, 2005, Alion
    acquired approximately 12.5 percent of the A ordinary
    shares in VectorCommand Ltd. VectorCommand Ltd., headquartered
    in the United Kingdom, designs and develops technologies used in
    training and operations by emergency managers and incident
    commanders in Australia, Europe, North America and the United
    Kingdom.                                            
|
| |  | John J. McMullen Associates, Inc. (JJMA)  On
    April 1, 2005, Alion acquired all of the outstanding stock
    of John J. McMullen Associates, Inc. (now known as
    Alion  JJMA Corporation), a provider of ship and
    systems design from mission analysis and feasibility trade-off
    studies through contract and                                                                                                            

11



---



##### 



| |  |                                                                                                                                                                                                         
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | detail design, production supervision, testing and logistics
    support for the commercial and naval markets. JJMA had
    approximately 600 employees and was headquartered in Iselin, New
    Jersey.

Market and Industry Background




| |                                                                 
| | ----------------------------------------------------------------
| | Trends in government spending likely to affect our
    business.





| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | Department of Defense spending. Congress appropriated
    $390 billion in defense spending for fiscal year
    2006



| |                                         
| | ----------------------------------------
| | Sustained Spending for National Defense.





| |                                                   
| | --------------------------------------------------
| | Sustained interest in procurement and development.





| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | training and training transformation;                                            
|
| |  | modeling and simulation as basis for mission planning and
    preparation;       
|
| |  | the enhancement of defenses against biological, chemical and
    nuclear attacks;
|
| |  | the use of information technology for national security; and                     
|
| |  | an overall sustained level of spending for homeland defense.                     



| |                                          
| | -----------------------------------------
| | We are primarily a government contractor.





12



---



##### 





Contract Types.




| |   |                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Cost-reimbursement contracts allow us to recover our direct
    labor and allocable indirect costs, plus a fee which may be
    fixed or variable depending on the contract arrangement.
    Allocable indirect costs refer to those costs related to
    operating our business that can be recovered under a contract.
|
| |  | Time-and-material contracts allow us to recover our labor costs,
    based on negotiated, fixed hourly rates, as well as certain
    other costs.                                                                                                                                                                       
|
| |  | Under fixed-price contracts, customers pay us a fixed dollar
    amount to cover all direct and indirect costs, plus a fee. Under
    fixed-price contracts, we assume the risk of any cost overruns
    and receive the benefit of any cost savings.                                                                   



|                  |  |                                  |     |  |      |  |     |      |  |   |     |  |  |  |     |   |  |   |     |  |  |  |     |  
|----------------- |  | -------------------------------- | --- |  | ---- |  | --- | ---- |  | - | --- |  |  |  | --- | - |  | - | --- |  |  |  | --- | -
|                  |  | For the Year Ended September 30, |    
|                  |  |                                  |    
|Contract Type     |  | 2005                             |     |  | 2004 |  |     | 2003 | 
|                  |  |                                  |     |  |      |  |     |      | 
|Cost-plus         |  | $                                | 216 |  |      |  | 58  | %    |  | $ | 160 |  |  |  | 59  | % |  | $ | 133 |  |  |  | 62  | %
|Fixed-price       |  | $                                | 77  |  |      |  | 21  | %    |  | $ | 44  |  |  |  | 16  | % |  | $ | 34  |  |  |  | 16  | %
|Time-and-material |  | $                                | 76  |  |      |  | 21  | %    |  | $ | 66  |  |  |  | 25  | % |  | $ | 46  |  |  |  | 22  | %
|                  |  |                                  |     |  |      |  |     |      |  |   |     |  |  |  |     |   |  |  
|Total             |  | $                                | 369 |  |      |  | 100 | %    |  | $ | 270 |  |  |  | 100 | % |  | $ | 213 |  |  |  | 100 | %
|                  |  |                                  |     |  |      |  |     |      |  |   |     |  |  |  |     |   |  |  



Government Oversight.


Backlog.




| |   |                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | funded backlog, which refers to contracts that have been awarded
    to us and whose funding has been authorized by the customer,
    less revenue previously recognized under the same
    contracts, and

13



---



##### 





| |   |                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | unfunded backlog, which refers to the total estimated value of
    contracts awarded to us, but whose funding has not yet been
    authorized by the customer.



|         |       |               |   |       |       |  |   |       |       |  |   |       |       | 
|-------- | ----- | ------------- | - | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|         |       | September 30, |  
|         |       |               |  
|         |       | 2005          |   |       | 2004  |  |   | 2003  |      
|         |       |               |   |       |       |  |   |       |      
|         |       | (In millions) |  
|Backlog: |       |               |   |       |       |  |   |       |       |  |   |      
|         |       | Funded        |   | $     | 193   |  |   | $     | 161   |  |   | $     | 107   | 
|         |       | Unfunded      |   | $     | 2,581 |  |   | $     | 1,793 |  |   | $     | 1,435 | 
|         |       |               |   |       |       |  |   |       |      
|         | Total |               | $ | 2,774 |       |  | $ | 1,954 |       |  | $ | 1,542 |      
|         |       |               |   |       |       |  |   |       |      





| |   |                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------
| |  | in-process backlog, which refers to proposals that we are
    preparing to submit following a request from a customer, and                
|
| |  | submitted backlog, which refers to proposals that we have
    submitted to a customer and for which we are awaiting an award
    decision.



|           |       |               |       |       |      |   |     |      |  |   |     |     | 
|---------- | ----- | ------------- | ----- | ----- | ---- | - | --- | ---- |  | - | --- | --- | 
|           |       | September 30, |      
|           |       |               |      
|           |       | 2005          |       |       | 2004 |   |     | 2003 | 
|           |       |               |       |       |      |   |     |      | 
|           |       | (In millions) |      
|In-process |       | $             | 276   |       |      | $ | 56  |      |  | $ | 31  |    
|Submitted  |       | $             | 1,121 |       |      | $ | 425 |      |  | $ | 392 |    
|           |       |               |       |       |      |   |     |      | 
|           | Total |               | $     | 1,397 |      |   | $   | 481  |  |   | $   | 423 | 
|           |       |               |       |       |      |   |     |      | 

Seasonality and Cyclicality




14



---



##### 



Corporate Culture


Employees and Recruiting.


We view our employees as our most valuable asset.






Our Customers




|                                 |       |               |     |     |      |  |    |      |   |   |     |     |  |  |    |     |   |   |     |     |  |  |    |     |  
|-------------------------------- | ----- | ------------- | --- | --- | ---- |  | -- | ---- | - | - | --- | --- |  |  | -- | --- | - | - | --- | --- |  |  | -- | --- | -
|                                 |       | 2005          |     |     | 2004 |  |    | 2003 |  
|                                 |       |               |     |     |      |  |    |      |  
|                                 |       | (In millions) |    
|U.S. Department of Defense (DoD) |       | $             | 324 |     |      |  | 88 | %    |   | $ | 245 |     |  |  | 91 | %   |   | $ | 202 |     |  |  | 95 | %  
|Other Federal Civilian Agencies  |       | $             | 30  |     |      |  | 8  | %    |   | $ | 19  |     |  |  | 7  | %   |   | $ | 7   |     |  |  | 3  | %  
|Commercial and International     |       | $             | 15  |     |      |  | 4  | %    |   | $ | 6   |     |  |  | 2  | %   |   | $ | 4   |     |  |  | 2  | %  
|                                 |       |               |     |     |      |  |    |      |   |   |     |     |  |  |    |     |   |  
|                                 | Total |               | $   | 369 |      |  |    | 100  | % |   | $   | 270 |  |  |    | 100 | % |   | $   | 213 |  |  |    | 100 | %
|                                 |       |               |     |     |      |  |    |      |   |   |     |     |  |  |    |     |   |  

Competition




15



---



##### 









| |   |                                                             
| | - | ------------------------------------------------------------
| |  | technical capabilities and approach;                        
|
| |  | quality of the personnel, including management capabilities;
|
| |  | successful past contract performance; and                   
|
| |  | price.                                                      



S Corporation Status






| |   |                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------
| |  | one class of stock;                                                                                               
|
| |  | up to 100 shareholders; and                                                                                       
|
| |  | certain types of shareholders, such as individuals, trusts and
    some tax-exempt organizations, including ESOPs.











16



---



##### 





Business Development and Promotional Activities


face-to








Resources




Patents and Proprietary Information






17



---



##### 



Foreign Operations


U.S.-based


Company Information Available on the Internet


10-K; 10-Q; 8-K;


Environmental Matters






| |   |                                                   
| | - | --------------------------------------------------
| |  | emissions into the air,                           
|
| |  | discharges into the environment,                  
|
| |  | handling and disposal of regulated substances, and
|
| |  | contamination by regulated substances.            





Risk Factors




| |                              
| | -----------------------------
| | Risks Related to Our Business



| |                                              
| | ---------------------------------------------
| | An economic downturn could harm our business.





| |                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We face intense competition from many competitors that
    have greater resources than we do, which could result in price
    reductions, reduced profitability, and loss of market
    share.



18



---



##### 







| |                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We incurred a significant amount of debt in order to
    complete the IITRI acquisition and through subsequent debt
    refinancing, which may limit our operational flexibility and
    negatively affect the value of your investment in the ESOP
    component.







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | limit our ability to obtain additional financing for working
    capital, capital expenditures, acquisitions and other general
    corporate activities;                                                                                                                                                                                                                                                                                                                                         
|
| |  | limit our flexibility in planning for, or reacting to, changes
    in our business and the industry in which we operate;                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | make it more difficult for us to satisfy our obligations to our
    creditors, including our repurchase obligations to ESOP
    participants, and, if we fail to comply with the requirements of
    the indebtedness, may require refinancing on terms unfavorable
    to us, or if refinancing is not possible, our creditors could
    accelerate the maturity of our indebtedness, which could cause
    us to default under other indebtedness, dispose of assets or
    declare bankruptcy;
|
| |  | limit our ability to successfully withstand a downturn in our
    business or the economy generally; and                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | place us at a competitive disadvantage against other less
    leveraged competitors.                                                                                                                                                                                                                                                                                                                                                                                                             



| |                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our ability to service our debt and meet other future
    obligations is dependent on our future operating results and we
    cannot be sure that we will be able to meet these obligations as
    they come due.





| |   |                                                                 
| | - | ----------------------------------------------------------------
| |  | funding of our contract backlog;                                
|
| |  | the time within which our customers pay our accounts receivable;
|
| |  | new contract awards and our performance under these contracts;  

19



---



##### 





| |   |                                                                        
| | - | -----------------------------------------------------------------------
| |  | continued increase in revenues on an annual basis;                     
|
| |  | interest rate levels;                                                  
|
| |  | our status as an S corporation for federal income tax
    purposes; and
|
| |  | general economic conditions.                                           

payment-in






| |                              
| | -----------------------------
| | Risks Related to Our Industry



| |                                                                                    
| | -----------------------------------------------------------------------------------
| | We are dependent on government contracts for substantially
    all of our revenues.





| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | The failure by Congress to approve budgets timely for the
    federal agencies we support could delay or reduce spending and
    cause us to lose revenue.





| |                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Historically, a few contracts have provided us with most
    of our revenues, and if we do not retain or replace these
    contracts our operations will suffer.





| |    |                                                                                                                                           
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Modeling and Simulation Information Analysis Center for the
    U.S. Department of Defense  Defense Information
    Systems Agency (19%);
|
| | 2. | Joint Spectrum Center Engineering Support Services for the
    U.S. Department of Defense Joint Spectrum Center (12%);                    

20



---



##### 





| |    |                                                                                                                                      
| | -- | -------------------------------------------------------------------------------------------------------------------------------------
| | 3. | Information Technology Services for General Services
    Administration  U.S. Department of Defense (7%);                           
|
| | 4. | Night Vision HighTech Omnibus Contract for the
    U.S. Department of Army (5%); and                                                 
|
| | 5. | Engineering, Financial and Program Management Services to the
    U.S. Department of the Navys Virtual SYSCOM
    (VS) program (5%).





| |                                                                                    
| | -----------------------------------------------------------------------------------
| | Government contracts contain termination provisions that
    are unfavorable to us.





| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | Actual or perceived conflicts of interest may prevent us
    from being able to bid on or perform contracts.





| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | We may not receive the full amount of our backlog, which
    could lower future revenues.



21



---



##### 







| |                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because government contracts are subject to government
    audits, contract payments are subject to adjustment and
    repayment which may result in revenues attributed to a contract
    being lower than expected.





| |                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our subcontractors failure to perform contractual
    obligations could damage our reputation as a prime contractor
    and thereby our ability to obtain future business.





| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | If we fail to recover pre-contract costs, it may result in
    reduced fees or in losses.





| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we do not accurately estimate the expenses, time and
    resources necessary to satisfy our contractual obligations, our
    profit will be lower than expected.





22



---



##### 









| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | Our operating margins and operating results may suffer if
    cost-reimbursement contracts increase in proportion to our total
    contract mix.





| |                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If the volume of services we provide under fixed-price
    contracts decreases in total or as a proportion of our total
    business, or if profit rates on these contracts decline, our
    operating margins and operating results may suffer.





| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As a federal government contractor, we must comply with
    complex procurement laws and regulations and our failure to do
    so could have a negative impact upon our business.





| |                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our failure to obtain and maintain necessary security
    clearances may limit our ability to carry out confidential work
    for government customers, which could cause our revenues to
    decline.



23



---



##### 







| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | We derive significant revenues from contracts awarded
    through a competitive bidding process which is an inherently
    unpredictable process.





| |   |                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the frequent need to bid on programs in advance of the
    completion of their design, which may result in unforeseen
    technological difficulties and/or cost overruns;                
|
| |  | the substantial time and effort, including design, development
    and promotional activities, required to prepare bids and
    proposals for contracts that may not be awarded to us; and
|
| |  | the design complexity and rapid rate of technological
    advancement of most of our research offerings.                                                                                  





| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | Intense competition in the technology and defense
    industries could limit our ability to win and retain government
    contracts.







| |   |                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------
| |  | the effectiveness of our research and development programs;                                                   
|
| |  | our ability to offer better performance than our competitors at
    a lower or comparable cost;               
|
| |  | the readiness of our facilities, equipment and personnel to
    perform the programs for which we compete; and
|
| |  | our ability to attract and retain key personnel.                                                              





| |                                
| | -------------------------------
| | Risks Related To Our Operations



| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | We depend on key management and personnel and may not be
    able to retain those employees due to competition for their
    services.



24



---



##### 









| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | Our business could suffer if we fail to attract, train and
    retain skilled employees.





| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | Our employees may engage in misconduct or other improper
    activities, which could harm our business.





| |                                                                                     
| | ------------------------------------------------------------------------------------
| | If we are unable to manage our growth, our business could
    be adversely affected.





| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | We may undertake acquisitions that could increase our
    costs or liabilities or be disruptive.

day-to


25



---



##### 







| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | Covenants in our credit facility may restrict our
    financial and operating flexibility.







| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | Environmental laws and regulations and our use of
    hazardous materials may subject us to significant
    liabilities.





| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | modifications to current laws and regulations;                             
|
| |  | new laws and regulations;                                                  
|
| |  | new guidance or new interpretation of existing laws and
    regulations; or
|
| |  | the discovery of previously unknown contamination.                         






|        |           
|------- | ----------
|Item 2. | Properties



26



---



##### 


















|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings



| |                   
| | ------------------
| | AB Tech settlement









Joseph Hudert vs. Alion;
Frank Stotmeister vs. Alion






27



---



##### 


















|        |                                                    
|------- | ---------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security Holders






PART II







|        |                                                                                                                    
|------- | -------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity, Related
    Stockholders Matters and Issuer Purchases of Equity
    Security



8-K.




| |                
| | ---------------
| | Dividend Policy



28



---



##### 








|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data









Selected Financial Data of Alion Science and Technology
Corporation


For Years Ended September 30,


|                                                                                          |  |                                                 |           |   |         |   |           |         |  |   |           |           |  |         |         |   |          |   |         |   |  |   |         |  
|----------------------------------------------------------------------------------------- |  | ----------------------------------------------- | --------- | - | ------- | - | --------- | ------- |  | - | --------- | --------- |  | ------- | ------- | - | -------- | - | ------- | - |  | - | ------- | -
|                                                                                          |  |                                                 |           |   |         |   |           |         |  |   |           | Pro Forma | 
|                                                                                          |  | 2005(1)                                         |           |   | 2004(2) |   |           | 2003(3) |  |   | 2002(4)   |           |  | 2001(4) |         |   | 2003(12) |  
|                                                                                          |  |                                                 |           |   |         |   |           |         |  |   |           |           |  |         |         |   |          |  
|                                                                                          |  | (In thousands, except share and per share data) |          
|Consolidated Operating Data:                                                              |  |                                                 |           |   |         |   |           |         |  |   |           |           |  |         |         |   |          |   |         |   |  |   |         |  
|Contract revenue                                                                          |  | $                                               | 369,231   |   |         | $ | 269,940   |         |  | $ | 165,917   |           |  | $       | 201,738 |   |          | $ | 193,152 |   |  | $ | 213,182 |  
|Direct contract expenses                                                                  |  |                                                 | 267,241   |   |         |   | 196,388   |         |  |   | 120,559   |           |  |         | 147,377 |   |          |   | 140,555 |   |  |   | 155,214 |  
|Operating expenses(5)                                                                     |  |                                                 | 104,081   |   |         |   | 73,703    |         |  |   | 46,273    |           |  |         | 48,488  |   |          |   | 41,726  |   |  |   | 64,842  |  
|                                                                                          |  |                                                 |           |   |         |   |           |         |  |   |           |           |  |         |         |   |          |  
|Operating income (loss)                                                                   |  |                                                 | (2,091    | ) |         |   | (151      | )       |  |   | (915      | )         |  |         | 5,873   |   |          |   | 10,871  |   |  |   | (6,874  | )
|Other income (expense)(6)                                                                 |  |                                                 | (38,081   | ) |         |   | (14,943   | )       |  |   | (11,701   | )         |  |         | (586    | ) |          |   | (1,072  | ) |  |   | (13,847 | )
|Income tax (expense) benefit(7)                                                           |  |                                                 | (66       | ) |         |   | (17       | )       |  |   |          |           |  |         | (589    | ) |          |   | (302    | ) |  |   | (27     | )
|                                                                                          |  |                                                 |           |   |         |   |           |         |  |   |           |           |  |         |         |   |          |  
|Net income (loss)(8)                                                                      |  | $                                               | (40,238   | ) |         | $ | (15,111   | )       |  | $ | (12,616   | )         |  | $       | 4,698   |   |          | $ | 9,497   |   |  | $ | (20,748 | )
|                                                                                          |  |                                                 |           |   |         |   |           |         |  |   |           |           |  |         |         |   |          |  
|Basic and diluted loss per share                                                          |  | $                                               | (9.50     | ) |         | $ | (4.91     | )       |  | $ | (6.05     | )         |  |         |         |   |          |   |         |   |  |   |         |  
|Basic and diluted weighted-average common shares outstanding                              |  |                                                 | 4,235,947 |   |         |   | 3,074,709 |         |  |   | 2,085,274 |           |  |         |         |   |          |   |         |   |  |   |         |  
|                                                                                          |  |                                                 |           |   |         |   |           |         |  |   |           |           |  |         |         |   |          |  
|Unaudited pro forma as adjusted basic and diluted earnings
    (loss) per common share(9) |  |                                                 |           |   |         |   |           |         |  |   |           |           |  |         |         |   |          |   |         |   |  | $ | (7.83   | )
|                                                                                          |  |                                                 |           |   |         |   |           |         |  |   |           |           |  |         |         |   |          |  

29



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##### 



|                                                                                                               |                      |                                                 |           |         |         |   |           |         |   |   |           |           |   |         |           |        |          |   |         |         |   |  |  |  | 
|-------------------------------------------------------------------------------------------------------------- | -------------------- | ----------------------------------------------- | --------- | ------- | ------- | - | --------- | ------- | - | - | --------- | --------- | - | ------- | --------- | ------ | -------- | - | ------- | ------- | - |  |  |  | 
|                                                                                                               |                      |                                                 |           |         |         |   |           |         |   |   |           | Pro Forma |  
|                                                                                                               |                      | 2005(1)                                         |           |         | 2004(2) |   |           | 2003(3) |   |   | 2002(4)   |           |   | 2001(4) |           |        | 2003(12) |  
|                                                                                                               |                      |                                                 |           |         |         |   |           |         |   |   |           |           |   |         |           |        |          |  
|                                                                                                               |                      | (In thousands, except share and per share data) |          
|Consolidated Balance Sheet Data at End of Period:                                                              |                      |                                                 |           |         |         |   |           |         |   |   |           |           |   |         |           |        |          |   |         |         |   |  |  | 
|Net accounts receivable                                                                                        |                      | $                                               | 80,898    |         |         | $ | 68,949    |         |   | $ | 42,775    |           |   | $       | 49,051    |        |          | $ | 56,095  |         |   |  |  | 
|Total assets                                                                                                   |                      |                                                 | 334,249   |         |         |   | 188,461   |         |   |   | 144,754   |           |   |         | 71,096    |        |          |   | 76,309  |         |   |  |  | 
|Current portion of long-term debt                                                                              |                      |                                                 | 1,404     |         |         |   | 468       |         |   |   | 5,000     |           |   |         | 3,330     |        |          |   | 141     |         |   |  |  | 
|Long-term debt, excluding current portion                                                                      |                      |                                                 | 180,833   |         |         |   | 99,631    |         |   |   | 74,719    |           |   |         | 1,654     |        |          |   | 11,886  |         |   |  |  | 
|Redeemable common stock warrants                                                                               |                      |                                                 | 44,590    |         |         |   | 20,777    |         |   |   | 14,762    |           |   |         |          |        |          |   |        |         |   |  |  | 
|Long-term deferred gain on sale of building to Illinois
    Institute of Technology, excluding current portion |                      |                                                 |          |         |         |   |          |         |   |   |          |           |   |         | 3,523     |        |          |   | 4,054   |         |   |  |  | 
|Other Data:                                                                                                    |                      |                                                 |           |         |         |   |           |         |   |   |           |           |   |         |           |        |          |   |         |         |   |  |  | 
|Depreciation and amortization                                                                                  |                      | $                                               | 17,771    |         |         | $ | 13,447    |         |   | $ | 9,553     |           |   | $       | 3,447     |        |          | $ | 3,488   |         |   |  |  | 
|Capital expenditures                                                                                           |                      |                                                 | 2,223     |         |         |   | 3,678     |         |   |   | 1,329     |           |   |         | 3,643     |        |          |   | 1,940   |         |   |  |  | 
|Cash flows provided by (used in):                                                                              |                      |                                                 |           |         |         |   |           |         |   |   |           |           |   |         |           |        |          |   |         |         |   |  |  | 
|                                                                                                               | Operating activities |                                                 | $         | 35,140  |         |   | $         | 5,675   |   |   | $         | 14,264    |   |         | $         | 14,713 |          |   | $       | 7,907   |   |  |  |  | 
|                                                                                                               | Investing activities |                                                 |           | (78,017 | )       |   |           | (23,625 | ) |   |           | (61,428   | ) |         |           | (4,466 | )        |   |         | 9,863   |   |  |  |  | 
|                                                                                                               | Financing activities |                                                 |           | 75,938  |         |   |           | 22,173  |   |   |           | 47,652    |   |         |           | (9,851 | )        |   |         | (17,770 | ) |  |  |  | 
|Funded contract backlog(10)                                                                                    |                      |                                                 | 193,000   |         |         |   | 161,000   |         |   |   | 107,000   |           |   |         | 72,000    |        |          |   | 67,000  |         |   |  |  | 
|Unfunded contract backlog(11)                                                                                  |                      |                                                 | 2,581,000 |         |         |   | 1,793,000 |         |   |   | 1,435,000 |           |   |         | 1,431,000 |        |          |   | 737,000 |         |   |  |  | 
|Number of employees                                                                                            |                      |                                                 | 2,508     |         |         |   | 1,880     |         |   |   | 1,604     |           |   |         | 1,622     |        |          |   | 1,458   |         |   |  |  | 






| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | During fiscal year 2005, the Company completed four acquisitions
    and made one strategic investment as described below. The
    results of operations for the companies acquired are included in
    Alions operations from the dates of the acquisitions. On
    October 28, 2004, Alion purchased substantially all of the
    assets of Countermeasures for approximately $2.4 million.
    Countermeasures had two employees and was located in Hollywood,
    Maryland. As of September 30, 2005, the Company has
    recorded approximately $1.4 million in goodwill relating to
    this acquisition.



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On February 11, 2005, Alion acquired 100 percent of
    the outstanding stock of METI, an environmental and life
    sciences research and development company for approximately
    $7.0 million in cash. METI had approximately 110 employees
    and was headquartered in Research Triangle Park, North Carolina.
    As of September 30, 2005, the Company has recorded
    $5.5 million in goodwill related to this acquisition.                                                                                                                                                                                                                                                                                                                                                          
|
| |  | On February 25, 2005, Alion acquired 100 percent of
    the outstanding stock of CATI, a flight training software and
    simulator development company, for approximately
    $7.3 million in cash. CATI had approximately 55 employees
    and was headquartered in Seaside, California. The transaction is
    subject to an earn-out provision
    not-to-exceed a
    cumulative amount of $9.0 million based on attaining
    certain cumulative revenue goals for fiscal years 2005, 2006,
    and 2007, and a second earn-out provision
    not-to-exceed
    $1.5 million for attaining certain revenue goals in the
    commercial aviation industry. As of September 30, 2005, the
    Company has recorded approximately $12.9 million in
    goodwill related to this acquisition.
|
| |  | On April 1, 2005, the Company acquired 100% of the issued
    and outstanding stock of JJMA. The Company paid the equity
    holders of JJMA approximately $51.9 million, issued
    1,347,197 shares of Alion common stock to the JJMA Trust
    valued at approximately $37.3 million, and agreed to make
    $8.3 million in future payments. Including acquisition
    costs of $1.1 million, the aggregate purchase price was
    $99.5 million. As of September 30, 2005, the Company
    has recorded approximately $61.9 million in goodwill
    related to the JJMA acquisition.                                                                                                                                                                                                      

30



---



##### 





| |  |                                                                                                                                                                                 
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On March 22, 2005, Alion acquired approximately
    12.5 percent of the A ordinary shares in VectorCommand Ltd.
    for $1.5 million, which investment is accounted for at cost.



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | During fiscal year 2004, the Company completed two acquisitions
    as described below. Operating results for these businesses are
    included in our consolidated totals from the respective dates of
    acquisitions. On October 31, 2003, Alion acquired 100% of
    the outstanding stock of Innovative Technology Solutions
    Corporation (ITSC), for $4.0 million. The
    transaction is subject to an earn out provision
    not-to-exceed
    $1.5 million. ITSC is a New Mexico corporation with
    approximately 53 employees, the majority of whom are located in
    New Mexico. As of September 30, 2005, the Company has
    recorded approximately $5.0 million of goodwill relating to
    this acquisition.



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On February 13, 2004, Alion acquired 100% of the
    outstanding stock of Identix Public Sector, Inc. (IPS, now known
    as Alion-IPS Corporation) for $8.0 million in cash.
    IPS, formerly ANADAC, was a wholly-owned subsidiary of Identix
    Incorporated. Following the closing, the Company paid Identix
    approximately $4.3 million for intercompany payables. As of
    September 30, 2005, the Company has recorded approximately
    $6.1 million of goodwill relating to this acquisition.



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (3) | For fiscal year 2003 (October 1, 2002 to September 30,
    2003), the operations data presented reflects approximately nine
    months of Alion operations since the Transaction occurred on
    December 20, 2002, which was at the end
    of IITRIs first quarter of operations for fiscal
    2003. During the period October 1, 2002 to
    December 20, 2002, Alion was organizationally a business
    shell, operationally inactive until the Transaction occurred.                                                                                                                                                                                                                                                                                                                                                          
|
| | (4) | Represents consolidated operating and balance sheet data of the
    Selected Operations of IITRI which was acquired by Alion on
    December 20, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | (5) | Operating expenses include (i) non-recurring transaction
    expenses of approximately $6.7 million and
    $6.4 million for fiscal years ended September 30, 2003
    and 2002, respectively, and (ii) non-recurring, conversion
    and roll-out expenses of approximately $1.5 million for the
    fiscal year ended September 30, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | (6) | For the years ended September 30, 2005, 2004 and 2003,
    other income (expense) includes approximately
    $38.7 million, $16.8 million and $13.9 million,
    respectively, in interest-related expense associated with the
    debt financing (which includes the related change in warrant
    valuation associated with the change in the share price of Alion
    stock) resulting from the Transaction and the acquisitions which
    were completed in fiscal years 2005 and 2004, as described
    above. Other income (expense) for the year ended
    September 30, 2004 includes a gain of approximately
    $2.1 million on the sale of the Companys minority
    interest in Matrics Incorporated.                                                                                                                    
|
| | (7) | Income tax (expense) benefit primarily relates to income
    (loss) of our for-profit, wholly-owned subsidiary, HFA prior to
    HFA becoming a Q-sub beginning on December 21, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | (8) | The decrease in net income for the year ended September 30,
    2002, as compared to the year ended September 30, 2001 is
    primarily attributable to approximately $6.4 million in
    non-recurring costs (e.g., outside legal, finance, accounting
    and audit fees) related to the acquisition of the Selected
    Operations of IITRI.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | (9) | IITRI operated as a non-stock, not-for-profit corporation since
    its inception. Therefore, prior to 2003, our historical capital
    structure is not indicative of our current capital structure
    and, accordingly, historical earnings per share information has
    not been presented. Pro forma basic and diluted earnings per
    common share are computed based upon approximately
    2.575 million shares of our stock outstanding after closing
    of the Transaction and completion of the one-time ESOP
    investment election being reflected as outstanding for the
    period prior to the closing of the Transaction. As of
    September 30, 2003, the pro forma basic and diluted
    earnings per common share are computed based upon approximately
    2.65 million weighted average shares outstanding.



|     |                                                                                                                                                                                                                      
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Funded backlog represents the total amount of contracts that
    have been awarded and whose funding has been authorized minus
    the amount of revenue booked under the contracts from their
    inception to date.
|    
|(11) | Unfunded backlog refers to the estimated total value of
    contracts which have been awarded but whose funding has not yet
    been authorized for expenditure.                                                     

31



---



##### 





|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(12) | The unaudited pro forma consolidated statements of operations
    set forth below should be read in connection with, and are
    qualified by reference to, our consolidated financial statements
    and related notes, as well as Managements Discussion
    and Analysis of Financial Condition and Results of
    Operations, included elsewhere in this annual report. We
    believe that the assumptions used in the preparation of this
    unaudited pro forma information provide a reasonable basis for
    presenting the significant effects directly attributable to the
    transactions discussed below. The unaudited pro forma
    consolidated operating data are not necessarily indicative of
    the results that would have been reported had such events
    actually occurred on the dates described below, nor are they
    indicative of our future results. The unaudited pro forma
    consolidated operating data have been prepared to reflect the
    following adjustments to our historical results of operations
    and to give effect to the following transactions as if those
    transactions had been consummated on October 1, 2001:



| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our incurrence of approximately $96.1 million of debt with
    detachable warrants to purchase common stock, in connection with
    the purchase of IITRIs assets;
|
| |  | the acquisition of IITRIs assets, which was accounted
    for under the purchase method of accounting; and                                                        
|
| |  | the purchase of our common stock for approximately
    $25.8 million by the ESOP Trust.                                                                            

32



---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION


Unaudited Pro Forma Consolidated Statement of Operations


For the Year Ended September 30, 2003


|                                                             |                                       |                                              |        |       |            |   |         |             |         |   |           |        |      |   |         |         |         |  
|------------------------------------------------------------ | ------------------------------------- | -------------------------------------------- | ------ | ----- | ---------- | - | ------- | ----------- | ------- | - | --------- | ------ | ---- | - | ------- | ------- | ------- | -
|                                                             |                                       | Year Ended September 30, 2003                |       
|                                                             |                                       |                                              |       
|                                                             |                                       | Selected                                     |        |       |           
|                                                             |                                       | Operations of IITRI                          |        |       | Alion      |   |         | Pro Forma   |         |   |          
|                                                             |                                       | Historical                                   |        |       | Historical |   |         | Adjustments |         |   | Pro Forma |       
|                                                             |                                       |                                              |        |       |            |   |         |             |         |   |           |       
|                                                             |                                       | (In thousands, except per share information) |       
|Contract revenue                                             |                                       | $                                            | 47,265 |       |            | $ | 165,917 |             |         |   |           |        |      | $ | 213,182 |        
|Direct contract expense                                      |                                       |                                              | 34,655 |       |            |   | 120,559 |             |         |   |           |        |      |   | 155,214 |        
|                                                             |                                       |                                              |        |       |            |   |         |             |         |   |           |       
|                                                             |                                       | Gross profit                                 |        |       | 12,610     |   |         |             | 45,358  |   |           |        |      |   |         |         | 57,968  |  
|                                                             |                                       |                                              |        |       |            |   |         |             |         |   |           |       
|Operating expenses:                                          |                                       |                                              |        |       |            |   |         |             |         |   |           |        |      |   |         |        
|                                                             | Indirect contract expense             |                                              |        | 2,568 |            |   |         | 8,685       |         |   |           |        |      |   |         | 11,253  |        
|                                                             | Research and development              |                                              |        | 36    |            |   |         | 177         |         |   |           |        |      |   |         | 213     |        
|                                                             | General and administrative            |                                              |        | 4,732 |            |   |         | 19,909      |         |   |           | 29     | (1)  |   |         | 24,670  |        
|                                                             | Stock-based and deferred compensation |                                              |        |      |            |   |         | 856         |         |   |           |        |      |   |         | 856     |        
|                                                             | Non-recurring transaction expense     |                                              |        | 6,000 |            |   |         | 726         |         |   |           |        |      |   |         | 6,726   |        
|                                                             | Rental and occupancy expense          |                                              |        | 2,089 |            |   |         | 6,892       |         |   |           | 112    | (2)  |   |         | 9,093   |        
|                                                             | Depreciation and amortization         |                                              |        | 886   |            |   |         | 9,553       |         |   |           | (474   | )(3) |   |         | 12,436  |        
|                                                             |                                       |                                              |        |       |            |   |         |             |         |   | 2,471     | (4)    |      |   |         |        
|                                                             | Bad debt expense (recovery)           |                                              |        | 120   |            |   |         | (525        | )       |   |           |        |      |   |         | (405    | )      
|                                                             |                                       |                                              |        |       |            |   |         |             |         |   |           |       
|Total operating expenses                                     |                                       |                                              | 16,431 |       |            |   | 46,273  |             |         |   |           |        |      |   | 64,842  |        
|                                                             |                                       |                                              |        |       |            |   |         |             |         |   |           |       
|                                                             |                                       | Operating income (loss)                      |        |       | (3,821     | ) |         |             | (915    | ) |           |        |      |   |         |         | (6,874  | )
|Other income (expense):                                      |                                       |                                              |        |       |            |   |         |             |         |   |           |        |      |   |         |        
|                                                             | Interest income                       |                                              |        | 22    |            |   |         | 21          |         |   |           |        |      |   |         | 43      |        
|                                                             | Interest expense                      |                                              |        | (51   | )          |   |         | (11,724     | )       |   |           | (1,685 | )(5) |   |         | (13,869 | )      
|                                                             |                                       |                                              |        |       |            |   |         |             |         |   | (106      | )(6)   |      |   |         |        
|                                                             |                                       |                                              |        |       |            |   |         |             |         |   | (303      | )(7)   |      |   |         |        
|                                                             | Other                                 |                                              |        | (23   | )          |   |         | 2           |         |   |           |        |      |   |         | (21     | )      
|                                                             |                                       |                                              |        |       |            |   |         |             |         |   |           |       
|                                                             |                                       | Income (loss) before income taxes            |        |       | (3,873     | ) |         |             | (12,616 | ) |           |        |      |   |         |         | (20,721 | )
|                                                             |                                       | Income tax expense                           |        |       | (27        | ) |         |             |        |   |           |        |      |   |         |         | (27     | )
|                                                             |                                       |                                              |        |       |            |   |         |             |         |   |           |       
|                                                             |                                       | Net income (loss)                            |        | $     | (3,900     | ) |         | $           | (12,616 | ) |           |        |      |   |         | $       | (20,748 | )
|                                                             |                                       |                                              |        |       |            |   |         |             |         |   |           |       
|Basic and diluted (loss) per share                           |                                       |                                              |        |       |            |   |         |             |         |   |           |        |      | $ | (7.83   | )(8)   
|Basic and diluted weighted average common shares outstanding |                                       |                                              |        |       |            |   |         |             |         |   | 2,649     | (8)    |      |   |         |        








|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents Alion board of director expenses and interest expense
    on the $0.9 million note due to officer under terms of a
    compensation agreement, net of estimated fair value of
    detachable warrants.                                                                                                                                                                                                                                           
|   
|(2) | Represents the elimination of the amortization of the deferred
    gain related to the sale of real estate during the year ended
    September 30, 2001.                                                                                                                                                                                                                                                                                                    
|   
|(3) | Reversal of IITRIs historical amortization expense
    related to pre-acquisition goodwill.                                                                                                                                                                                                                                                                                                                                                                
|   
|(4) | Under the provisions of SFAS No. 141,Business
    Combinations, the Transaction purchase price was allocated
    between net tangible assets, the value attributed to
    identifiable intangible assets (purchased contracts) and
    goodwill. For purposes of the pro forma consolidated statements
    of operations, the excess purchase price over the identifiable
    net assets acquired is considered to be goodwill with an
    indefinite life

33



---



##### 



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | and therefore is not amortizable. The estimated value of
    $30.6 million attributed to intangible assets has an
    estimated useful life of three years and has been amortized
    accordingly using the straight-line method in the pro forma
    statements of operations. Additionally, an estimated value of
    approximately $1.5 million was assigned to a single lot of
    non-capitalized assets (e.g., office furnishings, laptop
    computers, etc.). This asset has an estimated useful life of
    three years and has been amortized accordingly using the
    straight-line method in the pro forma statement of operations.                                                                                                                                                
|   
|(5) | Represents interest expense on approximately $96.1 million
    of debt, utilizing a weighted average interest factor of
    approximately 8.1% per year, issued to finance the
    Transaction. The senior term note is a variable rate note that
    is indexed to the prime rate. The prime rate used for the
    weighted average interest rate calculation was 4.25%.                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(6) | Represents amortization of debt issuance costs under the
    effective interest method over the life of the senior term note
    of five years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(7) | Represents accretion of long-term debt to face value over the
    term of the debt using the effective interest method. Discount
    to debt reflects estimated fair value of detachable warrants of
    $10.3 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(8) | Our historical capital structure is not indicative of our
    current structure, and accordingly, historical earnings per
    share information has not been presented. For the fiscal year
    ended September 30, 2003, unaudited pro forma basic and
    diluted loss per share of common stock has been calculated in
    accordance with the rules for initial public offerings. These
    rules require that the weighted average share calculation give
    retroactive effect to any changes in our capital structure.
    Accordingly, pro forma weighted average shares assume the
    approximately 2.575 million shares issued by Alion after
    completion of the initial one-time ESOP investment on
    December 20, 2002, were outstanding for the entire period
    presented.






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations



About This Managements Discussion and Analysis






| |   |                                                                
| | - | ---------------------------------------------------------------
| |  | provide an overview of our business;                           
|
| |  | explain the year-over-year trends in our results of operations;
|
| |  | describe our liquidity and capital resources; and,             
|
| |  | explain our critical accounting policies.                      

Overview




| |                                               
| | ----------------------------------------------
| | Pro Forma Comparisons of Results of Operations



34



---



##### 





|                  |       |                                   |       |         |         |   |       |         |         |   |       |         |         | 
|----------------- | ----- | --------------------------------- | ----- | ------- | ------- | - | ----- | ------- | ------- | - | ----- | ------- | ------- | 
|                  |       | For the Years Ended September 30, |      
|                  |       |                                   |      
|                  |       | 2005                              |       |         | 2004    |   |       | 2003    |        
|                  |       |                                   |       |         |         |   |       |         |        
|                  |       | (In millions)                     |      
|Revenue           |       | $                                 | 369.2 |         |         | $ | 269.9 |         |         | $ | 213.2 |        
|                  |       |                                   |       |         |         |   |       |         |        
|Net loss          |       | $                                 | (40.2 | )       |         | $ | (15.1 | )       |         | $ | (20.7 | )      
|                  |       |                                   |       |         |         |   |       |         |        
|Contract Backlog: |       |                                   |       |         |         |   |       |         |         |   |       |        
|                  |       | Funded                            |       |         | 193.0   |   |       |         | 161.0   |   |       |         | 107.0   | 
|                  |       | Unfunded                          |       |         | 2,581.0 |   |       |         | 1,793.0 |   |       |         | 1,435.0 | 
|                  |       |                                   |       |         |         |   |       |         |        
|                  | Total |                                   | $     | 2,774.0 |         |   | $     | 1,954.0 |         |   | $     | 1,542.0 |        
|                  |       |                                   |       |         |         |   |       |         |        



|                                 |       |               |     |     |      |  |    |      |   |   |     |     |  |  |    |     |   |   |     |     |  |  |    |     |  
|-------------------------------- | ----- | ------------- | --- | --- | ---- |  | -- | ---- | - | - | --- | --- |  |  | -- | --- | - | - | --- | --- |  |  | -- | --- | -
|                                 |       | 2005          |     |     | 2004 |  |    | 2003 |  
|                                 |       |               |     |     |      |  |    |      |  
|                                 |       | (In millions) |    
|U.S. Department of Defense (DoD) |       | $             | 324 |     |      |  | 88 | %    |   | $ | 245 |     |  |  | 91 | %   |   | $ | 202 |     |  |  | 95 | %  
|Other Federal Civilian Agencies  |       | $             | 30  |     |      |  | 8  | %    |   | $ | 19  |     |  |  | 7  | %   |   | $ | 7   |     |  |  | 3  | %  
|Commercial and International     |       | $             | 15  |     |      |  | 4  | %    |   | $ | 6   |     |  |  | 2  | %   |   | $ | 4   |     |  |  | 2  | %  
|                                 |       |               |     |     |      |  |    |      |   |   |     |     |  |  |    |     |   |  
|                                 | Total |               | $   | 369 |      |  |    | 100  | % |   | $   | 270 |  |  |    | 100 | % |   | $   | 213 |  |  |    | 100 | %
|                                 |       |               |     |     |      |  |    |      |   |   |     |     |  |  |    |     |   |  





35



---



##### 





Summary of Annual Revenue by Customer/ Government Agency


|                                                                                       |  |                                                                                      |  |                                           |                    |               |             |         |    |             |         |   |   |   |     |  
|-------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------ |  | ----------------------------------------- | ------------------ | ------------- | ----------- | ------- | -- | ----------- | ------- | - | - | - | --- | -
|                                                                                       |  |                                                                                      |  | Primary Core                              |                    |               | FY05 Annual |         |    | FY05 Annual |        
|Sponsor/Government Agency                                                              |  | Title                                                                                |  |                                           | Business Area*     |               |             | Revenue |    |             | Revenue |  
|                                                                                       |  |                                                                                      |  |                                           |                    |               |             |         |    |             |         |  
|                                                                                       |  |                                                                                      |  |                                           |                    | (In millions) |            
|Department of Defense - Defense Modeling and Simulation
    Information Systems Agency |  | Information Analysis Center                                                          |  | Modeling and Simulation                   |                    | $             | 69          |         |    |             | 19      | %
|Department of Defense - Joint Spectrum Center                                          |  | Joint Spectrum Center Engineering Support Services                                   |  | Wireless Communications                   |                    | $             | 46          |         |    |             | 12      | %
|General Services Administration                                                        |  | Information Technology Services - U.S. Department                                    |  | Information Technology                    |                    | $             | 25          |         |    |             | 7       | %
|Department of Defense - Army                                                           |  | U.S. Army Night Vision Lab Hightech Omnibus contract                                 |  |                                           | Defense Operations |               |             | $       | 19 |             |         |   | 5 | %
|Department of Defense - Navy                                                           |  | Engineering, Financial and Program Management Services to the Virtual SYSCOM program |  | Naval Architecture and Marine Engineering |                    | $             | 19          |         |    |             | 5       | %
|                                                                                       |  |                                                                                      |  |                                           |                    |               |             |         |    |             |         |  
|Subtotal                                                                               |  |                                                                                      |  |                                           |                    |               |             |         |    | $           | 178     |   |   |   | 48  | %
|Other Sponsors/ Agencies                                                               |  |                                                                                      |  |                                           |                    |               |             |         |    | $           | 191     |   |   |   | 52  | %
|                                                                                       |  |                                                                                      |  |                                           |                    |               |             |         |    |             |         |  
|Total Revenues                                                                         |  |                                                                                      |  |                                           |                    |               |             |         |    | $           | 369     |   |   |   | 100 | %
|                                                                                       |  |                                                                                      |  |                                           |                    |               |             |         |    |             |         |  






|  |                                                                                                                                                                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | The total annual revenue identified with a sponsor/government
    agency may include revenue within multiple business areas. The
    primary core business area is the single largest business area
    with the sponsor/government agency.



percentage-of


36



---



##### 





|                  |  |                                  |     |  |      |  |     |      |  |   |     |  |  |  |     |   |  |   |     |  |  |  |     |  
|----------------- |  | -------------------------------- | --- |  | ---- |  | --- | ---- |  | - | --- |  |  |  | --- | - |  | - | --- |  |  |  | --- | -
|                  |  | For the Year Ended September 30, |    
|                  |  |                                  |    
|Contract Type     |  | 2005                             |     |  | 2004 |  |     | 2003 | 
|                  |  |                                  |     |  |      |  |     |      | 
|Cost-plus         |  | $                                | 216 |  |      |  | 58  | %    |  | $ | 160 |  |  |  | 59  | % |  | $ | 133 |  |  |  | 62  | %
|Fixed-price       |  | $                                | 77  |  |      |  | 21  | %    |  | $ | 44  |  |  |  | 16  | % |  | $ | 34  |  |  |  | 16  | %
|Time-and-material |  | $                                | 76  |  |      |  | 21  | %    |  | $ | 66  |  |  |  | 25  | % |  | $ | 46  |  |  |  | 22  | %
|                  |  |                                  |     |  |      |  |     |      |  |   |     |  |  |  |     |   |  |  
|Total             |  | $                                | 369 |  |      |  | 100 | %    |  | $ | 270 |  |  |  | 100 | % |  | $ | 213 |  |  |  | 100 | %
|                  |  |                                  |     |  |      |  |     |      |  |   |     |  |  |  |     |   |  |  







| |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Countermeasures, Inc.  On October 28, 2004,
    Alion purchased substantially all of the assets of
    Countermeasures. Alion acquired technology and software (e.g.,
    Buddy
    Systemtm
    used in vulnerability assessment) for identifying, quantifying
    and managing physical, infrastructure, program and electronic
    risks. Countermeasures had two employees and was located in
    Hollywood, Md.                           
|
| | Mantech Environmental Technology, Inc.  On
    February 11, 2005, Alion acquired 100 percent of the
    outstanding stock of METI, an environmental and life sciences
    research and development company. METI had approximately 110
    employees and was headquartered in Research Triangle Park, NC.                                                                                                                                        
|
| | Carmel Applied Technologies, Inc.  On
    February 25, 2005, Alion acquired 100 percent of the
    outstanding stock of CATI, a flight training software and
    simulator development company. CATI had approximately 55
    employees and was headquartered in Seaside, Ca.                                                                                                                                                                    
|
| | VectorCommand, Ltd  On March 22, 2005, Alion
    acquired approximately 12.5 percent of the A ordinary
    shares in VectorCommand Ltd. VectorCommand Ltd., headquartered
    in the United Kingdom, designs and develops technologies used in
    training and operations by emergency managers and incident
    commanders in Australia, Europe, North America and the United
    Kingdom.                                                     
|
| | John J. McMullen Associates, Inc.  On April 1,
    2005, Alion acquired all of the outstanding stock of JJMA, a
    provider of ship and systems design from mission analysis and
    feasibility trade-off studies through contract and detail
    design, production supervision, testing and logistics support
    for the commercial and naval markets. JJMA had approximately 600
    employees and was headquartered in Iselin, New Jersey.





| |   |                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | help us expand our research base to include increasingly large
    and complex programs;                                                                          
|
| |  | increase our opportunities to exploit the synergies between
    different research fields in which we work to broaden our
    offerings to our existing customers;

37



---



##### 





| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | bring new strengths to our technical capabilities through
    cross-utilization of research technology and engineering
    skills; and
|
| |  | increase the overall depth and experience of our management.                                                                          

Results of Operations






| |                                                                            
| | ---------------------------------------------------------------------------
| | Year Ended September 30, 2005 Compared to Year Ended
    September 30, 2004





| |                                                                
| | ---------------------------------------------------------------
| | Acquisitions Completed in the Year Ended
    September 30, 2005



| |   |                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We completed the acquisition of substantially all of the assets
    Countermeasures on October 28, 2004. Countermeasures had
    two employees and was located in Hollywood, Maryland. Alion
    acquired technology and software (e.g. Buddy
    Systemtm
    used in vulnerability assessment) for identifying, quantifying
    and managing physical, infrastructure, program and electronic
    risks.
|
| |  | On February 11, 2005, we completed the acquisition of METI,
    an environmental and life sciences research and development
    company. METI had approximately 110 employees and was
    headquartered in Research Triangle Park, North Carolina.                                                                                                                                                          
|
| |  | On February 25, 2005, we completed the acquisition of CATI,
    a provider of flight training software and simulator development
    systems. CATI had approximately 55 employees and was
    headquartered in Seaside, California.                                                                                                                                                                         
|
| |  | On April 1, 2005, we completed the acquisition of JJMA, a
    provider of ship and systems design from mission analysis and
    feasibility trade-off studies through contract and detail
    design, production supervision, testing and logistics support
    for the commercial and naval markets. JJMA had approximately 600
    employees and was headquartered in Iselin, New Jersey.                 

38



---



##### 



|                               |                                              |                                     |       |            |                               |   |               |              |      |   |               |               |       |                 |       |      |              |   |      |      |      |   |       |      |       | 
|------------------------------ | -------------------------------------------- | ----------------------------------- | ----- | ---------- | ----------------------------- | - | ------------- | ------------ | ---- | - | ------------- | ------------- | ----- | --------------- | ----- | ---- | ------------ | - | ---- | ---- | ---- | - | ----- | ---- | ----- | 
|                               |                                              | Year Ended September 30, 2005       |       |            | Year Ended September 30, 2004 |  
|                               |                                              |                                     |       |            |                               |  
|                               |                                              |                                     |       | Acquired   |                               |   | Consolidated  |              |      |   |               | Consolidated  |      
|                               |                                              |                                     |       | Operations |                               |   | Operations of |              |      |   |               | Operations of |      
|                               |                                              | Consolidated                        |       |            | (METI,                        |   |               | Alion Less   |      |   | Consolidated  |               |       | Acquired        |       |      | Alion Less   |  
|                               |                                              | Operations of                       |       |            | CATI, and                     |   |               | the Acquired |      |   | Operations of |               |       | Operations      |       |      | the Acquired |  
|Financial Information          |                                              | Alion                               |       |            | JJMA)*                        |   |               | Operations   |      |   | Alion         |               |       | (ITSC and IPS)* |       |      | Operations   |  
|                               |                                              |                                     |       |            |                               |   |               |              |      |   |               |               |       |                 |       |      |              |  
|                               |                                              | (In millions)                       |      
|Total revenue                  |                                              | $                                   | 369.2 |            |                               | $ | 65.3          |              |      | $ | 303.9         |               |       | $               | 269.9 |      |              | $ | 28.4 |      |      | $ | 241.6 |     
|                               | Material and subcontract revenue             |                                     |       | 102.7      |                               |   |               | 16.9         |      |   |               | 85.8          |       |                 |       | 70.3 |              |   |      | 11.5 |      |   |       | 58.9 |      
|Total direct contract expenses |                                              |                                     | 267.2 |            |                               |   | 46.1          |              |      |   | 221.1         |               |       |                 | 196.4 |      |              |   | 19.5 |      |      |   | 176.9 |     
|                               | Major components of direct contract expense: |                                     |       |            |                               |   |               |              |      |   |               |               |       |                 |       |      |              |   |      |      |      |   |       |      |      
|                               |                                              | Direct labor cost                   |       |            | 152.5                         |   |               |              | 26.6 |   |               |               | 125.9 |                 |       |      | 120.0        |   |      |      | 8.1  |   |       |      | 111.9 | 
|                               |                                              | Other direct cost (ODC)             |       |            | 13.7                          |   |               |              | 2.9  |   |               |               | 10.8  |                 |       |      | 8.1          |   |      |      | 0.3  |   |       |      | 7.9   | 
|                               |                                              | Material and subcontract (M&S) cost |       |            | 101.0                         |   |               |              | 16.6 |   |               |               | 84.4  |                 |       |      | 68.3         |   |      |      | 11.1 |   |       |      | 57.1  | 
|Gross profit                   |                                              |                                     | 102.0 |            |                               |   | 19.2          |              |      |   | 82.8          |               |       |                 | 73.6  |      |              |   | 5.3  |      |      |   | 68.3  |     
|Total operating expense        |                                              |                                     | 104.1 |            |                               |   | 13.1          |              |      |   | 91.0          |               |       |                 | 73.7  |      |              |   | 4.4  |      |      |   | 69.3  |     
|                               | Major components of operating expense:       |                                     |       |            |                               |   |               |              |      |   |               |               |       |                 |       |      |              |   |      |      |      |   |       |      |      
|                               |                                              | Indirect personnel and facilities   |       |            | 41.6                          |   |               |              | 6.9  |   |               |               | 34.7  |                 |       |      | 28.6         |   |      |      | 2.2  |   |       |      | 26.4  | 
|                               |                                              | General and administrative          |       |            | 33.0                          |   |               |              | 2.9  |   |               |               | 30.1  |                 |       |      | 28.1         |   |      |      | 1.8  |   |       |      | 26.3  | 
|                               |                                              | Depreciation and amortization       |       |            | 17.8                          |   |               |              | 3.2  |   |               |               | 14.6  |                 |       |      | 13.4         |   |      |      | 0.3  |   |       |      | 13.1  | 
|                               |                                              | Stock-based compensation            |       |            | 10.6                          |   |               |              | 0.0  |   |               |               | 10.6  |                 |       |      | 2.5          |   |      |      | 0.0  |   |       |      | 2.5   | 
|Loss from operations           |                                              | $                                   | (2.1  | )          |                               | $ | 6.1           |              |      | $ | (8.2          | )             |       | $               | (0.2  | )    |              | $ | 0.9  |      |      | $ | (1.1  | )   






|  |                                                                                                                                                                                                                                                                                                                                             
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | For the years ended September 30, 2005 and 2004, the
    operations of the acquired entities, Countermeasures, METI, CATI
    and JJMA, and ITSC and IPS, respectively, have been fully
    integrated within Alion on a consolidated basis. The financial
    information attributed to these entities are the estimates of
    management.

Contract Revenues.


|  |  |                                                                        |  |   |              | 
|- |  | ---------------------------------------------------------------------- |  | - | ------------ | 
| |  | Revenue generated by the activities of acquired operations             |  | $ | 65.3 million | 
| |  | Revenue generated by the activities of the non-acquired
    operations |  | $ | 34.0 million | 
|  |  | Total:                                                                 |  | $ | 99.3 million | 



39



---



##### 





Direct Contract Expenses.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Direct labor costs for the year ended September 30, 2005
    increased by $32.5 million, or 27.1%, to
    $152.5 million from $120.0 million for the year ended
    September 30, 2004. As a percentage of revenue, direct
    labor cost was 41.3% for the year ended September 30, 2005
    as compared to 44.5% for the year ended September 30, 2004.
    The percentage decrease in direct labor cost is directly
    associated with the relative percentage increase in M&S cost
    associated with the increase in the percentage of M&S
    revenue, as described above.                                                                                                        
|
| |  | M&S cost increased approximately $32.7 million, or
    47.9%, to $101.0 million for the year ended
    September 30, 2005, compared to $68.3 million for the
    year ended September 30, 2004. As a percentage of revenue,
    M&S cost was 27.5% for the year ended September 30,
    2005 as compared to 25.3% for the year ended September 30,
    2004. The percentage increase in M&S cost is directly
    associated with the relative percentage increase in M&S cost
    associated with the contracts, as described above. As a
    percentage of M&S revenue, M&S cost was approximately
    98.3% and 97.2% for the years ended September 30, 2005 and
    2004, respectively.

Gross Profit.


|  |  |                                                                             |  |   |              | 
|- |  | --------------------------------------------------------------------------- |  | - | ------------ | 
| |  | Gross profit generated by the activities of the acquired
    operations     |  | $ | 19.2 million | 
| |  | Gross profit generated by the activities of the non-acquired
    operations |  | $ | 9.2 million  | 
|  |  | Total:                                                                      |  | $ | 28.4 million | 



40



---



##### 



Operating Expenses.


|  |  |                                                                             |  |   |               | 
|- |  | --------------------------------------------------------------------------- |  | - | ------------- | 
| |  | Operating expense incurred by the activities of the acquired
    operations |  | $ | 13.1  million | 
| |  | Operating expense incurred by activities of the non-acquired
    operations |  | $ | 17.3  million | 
|  |  | Total:                                                                      |  | $ | 30.4  million | 





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Stock-based compensation was approximately 2.9 and
    0.9 percentage points of revenue for the years ended
    September 30, 2005 and 2004, respectively. Stock-based
    compensation and deferred compensation relate primarily to the
    expense associated with the stock appreciation rights and
    phantom stock plans. Stock-based compensation increased
    approximately $8.1 million, or 324% to $10.6 million
    for the year ended September 30, 2005, from approximately
    $2.5 million for the year ended September 30, 2004.
    The increase in stock-based compensation and deferred
    compensation is a result of the increase in the value of
    Alions common stock and the increase in awards granted.                                                                                                                                                                                 
|
| |  | Operating expenses for indirect personnel and facilities costs
    related to rental and occupancy expenses increased approximately
    $13.0 million, or 45.4%, to $41.6 million for the year
    ended September 30, 2005, from $28.6 million for the
    year ended September 30, 2004. As a percentage of revenue,
    operating expenses relating to indirect personnel and facilities
    expense was 11.3% for the year ended September 30, 2005 as
    compared to 10.6% for the year ended September 30, 2004.
    The increase, as a percentage of revenue, is partially
    attributable to the increase in indirect labor costs associated
    with the integration activities of the CATI, METI and JJMA
    acquisitions. Management intends to reduce facility lease costs
    through efforts to sublet excess space which resulted from
    additional space acquired through the acquisition process.
|
| |  | General and administrative (G&A) expense increased
    approximately $4.9 million, or 17.4%, to $33.0 million
    for the year ended September 30, 2005, compared to
    $28.1 million for the year ended September 30, 2004.
    As a percentage of revenues, general and administrative expenses
    were 9.0% for the year ended September 30, 2005, compared
    to 10.4% for the year ended September 30, 2004. As a result
    of integrating the activities of CATI, METI and JJMA, the costs
    associated with providing G&A activities for the acquired
    operations have been partially absorbed by the existing G&A
    infrastructure, resulting in a decrease in expense expressed as
    a percentage of revenue.                                                                                                                                                                                    
|
| |  | Depreciation and amortization expense increased approximately
    $4.4 million, or 32.8%, to $17.8 million for the year
    ended September 30, 2005, as compared to $13.4 million
    for the year ended September 30, 2004. Depreciation is
    associated primarily with the value assigned to fixed assets
    while                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

41



---



##### 



| |  |                                                                                                                                                                                                                             
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | amortization expense is associated primarily with the intangible
    asset value assigned to the purchased contracts of the acquired
    entities. The $4.4 million increase is primarily
    attributable to the following:

|                                                 |         |               |     |      |      |   |     |      |      | 
|------------------------------------------------ | ------- | ------------- | --- | ---- | ---- | - | --- | ---- | ---- | 
|                                                 |         | Year Ended    |    
|                                                 |         | September 30, |    
|                                                 |         |               |    
|                                                 |         | 2005          |     |      | 2004 |  
|                                                 |         |               |     |      |      |  
|                                                 |         | (In millions) |    
|Depreciation expense                             |         | $             | 4.4 |      |      | $ | 2.8 |     
|Amortization expense for purchased contracts of: |         |               |     |      |      |   |     |     
|                                                 | - IITRI |               | $   | 10.2 |      |   | $   | 10.2 |     
|                                                 | - ITSC  |               | $   | 0.1  |      |   |     |     |     
|                                                 | - IPS   |               | $   | 0.5  |      |   | $   | 0.4  |     
|                                                 | - METI  |               | $   | 0.3  |      |   |     |     |     
|                                                 | - JJMA  |               | $   | 2.2  |      |   |     |     |     
|Amortization expense for non-compete agreements  |         | $             | 0.1 |      |      |   |    |     
|                                                 |         |               |     |      |      |  
|                                                 |         | Total         |     | $    | 17.8 |   |     | $    | 13.4 | 
|                                                 |         |               |     |      |      |  



Loss from Operations.


|  |  |                                                            |  |   |      |           
|- |  | ---------------------------------------------------------- |  | - | ---- | ----------
| |  | Operating income generated from the acquired operations    |  | $ | 6.1  | million   
| |  | Operating loss generated from the non-acquired operations* |  | $ | (8.0 | )  million
|  |  | Total:                                                     |  | $ | (1.9 | )  million






|  |                                                                                                                                                                            
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | For the year ended September 30, 2005, stock-based
    compensation expense of approximately $10.6 million was not
    attributed to the activities of acquired operations.

Other Income and Expense.


|                                               |       |               |      |      |      |   |     |      | 
|---------------------------------------------- | ----- | ------------- | ---- | ---- | ---- | - | --- | ---- | 
|                                               |       | Year Ended    |     
|                                               |       | September 30, |     
|                                               |       |               |     
|                                               |       | 2005          |      |      | 2004 |  
|                                               |       |               |      |      |      |  
|                                               |       | (In millions) |     
|Revolving facility                             |       | $             | 0.2  |      |      | $ | 0.8 |     
|Senior term loan                               |       |               | 6.9  |      |      |   | 3.1 |     
|Mezzanine Note - cash-pay interest             |       |               | 1.8  |      |      |   | 2.4 |     
|-
    accretion of debt discount               |       |               | 2.2  |      |      |   | 0.7 |     
|Subordinated note - PIK interest               |       |               | 2.3  |      |      |   | 2.4 |     
|-
    accretion of long-term deferred interest |       |               | 0.6  |      |      |   | 0.4 |     
|-
    accretion of debt discount               |       |               | 0.9  |      |      |   | 0.8 |     
|Agreements with officers                       |       |               | 0.0  |      |      |   | 0.2 |     
|Accretion of warrants(a)                       |       |               | 23.5 |      |      |   | 5.9 |     
|Other                                          |       |               | 0.3  |      |      |   | 0.1 |     
|                                               |       |               |      |      |      |  
|                                               | Total |               | $    | 38.7 |      |   | $   | 16.8 | 
|                                               |       |               |      |      |      |  

42



---



##### 








|    |                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Reflects change in value assigned to the detachable warrants
    associated with Mezzanine and Subordinated notes based on the
    change in the value of Alion common stock.



Income Tax (Expense) Benefit.


Net Loss.




| |                                                                                      
| | -------------------------------------------------------------------------------------
| | Year Ended September 30, 2004 Compared to Pro Forma
    Year Ended September 30, 2003





| |   |                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On February 13, 2004, we completed the acquisition of ITSC,
    a provider of nuclear safety and analysis services to the
    U.S. Department of Energy (DOE) as well as to the
    commercial nuclear power industry.

43



---



##### 





| |   |                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On October 31, 2003, we completed the acquisition of IPS a
    provider of program and acquisition management, integrated
    logistics support, and foreign military support primarily to
    U.S. Navy customers.

|                                 |                                              |                                       |         |                |                |   |        |                |        |   |               |   |         |   |         |   |         | 
|-------------------------------- | -------------------------------------------- | ------------------------------------- | ------- | -------------- | -------------- | - | ------ | -------------- | ------ | - | ------------- | - | ------- | - | ------- | - | ------- | 
|                                 |                                              |                                       |         | Pro Forma      |               
|                                 |                                              | Year Ended September 30, 2004         |         |                | Year Ended     |  
|                                 |                                              |                                       |         |                | September 30,  |  
|                                 |                                              |                                       |         | Consolidated   |                |   | 2003   |               
|                                 |                                              |                                       |         | Operations of  |                |   |        |               
|                                 |                                              | Consolidated                          |         |                | Acquired       |   |        | Alion Less the |        |   | Consolidated  |  
|                                 |                                              | Operations of                         |         |                | Operations     |   |        | Acquired       |        |   | Operations of |  
|Financial Information            |                                              | Alion                                 |         |                | (ITSC and IPS) |   |        | Operations     |        |   | Alion         |  
|                                 |                                              |                                       |         |                |                |   |        |                |        |   |               |  
|                                 |                                              |                                       |         | (In thousands) |               
|                                 |                                              | (In thousands)                        |         |                |               
|Total revenue                    |                                              | $                                     | 269,940 |                |                | $ | 28,359 |                |        | $ | 241,581       |   |         | $ | 213,182 |  
|Material and subcontract revenue |                                              |                                       | 70,328  |                |                |   | 11,465 |                |        |   | 58,863        |   |         |   | 43,391  |  
|Total direct contract expenses   |                                              |                                       | 196,388 |                |                |   | 19,488 |                |        |   | 176,900       |   |         |   | 155,214 |  
|                                 | Major components of direct contract expense: |                                       |         |                |                |   |        |                |        |   |               |   |         |   |         |   |        
|                                 |                                              | Direct labor cost                     |         |                | 119,999        |   |        |                | 8,106  |   |               |   | 111,894 |   |         |   | 105,469 | 
|                                 |                                              | Other direct cost (ODC)               |         |                | 8,109          |   |        |                | 252    |   |               |   | 7,857   |   |         |   | 7,617   | 
|                                 |                                              | Material and subcontract (M&S) cost   |         |                | 68,280         |   |        |                | 11,131 |   |               |   | 57,149  |   |         |   | 42,128  | 
|Gross profit                     |                                              |                                       | 73,552  |                |                |   | 5,296  |                |        |   | 68,256        |   |         |   | 57,968  |  
|Total operating expense          |                                              |                                       | 73,703  |                |                |   | 4,372  |                |        |   | 69,331        |   |         |   | 64,842  |  
|                                 | Major components of operating expense:       |                                       |         |                |                |   |        |                |        |   |               |   |         |   |         |   |        
|                                 |                                              | Indirect personnel and facilities     |         |                | 28,637         |   |        |                | 2,206  |   |               |   | 26,431  |   |         |   | 20,346  | 
|                                 |                                              | Non-recurring Transaction expense     |         |                |               |   |        |                |       |   |               |   |        |   |         |   | 6,726   | 
|                                 |                                              | General and administrative            |         |                | 28,116         |   |        |                | 1,850  |   |               |   | 26,266  |   |         |   | 24,670  | 
|                                 |                                              | Stock-based and deferred compensation |         |                | 2,513          |   |        |                |       |   |               |   | 2,513   |   |         |   | 856     | 
|                                 |                                              | Depreciation and amortization         |         |                | 13,448         |   |        |                | 317    |   |               |   | 13,131  |   |         |   | 12,436  | 
|Income (loss) from operations    |                                              | $                                     | (151    | )              |                | $ | 924    |                |        | $ | (1,075        | ) |         | $ | (6,874  | )






|  |                                                                                                                                                                                                                            
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | 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.

Contract Revenues.


|  |  |                                                                                                                        |  |   |              | 
|- |  | ---------------------------------------------------------------------------------------------------------------------- |  | - | ------------ | 
| |  | Revenue generated by the activities of acquired operations                                                             |  | $ | 28.3 million | 
| |  | Revenue generated primarily by work performed under Company
    contracts that were in existence during the prior year |  | $ | 28.4 million | 
|  |  | Total:                                                                                                                 |  | $ | 56.7 million | 





44



---



##### 





Direct Contract Expenses.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Direct labor costs for the year ended September 30, 2004
    increased by $14.5 million, or 13.8%, to
    $120.0 million from $105.5 million for the year ended
    September 30, 2003. As a percentage of revenue, direct
    labor cost was 44.5% for the year ended September 30, 2004
    as compared to 49.5% for the year ended September 30, 2003.
    The percentage decrease in direct labor cost is directly
    associated with the relative percentage increase in M&S cost
    associated with the M&S revenue of the acquired operations,
    as described above.                                                                                                         
|
| |  | M&S cost increased approximately $26.2 million, or
    62.1%, to $68.3 million for the year ended
    September 30, 2004, compared to $42.1 million for the
    year ended September 30, 2003. As a percentage of revenue,
    M&S cost was 25.3% for the year ended September 30,
    2004 as compared to 19.8% for the year ended September 30,
    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 97.1% during the years ended September 30,
    2004 and 2003.

Gross Profit.


|  |  |                                                                                                                             |  |   |              | 
|- |  | --------------------------------------------------------------------------------------------------------------------------- |  | - | ------------ | 
| |  | Gross profit generated by the activities of the acquired
    operations                                                     |  | $ | 5.3 million  | 
| |  | Gross profit generated primarily by work performed under Company
    contracts that were in existence during the prior year |  | $ | 10.3 million | 
|  |  | Total:                                                                                                                      |  | $ | 15.6 million | 



Operating Expenses.


|  |  |                                                                                                                 |  |   |               | 
|- |  | --------------------------------------------------------------------------------------------------------------- |  | - | ------------- | 
| |  | Operating expense incurred by the activities of the acquired
    operations                                     |  | $ | 4.4 million   | 
| |  | Operating expense incurred for the infrastructure needs in
    support of revenue growth of existing operations |  | $ | 11.2  million | 
|  |  | Total:                                                                                                          |  | $ | 15.6  million | 

45



---



##### 







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Overhead expenses for indirect personnel and facilities costs
    related to rental and occupancy expenses increased approximately
    $8.3 million, or 40.8%, to $28.6 million for the year
    ended September 30, 2004, from $20.3 million for the
    year ended September 30, 2003. As a percentage of revenue,
    operating expense relating to indirect personnel and facilities
    expense was 10.6% for the year ended September 30, 2004 as
    compared to 9.5% for the year ended September 30, 2003. The
    increase, as a percentage of revenue, is partially attributable
    to the increase in indirect labor costs associated with the
    integration activities of the ITSC and IPS acquisitions.                                                                   
|
| |  | General and administrative (G&A) expense increased
    approximately $3.6 million, or 14.1%, to $28.1 million
    for the year ended September 30, 2004, compared to
    $24.7 million for the year ended September 30, 2003.
    As a percentage of revenues, general and administrative expenses
    were 10.4% for the year ended September 30, 2004, compared
    to 11.6% for the year ended September 30, 2003. As a result
    of integrating the activities of ITSC and IPS, the costs
    associated with providing G&A activities for the acquired
    operations have been partially absorbed by the existing G&A
    infrastructure, resulting in a decrease in expense expressed as
    a percentage of revenue.                                                              
|
| |  | Stock-based compensation and deferred compensation relate
    primarily to the expense associated with the SAR and phantom
    stock plans. Stock-based compensation increased approximately
    $1.6 million, or 178% to $2.5 million for year ended
    September 30, 2004, from approximately $0.9 million
    for the year ended September 30, 2003. As a percentage of
    revenue, operating expense relating to stock-based compensation
    and deferred compensation expense was 0.9% for the year ended
    September 30, 2004 as compared to 0.4% for the year ended
    September 30, 2003. The increase in stock-based
    compensation and deferred compensation is a result of the
    increase in the value of Alions common stock and the
    increase in awards granted.
|
| |  | Non-recurring Transaction-related expenses (e.g., third party
    legal, accounting, and finance) was not incurred during the year
    ended September 30, 2004. For the year ended
    September 30, 2003, Transaction-related expenses were
    approximately $6.7 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Depreciation and amortization expense increased approximately
    $1.0 million, or 8.1%, to $13.4 million for the year
    ended September 30, 2004, as compared to $12.4 million
    for the year ended September 30, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Bad debt expense increased $1.0 million to
    $0.6 million for the year ended September 30, 2004 as
    compared to a recovery of $0.4 million for the year ended
    September 30, 2003. During the year ended
    September 30, 2003, approximately $0.5 million of cash
    was received due to the favorable resolution of a contractual
    dispute. As a percentage of revenue, bad debt expense was 0.2%
    for the year ended September 30, 2004 as compared to a
    recovery of 0.2% for the year ended September 30, 2003.

46



---



##### 



Loss from Operations.


|  |  |                                                                               |  |   |              | 
|- |  | ----------------------------------------------------------------------------- |  | - | ------------ | 
| |  | Operating income generated from the activities of the acquired
    operations |  | $ | 0.9  million | 
| |  | Decrease in operating loss generated from the existing operations             |  | $ | 5.8  million | 
|  |  | Total:                                                                        |  | $ | 6.7  million | 

Other Income and Expense.


|                                               |       |                |     |      |      |   |     |      | 
|---------------------------------------------- | ----- | -------------- | --- | ---- | ---- | - | --- | ---- | 
|                                               |       | For Year Ended |    
|                                               |       | September 30,  |    
|                                               |       |                |    
|                                               |       | 2004           |     |      | 2003 |  
|                                               |       |                |     |      |      |  
|                                               |       | (In millions)  |    
|Revolving debt                                 |       | $              | 0.8 |      |      | $ | 0.3 |     
|Senior term note                               |       |                | 3.1 |      |      |   | 2.4 |     
|Mezzanine note - stated 12% interest           |       |                | 2.4 |      |      |   | 2.4 |     
|-
    accretion of debt discount               |       |                | 0.7 |      |      |   | 1.7 |     
|Subordinated note - stated PIK interest        |       |                | 2.4 |      |      |   | 2.5 |     
|-
    accretion of long term deferred interest |       |                | 0.4 |      |      |   | 0.2 |     
|-
    accretion of debt discount               |       |                | 0.8 |      |      |   | 3.3 |     
|Promissory notes with officers                 |       |                | 0.2 |      |      |   | 0.0 |     
|Warrants                                       |       |                | 5.9 |      |      |   | 0.7 |     
|Other                                          |       |                | 0.1 |      |      |   | 0.4 |     
|                                               |       |                |     |      |      |  
|                                               | Total |                | $   | 16.8 |      |   | $   | 13.9 | 
|                                               |       |                |     |      |      |  






|    |                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Reflects change in value assigned to the detachable warrants
    associated with the change in the value of Alion common stock.
    The warrants are associated with the Mezzanine and Subordinated
    notes.



Income Tax (Expense) Benefit.


Net Loss.


Liquidity and Capital Resources




47



---



##### 













| |                             
| | ----------------------------
| | Discussion of Debt Structure



48



---



##### 





Term B Senior Credit Facility.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a senior term loan in the approximate amount of
    $143.3 million, (which includes the incremental term loan),
    of which $142.9 million was drawn down as of
    September 30, 2005;                                                                                                                                                                                                                                                          
|
| |  | a senior revolving credit facility, in the amount of
    $30.0 million, of which approximately $3.0 million was
    deemed borrowed as of September 30, 2005, through the
    issuance of letters of credit issued under the Companys
    prior senior credit facility which remain outstanding under the
    Term B Senior Credit Facility and the issuance of additional
    letters of credit under the Term B Senior Credit
    Facility; and
|
| |  | an uncommitted incremental term loan accordion
    facility in the amount of $150.0 million.                                                                                                                                                                                                                                                                                                                                                    











49



---



##### 





Use of Proceeds.




Security.


Interest and Fees.


50



---



##### 



Eurodollar Prime Rate


|               |                                                                  |                   |     |  |                   |  |     |                   |  |  |     |  | 
|-------------- | ---------------------------------------------------------------- | ----------------- | --- |  | ----------------- |  | --- | ----------------- |  |  | --- |  | 
|               |                                                                  | Spread            |     |  | ABR Spread        |  |     | ABR Spread        | 
|Leverage Ratio |                                                                  | (In basis points) |     |  | (In basis points) |  |     | (In basis points) | 
|               |                                                                  |                   |     |  |                   |  |     |                   | 
|Category 1     |                                                                  |                   | 275 |  |                   |  | 225 |                   |  |  | 175 | 
|               | Greater than or equal to 3.00 to 1.00                            |                   |     |  |                   |  |     |                   |  |  |     |  | 
|Category 2     |                                                                  |                   | 250 |  |                   |  | 200 |                   |  |  | 150 | 
|               | Greater than or equal to 2.50 to 1.00 but less than 3.00 to 1.00 |                   |     |  |                   |  |     |                   |  |  |     |  | 
|Category 3     |                                                                  |                   | 225 |  |                   |  | 175 |                   |  |  | 125 | 
|               | Greater than or equal to 2.00 to 1.00 but less than 2.50 to 1.00 |                   |     |  |                   |  |     |                   |  |  |     |  | 
|Category 4     |                                                                  |                   | 200 |  |                   |  | 150 |                   |  |  | 100 | 
|               | Less than 2.00 to 1.00                                           |                   |     |  |                   |  |     |                   |  |  |     |  | 













51



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##### 









Covenants.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Leverage Ratio. The Companys leverage ratio is
    calculated by dividing the total outstanding amount of all of
    the Companys consolidated indebtedness, but excluding the
    amount owed under the Companys subordinated note and the
    aggregate amount of letters of credit issued on the
    Companys behalf other than drawings which have not been
    reimbursed, by the Companys consolidated EBITDA for the
    previous four fiscal quarters on a rolling basis. The maximum
    total leverage ratio is measured as of the end of each of our
    fiscal quarters. For purposes of determining the Companys
    leverage ratio as of or for the quarters ended on
    September 30, 2004, December 31, 2004 and
    March 31, 2005, the Term B Senior Credit Facility deems the
    Companys consolidated EBITDA to be $7.5 million for
    the fiscal quarter ended December 31, 2003,
    $7.0 million for the fiscal quarter ended March 31,
    2004, and $7.7 million for the fiscal quarter ended
    June 30, respectively. For each of the following time
    periods, the Company is required to maintain a maximum leverage
    ratio not greater than the following:

|                                        |  |       |              | 
|--------------------------------------- |  | ----- | ------------ | 
|Period                                  |  | Ratio |             
|                                        |  |       |             
|April 1, 2005 through December 31, 2005 |  |       | 3.75 to 1.00 | 
|January 1, 2006 through March 31, 2006  |  |       | 3.50 to 1.00 | 
|April 1, 2006 through March 31, 2007    |  |       | 3.25 to 1.00 | 
|April 1, 2007 through March 31, 2008    |  |       | 2.75 to 1.00 | 
|Thereafter                              |  |       | 2.25 to 1.00 | 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Interest Coverage Ratio. The Companys interest
    coverage ratio is calculated by dividing the Companys
    consolidated EBITDA, less amounts the Company spends
    attributable to property, plant, equipment and other fixed
    assets, by the Companys consolidated interest expense. For
    purposes of determining the Companys interest coverage
    ratio as of or for the quarters ended on September 30,
    2004, December 31, 2004 and March 31, 2005, the Term B
    Senior Credit Facility deems the Companys consolidated
    EBITDA to be $7.5 million for the fiscal quarter ended
    December 31, 2003, $7.0 million for the fiscal quarter
    ended March 31, 2004, and $7.7 million for the fiscal
    quarter ended June 30, 2004. The Company is required to
    maintain a minimum fixed charge coverage ratio of at least the
    following:

|                                          |  |       |              | 
|----------------------------------------- |  | ----- | ------------ | 
|Date or Period                            |  | Ratio |             
|                                          |  |       |             
|August 2, 2004 through September 30, 2005 |  |       | 3.75 to 1.00 | 
|Thereafter                                |  |       | 4.00 to 1.00 | 

52



---



##### 







| |   |                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | incur additional indebtedness other than permitted additional
    indebtedness;                                                                                                                                                                                                                          
|
| |  | consolidate, merge or sell all or substantially all of the
    Companys assets;                                                                                                                                                                                                                         
|
| |  | make certain loans and investments including acquisitions of
    businesses, other than permitted acquisitions;                                                                                                                                                                                          
|
| |  | pay dividends or distributions other than distributions needed
    for the ESOP to satisfy its repurchase obligations, for the
    Company to satisfy any put right if exercised by mezzanine
    warrant holders and for certain payments required under the
    Companys equity based incentive plans;
|
| |  | enter into transactions with the Companys shareholders and
    affiliates;                                                                                                                                                                                                                              
|
| |  | enter into certain transactions not permitted under ERISA;                                                                                                                                                                                                                                               
|
| |  | grant certain liens and security interests;                                                                                                                                                                                                                                                              
|
| |  | enter into sale and leaseback transactions;                                                                                                                                                                                                                                                              
|
| |  | change lines of business;                                                                                                                                                                                                                                                                                
|
| |  | repay subordinated indebtedness and redeem or repurchase certain
    equity; or                                                                                                                                                                                                                          
|
| |  | use the proceeds of the Companys borrowings other than as
    permitted by the Term B Senior Credit Facility.                                                                                                                                                                                           

Events of Default.




| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | payment default;                                                                                                 
|
| |  | breach of representations and warranties;                                                                        
|
| |  | uncured covenant breaches;                                                                                       
|
| |  | default under certain other debt exceeding an agreed amount;                                                     
|
| |  | bankruptcy and insolvency events;                                                                                
|
| |  | notice of debarment, suspension or termination under a material
    government contract;                         
|
| |  | certain ERISA violations;                                                                                        
|
| |  | unstayed judgments in excess of an agreed amount;                                                                
|
| |  | failure of the subordinated note to be subordinated to the Term
    B Senior Credit Facility;                    
|
| |  | failure of the guarantee of the Term B Senior Credit Facility to
    be in effect;                               
|
| |  | failure of the security interests to be valid, perfected first
    priority security interests in the collateral;
|
| |  | failure of the Company to remain an S-corporation;                                                               
|
| |  | the Trust is subject to certain taxes in excess of an agreed
    amount;                                         
|
| |  | final negative determination that the ESOP is not a qualified
    plan; or                                       
|
| |  | change of control (as defined below).                                                                            



53



---



##### 





Senior Credit Agreement.










Mezzanine Note.






54



---



##### 



Subordinated Note. (paid-in


Warrants.








Other Notes and Agreements.




55



---



##### 







|                               |                |                      |       |        |      |  |        |        |  |  |        |        |  |      |         |         |  |  |        |        | 
|------------------------------ | -------------- | -------------------- | ----- | ------ | ---- |  | ------ | ------ |  |  | ------ | ------ |  | ---- | ------- | ------- |  |  | ------ | ------ | 
|                               |                | 5-Fiscal Year Period |      
|                               |                |                      |      
|                               |                | 2006                 |       |        | 2007 |  |        | 2008   |  |  | 2009   |        |  | 2010 |        
|                               |                |                      |       |        |      |  |        |        |  |  |        |        |  |      |        
|                               |                | ($ In thousands)     |      
|Bank revolving credit facility |                |                      |       |        |      |  |        |        |  |  |        |        |  |      |         |         |  |  |        |       
|                               | - Interest(1)  |                      | $     | 150    |      |  | $      | 150    |  |  | $      | 150    |  |      | $       | 150     |  |  | $      |       | 
|Senior Secured Term B Loan     |                |                      |       |        |      |  |        |        |  |  |        |        |  |      |         |         |  |  |        |       
|                               | - Interest(2)  |                      |       | 9,775  |      |  |        | 9,902  |  |  |        | 9,938  |  |      |         | 5,068   |  |  |        |       | 
|                               | - Principal(3) |                      |       | 1,440  |      |  |        | 1,440  |  |  |        | 1,440  |  |      |         | 138,600 |  |  |        |       | 
|Subordinated note              |                |                      |       |        |      |  |        |        |  |  |        |        |  |      |         |         |  |  |        |       
|                               | - Interest(4)  |                      |       |       |      |  |        |       |  |  |        |       |  |      |         | 6,384   |  |  |        | 3,192  | 
|                               | - Principal(4) |                      |       |       |      |  |        |       |  |  |        |       |  |      |         | 27,132  |  |  |        | 27,132 | 
|                               |                |                      |       |        |      |  |        |        |  |  |        |        |  |      |        
|Total cash  Pay interest      |                |                      | 9,925 |        |      |  | 10,052 |        |  |  | 10,088 |        |  |      | 11,602  |         |  |  |       |       
|Total cash  Pay principal     |                |                      | 1,440 |        |      |  | 1,440  |        |  |  | 1,440  |        |  |      | 165,732 |         |  |  | 27,132 |       
|                               |                |                      |       |        |      |  |        |        |  |  |        |        |  |      |        
|                               | Total          |                      | $     | 11,365 |      |  | $      | 11,492 |  |  | $      | 11,528 |  |      | $       | 177,334 |  |  | $      | 30,324 | 
|                               |                |                      |       |        |      |  |        |        |  |  |        |        |  |      |        






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We anticipate accessing, from time to time, our
    $30.0 million bank revolving credit facility to finance our
    ongoing working capital needs. The term of the revolving credit
    facility is five years. For the fiscal years 2006 through 2009,
    we anticipate the balance drawn on the revolving credit facility
    to be minimal. The interest expense value includes an estimate
    for the unused balance fee on the $30.0 million revolving
    credit facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(2) | The projected average annual balance which we estimate will be
    drawn under the Senior Secured Term B Loan is as follows:
    $141.8 million, $140.4 million, $139.0 million,
    $69.9 million, and $0.0 million for fiscal years
    ending September 30, 2006, 2007, 2008, 2009, and 2010,
    respectively. 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
    and, therefore, interest expense would continue at levels
    similar to those set forth for prior years. Based on an
    estimated LIBOR rate plus the CSFB Eurodollar spread, the
    effective annual interest rate for fiscal years 2006, 2007,
    2008, 2009 and 2010 is estimated to be approximately 7.2%, 7.1%,
    7.2%, 7.4% and 7.8% respectively. The effective interest rate
    takes into account the interest rate cap agreements which limit
    the interest rate we will pay on a portion, but not all, of the
    outstanding principal balance of the Term B Senior Credit
    Facility. The current cap agreements expire in September 2007.
    Outstanding principal balances not under the cap agreements have
    interest expense based on the Eurodollar rate. The term of the
    Senior Secured Term B Loan is five years. The approximate impact
    of a 1% increase in the interest rate, as applied to principal
    balances drawn under the Senior Secured Term B Loan not covered
    by the current interest rate cap agreements would be
    $0.8 million, $0.8 million, $1.4 million,
    $0.7 million, and $0.0 million for the fiscal years
    ending September 30, 2006, 2007, 2008, 2009 and 2010,
    respectively. The estimated interest expense value includes an
    estimate for the commitment fee on the Senior Secured Term B
    Loan.
|   
|(3) | The Term B senior credit facility requires us to repay
    1 percent of the principal balance outstanding under the
    senior term loan during the first four years (i.e. fiscal years
    2005 through 2008) of its term and 96 percent of the
    principal balance outstanding during the fifth and final year
    (i.e. 2009) of the term. The table reflects the balance drawn of
    $142.9 as of September 30, 2005, resulting in expected
    annual principal payments of approximately $1.4 million in
    each of fiscal years 2006, 2007, and 2008. During the fifth
    year, or 2009, we are scheduled to pay principal in the amount
    of $138.6 million. The Term B Senior Credit Facility also
    requires us to make mandatory prepayments of principal depending
    upon whether we                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

56



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##### 



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | 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 September 30, 2005, no mandatory
    prepayments are due.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(4) | Interest expense on the subordinated note during the four fiscal
    years from 2005 to 2008 is 6% simple interest,
    paid-in-kind by the
    issuance of the PIK notes. These interest amounts accrue to
    principal increasing the principal value of the subordinated
    note. PIK notes do not bear interest. Interest obligations paid
    by issuance of the PIK notes will not be compounded. In the
    years 2005 through 2008, the PIK interest on the Subordinated
    Note will be approximately $2.4 million in each year.
    During the eight-year term of the Subordinated Note,
    approximately $14.2 million of principal accretes to the
    note through the PIK notes. 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 on the
    original principal of $39.9 million. The principal,
    together with the outstanding balance of the PIK notes, will be
    paid in equal amounts at the end of fiscal years 2009 and 2010.

Other Obligations.




| |          
| | ---------
| | Earn-outs





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | AB Technologies (AB Tech)  Earn-out is based on an
    agreed-upon formula applied to net income of the business units
    that formerly comprised AB Tech. The earn-out obligation period
    expired on February 7, 2005, the fifth anniversary of the
    original acquisition date. As of September 30, 2005,
    approximately $1.4 million of earn-out has been recorded
    for fiscal year 2005. As of September 30, 2005, the maximum
    earn-out obligation of $11.5 million has been recorded from
    inception to date. On July 22, 2005, the Company settled
    the ongoing dispute between the Company and AB Tech. Under the
    terms of the settlement, the Company paid $3.4 million to the
    former shareholders of AB Tech in July 2005, and has a remaining
    obligation to pay $0.7 million to the former shareholders
    of AB Tech within fifteen days following the date that the
    Companys fiscal 2005 year-end audited financial
    statement report by the Companys auditor is issued and
    made publicly available by the Company.
|
| | ITSC  Earn-out is based on a portion of the gross
    revenue of the business units that formerly comprised ITSC. The
    Company has a maximum earn-out provision
    not-to-exceed
    $2.5 million. As of September 30, 2005, approximately
    $1.8 million of earn-out has been recorded from the date of
    the acquisition, of which approximately $1.5 million was
    recorded in fiscal year 2005. The obligation continues through
    December 31, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | CATI  Earn-out is based on the performance of the
    business units that formerly comprised CATI. The Company has a
    maximum earn-out provision
    not-to-exceed a
    cumulative amount of $9.0 million based on attaining
    certain revenue goals for fiscal years 2005, 2006, and 2007, and
    the Company has a second earn-out provision
    not-to-exceed a maximum
    of $1.5 million for attaining certain revenue goals in the
    commercial aviation industry. As of September 30, 2005, no
    earn-out obligation has been recorded for fiscal year 2005. The
    obligation continues through February 25, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                        



| |               
| | --------------
| | Lease payments



57



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##### 





| |                                  
| | ---------------------------------
| | Repurchase obligations under KSOP



Repurchase obligations under the KSOP


|               |  |                  |         |  |             |   |             |           |  |   |           | 
|-------------- |  | ---------------- | ------- |  | ----------- | - | ----------- | --------- |  | - | --------- | 
|               |  | Number of Shares |         |  |             |   | Total Value |          
|Date           |  | Repurchased      |         |  | Share Price |   |             | Purchased | 
|               |  |                  |         |  |             |   |             |           | 
|June 2003      |  |                  | 5,248   |  |             | $ | 11.13       |           |  | $ | 58,412    | 
|July 2003      |  |                  | 2,696   |  |             | $ | 11.13       |           |  | $ | 30,000    | 
|December 2003  |  |                  | 50,031  |  |             | $ | 14.71       |           |  | $ | 735,956   | 
|May 2004       |  |                  | 117     |  |             | $ | 16.56       |           |  | $ | 1,945     | 
|June 2004      |  |                  | 727     |  |             | $ | 16.56       |           |  | $ | 12,039    | 
|June 2004      |  |                  | 743     |  |             | $ | 16.56       |           |  | $ | 12,297    | 
|July 2004      |  |                  | 48,309  |  |             | $ | 16.56       |           |  | $ | 799,997   | 
|December 2004  |  |                  | 46,816  |  |             | $ | 19.94       |           |  | $ | 933,505   | 
|March 2005     |  |                  | 5,691   |  |             | $ | 19.94       |           |  | $ | 113,486   | 
|June 2005      |  |                  | 45,846  |  |             | $ | 29.81       |           |  | $ | 1,366,674 | 
|August 2005    |  |                  | 1,090   |  |             | $ | 33.78       |           |  | $ | 36,803    | 
|September 2005 |  |                  | 170,657 |  |             | $ | 33.78       |           |  | $ | 5,764,784 | 

Other contingent obligations which will impact the
Companys cash




| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | 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 deferred compensation programs for
    senior managers.                   







58



---



##### 





Contract performance  Joint Spectrum Center
Contract




Summary of Critical Accounting Policies




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





percentage-of








59



---



##### 



Accounting for Performance on
Construction-Type and Certain Production-Type Contracts.




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



Business Combinations.






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

Share-Based Payment, a revision of
SFAS No. 12 Accounting
for Stock Issued to Employees.


Accounting for Conditional Asset Retirement
Obligations  an Interpretation of FASB Statement
No. 143.


60



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##### 



Contractual Obligations




|                         |                   |                               |   |         |         |  |   |           |        |  |           |         |         |                |   |        |        |  |   |   |   | 
|------------------------ | ----------------- | ----------------------------- | - | ------- | ------- |  | - | --------- | ------ |  | --------- | ------- | ------- | -------------- | - | ------ | ------ |  | - | - | - | 
|                         |                   | Payments Due by Fiscal Year  
|                         |                   |                              
|                         |                   | Total                         |   |         | 2006    |  |   | 2007-2009 |        |  | 2010-2011 |         |         | 2012 and After
|                         |                   |                               |   |         |         |  |   |           |        |  |           |         |         |               
|                         |                   | (In thousands)               
|Contractual Obligations: |                   |                               |   |         |         |  |   |           |        |  |           |         |         |                |   |        |        |  |   |  
|                         | Long-term debt(1) |                               | $ | 242,043 |         |  | $ | 11,365    |        |  | $         | 200,354 |         |                | $ | 30,324 |        |  | $ |  |  
|                         | Lease Obligations |                               |   | 75,821  |         |  |   | 19,035    |        |  |           | 44,405  |         |                |   | 12,381 |        |  | $ |  |  
|                         |                   |                               |   |         |         |  |   |           |        |  |           |         |         |                |  
|                         |                   | Total contractual obligations |   | $       | 317,864 |  |   | $         | 30,400 |  |           | $       | 244,759 |                |   | $      | 42,705 |  |   | $ |  | 
|                         |                   |                               |   |         |         |  |   |           |        |  |           |         |         |                |  






|    |                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes interest payments and forecasted debt obligations.
    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.

Off-Balance Sheet Financing Arrangements









|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7a. | Quantitative and Qualitative Disclosures About Market
    Risk

Interest rate risk




61



---



##### 







Foreign currency risk




Risk associated with value of Alion common stock






| |   |                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------
| |  | Obligations related to the holders put rights associated
    with the Mezzanine Note warrants; and
|
| |  | Obligations related to the holders put rights associated
    with the Subordinated Note warrants. 







62



---



##### 








|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS


|                                                                                         |                                                                                                                                                 |     |    
|---------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | --- | ---
|Consolidated Financial Statements of Alion Science and
    Technology Corporation        |                                                                                                                                                 |    
|Report of Independent Registered Public
    Accounting Firm                              |                                                                                                                                                 | 64 
|Consolidated Financial Statements:                                                       |                                                                                                                                                 |    
|                                                                                         | Consolidated Balance Sheets as of
    September 30, 2005 and 2004                                                                               |     | 65 
|                                                                                         | Consolidated Statements of Operations for
    the years ended September 30, 2005, 2004 and 2003                                                 |     | 66 
|                                                                                         | Consolidated Statements of
    Shareholders Equity (Deficit), Subject to Redemption, for
    the years ended September 30, 2005, 2004 and 2003 |     | 67 
|                                                                                         | Consolidated Statements of Cash Flows for
    the years ended September 30, 2005, 2004 and 2003                                                 |     | 68 
|                                                                                         | Notes to Consolidated Financial
    Statements                                                                                                  |     | 70 
|Consolidated Financial Statement Schedule                                                |                                                                                                                                                 |    
|                                                                                         | Schedule II  Valuation and
    Qualifying Accounts                                                                                             |     | 95 
|Consolidated Financial Statements of Selected Operations
    of IIT Research Corporation |                                                                                                                                                 |    
|Report of Independent Auditors
    Report                                               |                                                                                                                                                 | 97 
|Consolidated Financial Statements:                                                       |                                                                                                                                                 |    
|                                                                                         | Consolidated Balance Sheets as of
    September 30, 2002 and 2001                                                                               |     | 98 
|                                                                                         | Consolidated Statements of Income for the
    years ended September 30, 2002, 2001, and 2000                                                    |     | 99 
|                                                                                         | Consolidated Statements of Changes in
    Owners Net Investment for the years ended
    September 30, 2002, 2001, and 2000                     |     | 100
|                                                                                         | Consolidated Statements of Cash Flows for
    the years ended September 30, 2002, 2001, and 2000                                                |     | 101
|Notes to Consolidated Financial
    Statements                                           |                                                                                                                                                 | 102

63



---



##### 






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM














| |             
| | ------------
| | /s/ KPMG LLP





64



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##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION





CONSOLIDATED BALANCE SHEETS


|                                                                          |                                                                                                                                                                                                                                                                    |                                                                       |                                                   |         |         |         |        |         |         |         | 
|------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------- | ------------------------------------------------- | ------- | ------- | ------- | ------ | ------- | ------- | ------- | 
|                                                                          |                                                                                                                                                                                                                                                                    | September 30,                                                         |                                                  
|                                                                          |                                                                                                                                                                                                                                                                    |                                                                       |                                                  
|                                                                          |                                                                                                                                                                                                                                                                    | 2005                                                                  |                                                   |         | 2004    |        
|                                                                          |                                                                                                                                                                                                                                                                    |                                                                       |                                                   |         |         |        
|                                                                          |                                                                                                                                                                                                                                                                    | (In thousands, except                                                 |                                                  
|                                                                          |                                                                                                                                                                                                                                                                    | share and per share                                                   |                                                  
|                                                                          |                                                                                                                                                                                                                                                                    | information)                                                          |                                                  
|Current assets:                                                           |                                                                                                                                                                                                                                                                    |                                                                       |                                                   |         |         |         |        |        
|                                                                          | Cash and cash equivalents                                                                                                                                                                                                                                          |                                                                       | $                                                 | 37,778  |         |         | $      | 4,717   |        
|                                                                          | Accounts receivable, less allowance of $3,539 and $2,896 at
    September 30, 2005 and September 30, 2004, respectively                                                                                                                                            |                                                                       |                                                   | 80,898  |         |         |        | 68,949  |        
|                                                                          | Stock subscriptions receivable                                                                                                                                                                                                                                     |                                                                       |                                                   | 1,733   |         |         |        | 1,556   |        
|                                                                          | Prepaid expenses                                                                                                                                                                                                                                                   |                                                                       |                                                   | 1,944   |         |         |        | 1,333   |        
|                                                                          | Other current assets                                                                                                                                                                                                                                               |                                                                       |                                                   | 2,802   |         |         |        | 1,008   |        
|                                                                          |                                                                                                                                                                                                                                                                    |                                                                       |                                                   |         |         |        
|                                                                          |                                                                                                                                                                                                                                                                    |                                                                       | Total current assets                              |         |         | 125,155 |        |         |         | 77,563  | 
|Property, plant and equipment, net                                        |                                                                                                                                                                                                                                                                    |                                                                       | 11,174                                            |         |         |         | 10,778 |        
|Intangible assets, net                                                    |                                                                                                                                                                                                                                                                    |                                                                       | 30,198                                            |         |         |         | 13,618 |        
|Goodwill                                                                  |                                                                                                                                                                                                                                                                    |                                                                       | 163,419                                           |         |         |         | 83,075 |        
|Other assets                                                              |                                                                                                                                                                                                                                                                    |                                                                       | 1,860                                             |         |         |         | 1,688  |        
|Deferred compensation assets                                              |                                                                                                                                                                                                                                                                    |                                                                       | 2,443                                             |         |         |         | 1,739  |        
|                                                                          |                                                                                                                                                                                                                                                                    |                                                                       |                                                   |         |         |        
|                                                                          |                                                                                                                                                                                                                                                                    |                                                                       | Total assets                                      |         |         | 334,249 |        |         |         | 188,461 | 
|                                                                          |                                                                                                                                                                                                                                                                    |                                                                       |                                                   |         |         |        
|Current liabilities:                                                      |                                                                                                                                                                                                                                                                    |                                                                       |                                                   |         |         |         |        |        
|                                                                          | Current portion, Term B Senior Credit Facility note payable                                                                                                                                                                                                        |                                                                       |                                                   | 1,404   |         |         |        | 468     |        
|                                                                          | Current portion, acquisition obligations                                                                                                                                                                                                                           |                                                                       |                                                   | 3,616   |         |         |        | 3,059   |        
|                                                                          | Trade accounts payable and accrued liabilities                                                                                                                                                                                                                     |                                                                       |                                                   | 27,312  |         |         |        | 23,420  |        
|                                                                          | Accrued payroll and related liabilities                                                                                                                                                                                                                            |                                                                       |                                                   | 29,161  |         |         |        | 18,561  |        
|                                                                          | ESOP liabilities                                                                                                                                                                                                                                                   |                                                                       |                                                   | 274     |         |         |        | 136     |        
|                                                                          | Current portion of accrued loss on operating leases                                                                                                                                                                                                                |                                                                       |                                                   | 1,054   |         |         |        | 832     |        
|                                                                          | Billings in excess of costs and estimated earnings on
    uncompleted contracts                                                                                                                                                                                    |                                                                       |                                                   | 2,559   |         |         |        | 676     |        
|                                                                          |                                                                                                                                                                                                                                                                    |                                                                       |                                                   |         |         |        
|                                                                          |                                                                                                                                                                                                                                                                    |                                                                       | Total current liabilities                         |         |         | 65,380  |        |         |         | 47,152  | 
|Acquisition obligations, excluding current portion                        |                                                                                                                                                                                                                                                                    |                                                                       | 7,100                                             |         |         |         |       |        
|Term B Senior Credit Facility note payable, excluding current
    portion |                                                                                                                                                                                                                                                                    |                                                                       | 137,945                                           |         |         |         | 46,367 |        
|Mezzanine note payable                                                    |                                                                                                                                                                                                                                                                    |                                                                       |                                                  |         |         |         | 17,503 |        
|Subordinated note payable                                                 |                                                                                                                                                                                                                                                                    |                                                                       | 42,888                                            |         |         |         | 34,247 |        
|Agreements with officers                                                  |                                                                                                                                                                                                                                                                    |                                                                       |                                                  |         |         |         | 1,514  |        
|Deferred compensation liability                                           |                                                                                                                                                                                                                                                                    |                                                                       | 2,465                                             |         |         |         | 1,735  |        
|Accrued compensation, excluding current portion                           |                                                                                                                                                                                                                                                                    |                                                                       | 6,356                                             |         |         |         | 2,128  |        
|Accrued postretirement benefit obligations                                |                                                                                                                                                                                                                                                                    |                                                                       | 3,357                                             |         |         |         | 3,398  |        
|Non-current portion of lease obligations                                  |                                                                                                                                                                                                                                                                    |                                                                       | 3,694                                             |         |         |         | 3,892  |        
|Redeemable common stock warrants                                          |                                                                                                                                                                                                                                                                    |                                                                       | 44,590                                            |         |         |         | 20,777 |        
|                                                                          |                                                                                                                                                                                                                                                                    |                                                                       |                                                   |         |         |        
|                                                                          |                                                                                                                                                                                                                                                                    |                                                                       | Total liabilities                                 |         |         | 313,775 |        |         |         | 178,713 | 
|Shareholders equity, subject to redemption:                              |                                                                                                                                                                                                                                                                    |                                                                       |                                                   |         |         |         |        |        
|                                                                          | Common stock (subject to redemption), $0.01 par value,
    8,000,000 shares authorized, 5,149,840 shares and
    3,376,197 shares issued, and 5,149,840 shares and
    3,376,197 shares outstanding at September 30, 2005 and
    September 30, 2004, respectively |                                                                       |                                                   | 51      |         |         |        | 34      |        
|                                                                          | Additional paid-in capital                                                                                                                                                                                                                                         |                                                                       |                                                   | 88,479  |         |         |        | 37,532  |        
|                                                                          | Accumulated deficit                                                                                                                                                                                                                                                |                                                                       |                                                   | (68,056 | )       |         |        | (27,818 | )      
|                                                                          |                                                                                                                                                                                                                                                                    |                                                                       |                                                   |         |         |        
|                                                                          |                                                                                                                                                                                                                                                                    |                                                                       | Total shareholders equity, subject to redemption |         |         | 20,474  |        |         |         | 9,748   | 
|                                                                          |                                                                                                                                                                                                                                                                    |                                                                       |                                                   |         |         |        
|                                                                          |                                                                                                                                                                                                                                                                    | Total liabilities and shareholders equity, subject to
    redemption |                                                   | $       | 334,249 |         |        | $       | 188,461 |        
|                                                                          |                                                                                                                                                                                                                                                                    |                                                                       |                                                   |         |         |        



65



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ALION SCIENCE AND TECHNOLOGY CORPORATION





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                             |                                   |                                 |           |         |         |   |           |         |         |   |           |         |         |  
|------------------------------------------------------------ | --------------------------------- | ------------------------------- | --------- | ------- | ------- | - | --------- | ------- | ------- | - | --------- | ------- | ------- | -
|                                                             |                                   | Year Ended September 30,        |          
|                                                             |                                   |                                 |          
|                                                             |                                   | 2005                            |           |         | 2004    |   |           | 2003    |        
|                                                             |                                   |                                 |           |         |         |   |           |         |        
|                                                             |                                   | (In thousands, except share and |          
|                                                             |                                   | per share information)          |          
|Contract revenue                                             |                                   | $                               | 369,231   |         |         | $ | 269,940   |         |         | $ | 165,917   |        
|Direct contract expense                                      |                                   |                                 | 267,241   |         |         |   | 196,388   |         |         |   | 120,559   |        
|                                                             |                                   |                                 |           |         |         |   |           |         |        
|                                                             | Gross profit                      |                                 |           | 101,990 |         |   |           | 73,552  |         |   |           | 45,358  |        
|                                                             |                                   |                                 |           |         |         |   |           |         |        
|Operating expenses:                                          |                                   |                                 |           |         |         |   |           |         |         |   |           |        
|                                                             | Indirect contract expense         |                                 |           | 29,017  |         |   |           | 17,647  |         |   |           | 8,685   |        
|                                                             | Research and development          |                                 |           | 498     |         |   |           | 399     |         |   |           | 177     |        
|                                                             | General and administrative        |                                 |           | 32,974  |         |   |           | 28,117  |         |   |           | 19,909  |        
|                                                             | Non-recurring transaction expense |                                 |           |        |         |   |           |        |         |   |           | 726     |        
|                                                             | Rental and occupancy expense      |                                 |           | 12,542  |         |   |           | 10,990  |         |   |           | 6,892   |        
|                                                             | Depreciation and amortization     |                                 |           | 17,771  |         |   |           | 13,447  |         |   |           | 9,553   |        
|                                                             | Stock-based compensation(1)       |                                 |           | 10,628  |         |   |           | 2,513   |         |   |           | 856     |        
|                                                             | Bad debt expense (recovery)       |                                 |           | 651     |         |   |           | 590     |         |   |           | (525    | )      
|                                                             |                                   |                                 |           |         |         |   |           |         |        
|Total operating expenses                                     |                                   |                                 | 104,081   |         |         |   | 73,703    |         |         |   | 46,273    |        
|                                                             |                                   |                                 |           |         |         |   |           |         |        
|                                                             |                                   | Operating loss                  |           |         | (2,091  | ) |           |         | (151    | ) |           |         | (915    | )
|Other income (expense):                                      |                                   |                                 |           |         |         |   |           |         |         |   |           |        
|                                                             | Interest income                   |                                 |           | 475     |         |   |           | 27      |         |   |           | 21      |        
|                                                             | Interest expense                  |                                 |           | (38,696 | )       |   |           | (16,835 | )       |   |           | (11,724 | )      
|                                                             | Other                             |                                 |           | 140     |         |   |           | 1,865   |         |   |           | 2       |        
|                                                             |                                   |                                 |           |         |         |   |           |         |        
|                                                             |                                   | Loss before income taxes        |           |         | (40,172 | ) |           |         | (15,094 | ) |           |         | (12,616 | )
|                                                             |                                   | Income tax expense              |           |         | (66     | ) |           |         | (17     | ) |           |         |        |  
|                                                             |                                   |                                 |           |         |         |   |           |         |        
|                                                             |                                   | Net loss                        |           |         | (40,238 | ) |           |         | (15,111 | ) |           |         | (12,616 | )
|                                                             |                                   |                                 |           |         |         |   |           |         |        
|Basic and diluted loss per share                             |                                   | $                               | (9.50     | )       |         | $ | (4.91     | )       |         | $ | (6.05     | )      
|                                                             |                                   |                                 |           |         |         |   |           |         |        
|Basic and diluted weighted average common shares outstanding |                                   |                                 | 4,235,947 |         |         |   | 3,074,709 |         |         |   | 2,085,274 |        
|                                                             |                                   |                                 |           |         |         |   |           |         |        






|    |                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------
|(1) | Stock-based compensation is a separately reported component of
    general and administrative expense.



66



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##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION





CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(DEFICIT),


SUBJECT TO REDEMPTION


|                                               |  |                                          |           |   |        |            |    |          |  |   |          |   |  |          |         |   |             |   |        |       |  |   |         |   |  |   |         |  
|---------------------------------------------- |  | ---------------------------------------- | --------- | - | ------ | ---------- | -- | -------- |  | - | -------- | - |  | -------- | ------- | - | ----------- | - | ------ | ----- |  | - | ------- | - |  | - | ------- | -
|                                               |  |                                          |           |   |        | Additional |    |          |  |   |          |   |  |          |        
|                                               |  | Common                                   |           |   | Common |            |    | Paid-In- |  |   | Treasury |   |  | Treasury |         |   | Accumulated |   |        |      
|                                               |  | Shares                                   |           |   | Stock  |            |    | Capital  |  |   | Shares   |   |  | Stock    |         |   | Deficit     |   |        | Total | 
|                                               |  |                                          |           |   |        |            |    |          |  |   |          |   |  |          |         |   |             |   |        |       | 
|                                               |  | (In thousands, except share information) |          
|Balances at September 30, 2002                 |  |                                          | 100       |   |        | $          |   |          |  | $ | 1        |   |  |          |        |   |             | $ |       |       |  | $ | (91     | ) |  | $ | (90     | )
|Issuance of common stock to KSOP Trust         |  |                                          | 2,973,713 |   |        |            | 29 |          |  |   | 30,549   |   |  |          |        |   |             |   |       |       |  |   |        |   |  |   | 30,578  |  
|Purchase of common stock from KSOP Trust       |  |                                          | (7,944    | ) |        |            |   |          |  |   |         |   |  |          | 7,944   |   |             |   | (88    | )     |  |   |        |   |  |   | (88     | )
|Release of treasury shares to KSOP Trust       |  |                                          | 7,944     |   |        |            |    |          |  |   | 28       |   |  |          | (7,944  | ) |             |   | 88     |       |  |   |        |   |  |   | 116     |  
|Net loss for the year ended September 30, 2003 |  |                                          |          |   |        |            |   |          |  |   |         |   |  |          |        |   |             |   |       |       |  |   | (12,616 | ) |  |   | (12,616 | )
|                                               |  |                                          |           |   |        |            |    |          |  |   |          |   |  |          |         |   |             |   |        |       | 
|Balances at September 30, 2003                 |  |                                          | 2,973,813 |   |        | $          | 29 |          |  | $ | 30,578   |   |  |          |        |   |             | $ |       |       |  | $ | (12,707 | ) |  | $ | 17,900  |  
|Purchase of common stock from KSOP Trust       |  |                                          | (99,927   | ) |        |            |   |          |  |   |         |   |  |          | 99,927  |   |             |   | (1,562 | )     |  |   |        |   |  |   | (1,562  | )
|Release of treasury shares to KSOP Trust       |  |                                          | 99,927    |   |        |            |   |          |  |   |         |   |  |          | (99,927 | ) |             |   | 1,562  |       |  |   |        |   |  |   | 1,562   |  
|Issuance of common stock to KSOP Trust         |  |                                          | 402,384   |   |        |            | 5  |          |  | $ | 6,954    |   |  |          |        |   |             |   |       |       |  |   |        |   |  |   | 6,959   |  
|Net loss for the year ended September 30, 2004 |  |                                          |          |   |        |            |   |          |  |   |         |   |  |          |        |   |             |   |       |       |  | $ | (15,111 | ) |  |   | (15,111 | )
|                                               |  |                                          |           |   |        |            |    |          |  |   |          |   |  |          |         |   |             |   |        |       | 
|Balances at September 30, 2004                 |  |                                          | 3,376,197 |   |        | $          | 34 |          |  | $ | 37,532   |   |  | $        |        |   |             | $ |       |       |  | $ | (27,818 | ) |  | $ | 9,748   |  
|Purchase of common stock from KSOP Trust       |  |                                          | (52,507   | ) |        |            |   |          |  |   |         |   |  |          | 52,507  |   |             |   | (1,047 | )     |  |   |        |   |  |   | (1,047  | )
|Release of treasury shares to KSOP Trust       |  |                                          | 52,507    |   |        |            |   |          |  |   |         |   |  |          | (52,507 | ) |             |   | 1,047  |       |  |   |        |   |  |   | 1,047   |  
|Issuance of common stock to KSOP Trust         |  |                                          | 1,944,300 |   |        |            | 19 |          |  |   | 56,710   |   |  |          |        |   |             |   |       |       |  |   |        |   |  |   | 56,729  |  
|Retirement of common stock from KSOP Trust     |  |                                          | (170,657  | ) |        |            | (2 | )        |  |   | (5,763   | ) |  |          |        |   |             |   |       |       |  |   |        |   |  |   | (5,765  | )
|Net loss for year ended September 30, 2005     |  |                                          |          |   |        |            |   |          |  |   |         |   |  |          |        |   |             |   |       |       |  |   | (40,238 | ) |  |   | (40,238 | )
|                                               |  |                                          |           |   |        |            |    |          |  |   |          |   |  |          |         |   |             |   |        |       | 
|Balances at September 30, 2005                 |  |                                          | 5,149,840 |   |        | $          | 51 |          |  | $ | 88,479   |   |  | $        |        |   |             | $ |       |       |  | $ | (68,056 | ) |  | $ | 20,474  |  
|                                               |  |                                          |           |   |        |            |    |          |  |   |          |   |  |          |         |   |             |   |        |       | 



67



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##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION





CONSOLIDATED STATEMENTS OF CASH FLOWS


Years Ended September 30, 2005, 2004 and 2003


|                                                                                    |                                                             |                                 |         |         |      |   |         |         |   |   |         |         |  
|----------------------------------------------------------------------------------- | ----------------------------------------------------------- | ------------------------------- | ------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                                                                    |                                                             | Year Ended September 30,        |        
|                                                                                    |                                                             |                                 |        
|                                                                                    |                                                             | 2005                            |         |         | 2004 |   |         | 2003    |  
|                                                                                    |                                                             |                                 |         |         |      |   |         |         |  
|                                                                                    |                                                             | (In thousands, except share and |        
|                                                                                    |                                                             | per share information)          |        
|Cash flows from operating activities:                                               |                                                             |                                 |         |         |      |   |         |         |   |   |         |        
|                                                                                    | Net loss                                                    |                                 | $       | (40,238 | )    |   | $       | (15,111 | ) |   | $       | (12,616 | )
|Adjustments to reconcile net loss to net cash provided by
    operating activities: |                                                             |                                 |         |         |      |   |         |         |   |   |         |        
|                                                                                    | Depreciation and amortization                               |                                 |         | 17,771  |      |   |         | 13,447  |   |   |         | 9,553   |  
|                                                                                    | Accretion of debt to face value                             |                                 |         | 3,056   |      |   |         | 1,449   |   |   |         | 1,024   |  
|                                                                                    | Amortization of debt issuance costs                         |                                 |         | 840     |      |   |         | 1,462   |   |   |         | 353     |  
|                                                                                    | (Increase) decrease in value of interest rate cap agreement |                                 |         | (118    | )    |   |         | 204     |   |   |         | 148     |  
|                                                                                    | Change in fair value of redeemable common stock warrants    |                                 |         | 23,729  |      |   |         | 6,015   |   |   |         | 4,453   |  
|                                                                                    | Stock-based compensation                                    |                                 |         | 10,629  |      |   |         | 2,513   |   |   |         | 856     |  
|                                                                                    | Loss on disposal of assets                                  |                                 |         | 27      |      |   |         |        |   |   |         | 7       |  
|                                                                                    | Gain on investments, net                                    |                                 |         | (72     | )    |   |         | (2,223  | ) |   |         | (113    | )
|Changes in assets and liabilities, net of effect of acquisitions:                   |                                                             |                                 |         |         |      |   |         |         |   |   |         |        
|                                                                                    | Accounts receivable, net                                    |                                 |         | 12,078  |      |   |         | (14,160 | ) |   |         | 4,571   |  
|                                                                                    | Other assets                                                |                                 |         | 1,036   |      |   |         | (4,215  | ) |   |         | 793     |  
|                                                                                    | Sale of marketable securities                               |                                 |         |        |      |   |         | 405     |   |   |         |        |  
|                                                                                    | Trade accounts payable and accruals                         |                                 |         | 6,200   |      |   |         | 13,808  |   |   |         | 5,664   |  
|                                                                                    | Other liabilities                                           |                                 |         | 202     |      |   |         | 2,081   |   |   |         | (429    | )
|                                                                                    |                                                             |                                 |         |         |      |   |         |         |  
|Net cash provided by operating activities                                           |                                                             |                                 | 35,140  |         |      |   | 5,675   |         |   |   | 14,264  |        
|Cash flows from investing activities:                                               |                                                             |                                 |         |         |      |   |         |         |   |   |         |        
|                                                                                    | Cash paid for acquisitions, net of cash acquired            |                                 |         | (74,591 | )    |   |         | (21,678 | ) |   |         | (60,099 | )
|                                                                                    | Capital expenditures                                        |                                 |         | (2,233  | )    |   |         | (3,678  | ) |   |         | (1,329  | )
|                                                                                    | Proceeds from sale of investment securities                 |                                 |         |        |      |   |         | 3,064   |   |   |         |        |  
|                                                                                    | Purchase of investment securities                           |                                 |         | (1,193  | )    |   |         | (1,333  | ) |   |         |        |  
|                                                                                    |                                                             |                                 |         |         |      |   |         |         |  
|Net cash used in investing activities                                               |                                                             |                                 | (78,017 | )       |      |   | (23,625 | )       |   |   | (61,428 | )      
|Cash flows from financing activities:                                               |                                                             |                                 |         |         |      |   |         |         |   |   |         |        
|                                                                                    | Proceeds from Term B Senior Credit Facility note payable    |                                 |         | 94,000  |      |   |         | 50,000  |   |   |         |        |  
|                                                                                    | Proceeds from senior note payable                           |                                 |         |        |      |   |         |        |   |   |         | 35,000  |  
|                                                                                    | Payment of debt issuance costs                              |                                 |         | (1,307  | )    |   |         | (3,280  | ) |   |         | (1,700  | )
|                                                                                    | Repayment of Term B Credit Facility note payable            |                                 |         | (1,080  | )    |   |         |        |   |   |         |        |  
|                                                                                    | Repayment of senior note payable                            |                                 |         |        |      |   |         | (29,250 | ) |   |         | (5,750  | )
|                                                                                    | Repayment of mezzanine note payable                         |                                 |         | (20,201 | )    |   |         | (750    | ) |   |         |        |  
|                                                                                    | Proceeds from agreement with officer                        |                                 |         |        |      |   |         | 750     |   |   |         |        |  
|                                                                                    | Repayment of agreements with officers                       |                                 |         | (1,823  | )    |   |         |        |   |   |         |        |  
|                                                                                    | Borrowings under revolving credit facility                  |                                 |         |        |      |   |         | 24,000  |   |   |         | (6,185  | )
|                                                                                    | Repayment of LaSalle revolving credit facility              |                                 |         |        |      |   |         | (24,000 | ) |   |         |        |  
|                                                                                    | Repayment of ITSC revolving credit facility                 |                                 |         |        |      |   |         | (375    | ) |   |         |        |  
|                                                                                    | Purchase of interest rate cap agreement                     |                                 |         |        |      |   |         | (319    | ) |   |         | (245    | )
|                                                                                    | Purchase of shares of common stock from ESOP Trust          |                                 |         | (8,160  | )    |   |         | (1,562  | ) |   |         | (88     | )
|                                                                                    | Cash received from issuance of common stock to Trust        |                                 |         | 14,509  |      |   |         | 6,959   |   |   |         | 26,620  |  
|                                                                                    |                                                             |                                 |         |         |      |   |         |         |  
|Net cash provided by financing activities                                           |                                                             |                                 | 75,938  |         |      |   | 22,173  |         |   |   | 47,652  |        
|Net increase in cash                                                                |                                                             |                                 | 33,061  |         |      |   | 4,223   |         |   |   | 488     |        
|Cash and cash equivalents at beginning of period                                    |                                                             |                                 | 4,717   |         |      |   | 494     |         |   |   | 6       |        
|                                                                                    |                                                             |                                 |         |         |      |   |         |         |  
|Cash and cash equivalents at end of period                                          |                                                             | $                               | 37,778  |         |      | $ | 4,717   |         |   | $ | 494     |        
|                                                                                    |                                                             |                                 |         |         |      |   |         |         |  

68



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##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION


CONSOLIDATED STATEMENTS OF CASH
FLOWS  (Continued)


|                                                  |                                                                                                           |                                 |  |        |      |  |  |       |   |  |  |        |  
|------------------------------------------------- | --------------------------------------------------------------------------------------------------------- | ------------------------------- |  | ------ | ---- |  |  | ----- | - |  |  | ------ | -
|                                                  |                                                                                                           | Year Ended September 30,        | 
|                                                  |                                                                                                           |                                 | 
|                                                  |                                                                                                           | 2005                            |  |        | 2004 |  |  | 2003  |  
|                                                  |                                                                                                           |                                 |  |        |      |  |  |       |  
|                                                  |                                                                                                           | (In thousands, except share and | 
|                                                  |                                                                                                           | per share information)          | 
|Supplemental disclosure of cash flow information: |                                                                                                           |                                 |  |        |      |  |  |       |   |  |  |       
|                                                  | Cash paid for interest                                                                                    |                                 |  | 9,328  |      |  |  | 7,563 |   |  |  | 3,774  |  
|                                                  | Cash paid (received) for taxes                                                                            |                                 |  | 367    |      |  |  | (29   | ) |  |  | (105   | )
|Non-cash financing activities:                    |                                                                                                           |                                 |  |        |      |  |  |       |   |  |  |       
|                                                  | Mezzanine note and warrants issued in connection with
    acquisition of selected operations of IITRI     |                                 |  |       |      |  |  |      |   |  |  | 20,343 |  
|                                                  | Subordinated note and warrants issued in connection with
    acquisition of selected operations of IITRI  |                                 |  |       |      |  |  |      |   |  |  | 39,900 |  
|                                                  | Bank debt assumed in connection with acquisition of selected
    operations of IITRI                      |                                 |  |       |      |  |  |      |   |  |  | 6,188  |  
|                                                  | IITRI transaction costs assumed in connection with acquisition
    of selected operations of IITRI        |                                 |  |       |      |  |  |      |   |  |  | 2,300  |  
|                                                  | Additional non-cash consideration paid in connection with
    acquisition of selected operations of IITRI |                                 |  |       |      |  |  |      |   |  |  | 1,520  |  
|                                                  | Deferred compensation arrangement with officer                                                            |                                 |  |       |      |  |  |      |   |  |  | 857    |  
|                                                  | Common stock issued to ESOP Trust in satisfaction of employer
    contribution liability                  |                                 |  | 5,707  |      |  |  | 4,330 |   |  |  | 2,828  |  
|                                                  | Common stock issued for acquisitions                                                                      |                                 |  | 37,250 |      |  |  |      |   |  |  |       |  
|                                                  |                                                                                                           |                                 |  |        |      |  |  |       |  



69



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##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|    |                                          
|--- | -----------------------------------------
|(1) | Description and Formation of the Business









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



|    |                                           
|--- | ------------------------------------------
|(2) | Summary of Significant Accounting Policies



| |                                                          
| | ---------------------------------------------------------
| | Basis of Presentation and Principles of
    Consolidation





70



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##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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





| |                 
| | ----------------
| | Use of Estimates





| |                          
| | -------------------------
| | Cash and Cash Equivalents





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





percentage-of






71



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##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






Accounting for Performance on
Construction-Type and Certain Production-Type Contracts.




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





| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | Accounts Receivable and Billings in Excess of Costs and
    Estimated Earnings on Uncompleted Contracts







| |                               
| | ------------------------------
| | Goodwill and Other Intangibles



72



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##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Business Combinations.




| |             
| | ------------
| | Fixed Assets





| |                                    
| | -----------------------------------
| | Fair Value of Financial Instruments





| |                                                                     
| | --------------------------------------------------------------------
| | Cash, cash equivalents, accounts payable and accounts
    receivable





| |                      
| | ---------------------
| | Marketable securities





| |                      
| | ---------------------
| | Senior Long-term debt





| |                  
| | -----------------
| | Interest rate cap



73



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##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                 
| | --------------------------------
| | Redeemable common stock warrants





| |            
| | -----------
| | Alion Stock





|    |                                                                   
|--- | ------------------------------------------------------------------
|(3) | Employee Stock Ownership Plan (ESOP) and Stock Ownership
    Trust





|    |                        
|--- | -----------------------
|(4) | Postretirement Benefits









|                                                                      |  |      |       |  |      |   |       | 
|--------------------------------------------------------------------- |  | ---- | ----- |  | ---- | - | ----- | 
|                                                                      |  | 2005 |       |  | 2004 |  
|                                                                      |  |      |       |  |      |  
|Accumulated postretirement benefit obligation as of
    September 30: |  |      |       |  |      |   |       | 
|Retirees                                                              |  | $    | 1,028 |  |      | $ | 1,118 | 
|Fully eligible active plan participants                               |  |      | 814   |  |      |   | 812   | 
|Other active plan participants                                        |  |      | 1,741 |  |      |   | 1,672 | 
|                                                                      |  |      |       |  |      |  
|                                                                      |  | $    | 3,583 |  |      | $ | 3,602 | 
|                                                                      |  |      |       |  |      |  

74



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##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                                           |  |      |       |   |      |   |       |  
|---------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                                           |  | 2005 |       |   | 2004 |  
|                                                           |  |      |       |   |      |  
|Reconciliation of beginning and ending benefit obligation: |  |      |       |   |      |   |       |  
|Benefit obligation at beginning of period                  |  | $    | 3,602 |   |      | $ | 2,938 |  
|Service cost                                               |  |      | 188   |   |      |   | 119   |  
|Interest cost                                              |  |      | 227   |   |      |   | 178   |  
|Actuarial (gain) loss                                      |  |      | 22    |   |      |   | 579   |  
|Benefits paid                                              |  |      | (456  | ) |      |   | (212  | )
|                                                           |  |      |       |   |      |  
|Benefit obligation at September 30                         |  | $    | 3,583 |   |      | $ | 3,602 |  
|                                                           |  |      |       |   |      |  



|                                                                               |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------ |  | - | ------ | - |  | - | ------ | -
|Funded status of the plan:                                                     |  |   |        |   |  |   |        |  
|Obligation at September 30                                                     |  | $ | (3,583 | ) |  | $ | (3,602 | )
|Unrecognized net loss (gain)                                                   |  | $ | 226    |   |  | $ | 204    |  
|                                                                               |  |   |        |   |  |  
|Accrued postretirement benefits included in the consolidated
    balance sheet |  | $ | (3,357 | ) |  | $ | (3,398 | )
|                                                                               |  |   |        |   |  |  



|                                         |  |      |     |  |      |   |     |  
|---------------------------------------- |  | ---- | --- |  | ---- | - | --- | -
|                                         |  | 2005 |     |  | 2004 |  
|                                         |  |      |     |  |      |  
|Service cost                             |  | $    | 188 |  |      | $ | 119 |  
|Interest cost                            |  |      | 227 |  |      |   | 178 |  
|Amortization of net (gain) loss          |  |      |    |  |      |   | (6  | )
|                                         |  |      |     |  |      |  
|Net periodic postretirement benefit cost |  | $    | 415 |  |      | $ | 291 |  
|                                         |  |      |     |  |      |  



|                                                                                    |  |      |       |  |      |  |       | 
|----------------------------------------------------------------------------------- |  | ---- | ----- |  | ---- |  | ----- | 
|                                                                                    |  | 2005 |       |  | 2004 | 
|                                                                                    |  |      |       |  |      | 
|Accumulated post retirement benefit obligation at
    September 30                  |  |      | 5.25% |  |      |  | 6.00% | 
|Service and interest cost portions of net periodic
    postretirement benefit costs |  |      | 6.00% |  |      |  | 6.25% | 



|                                                                                   |  |      |      |   |      |  |      |  
|---------------------------------------------------------------------------------- |  | ---- | ---- | - | ---- |  | ---- | -
|                                                                                   |  | 2005 |      |   | 2004 | 
|                                                                                   |  |      |      |   |      | 
|Health care cost trend rate assumed for next year                                  |  |      | 10.0 | % |      |  | 10.5 | %
|Rate to which the cost trend rate is assumed to decline
    (ultimate trend rates) |  |      | 5.0  | % |      |  | 5.5  | %
|Year the rate reaches the ultimate trend rate                                      |  |      | 2015 |   |      |  | 2014 |  



|                                              |  |                 |     |  |                 |   |      |  
|--------------------------------------------- |  | --------------- | --- |  | --------------- | - | ---- | -
|                                              |  | One-Percentage- |     |  | One-Percentage- |  
|                                              |  | Point Increase  |     |  | Point Decrease  |  
|                                              |  |                 |     |  |                 |  
|Total interest and service cost               |  | $               | 47  |  |                 | $ | (42  | )
|Accumulated postretirement benefit obligation |  |                 | 277 |  |                 |   | (251 | )

75



---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|            |  |   |       | 
|----------- |  | - | ----- | 
|2006        |  | $ | 256   | 
|2007        |  |   | 234   | 
|2008        |  |   | 244   | 
|2009        |  |   | 279   | 
|2010        |  |   | 307   | 
|2010 - 2015 |  | $ | 2,070 | 





|    |               
|--- | --------------
|(5) | Loss Per Share





|    |                                            
|--- | -------------------------------------------
|(6) | Shareholders Equity, Subject to Redemption







|    |                               
|--- | ------------------------------
|(7) | Goodwill and Intangible Assets





76



---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                 |                |                |   |     | 
|-------------------------------- | -------------- | -------------- | - | --- | 
|                                 |                | (In thousands) |  
|For the year ended September 30: |                |                |   |    
|                                 | 2006           |                | $ | 7.2 | 
|                                 | 2007           |                |   | 5.0 | 
|                                 | 2008           |                |   | 4.7 | 
|                                 | 2009           |                |   | 4.4 | 
|                                 | and thereafter |                |   | 8.9 | 





|    |               
|--- | --------------
|(8) | Long-Term Debt







| |                              
| | -----------------------------
| | Term B Senior Credit Facility





| |   |                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a senior term loan in the approximate amount of
    $142.9 million, (which includes the incremental term loan),
    all of which was drawn down as of September 30, 2005;                                               
|
| |  | a senior revolving credit facility, in the amount of
    $30.0 million, of which approximately $3.0 million was
    deemed borrowed as of September 30, 2005, through the
    issuance of letters of credit issued under

77



---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |   |                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | the Companys prior senior credit facility which remain
    outstanding under the Term B Senior Credit Facility and the
    issuance of one additional letter of credit under the Term B
    Senior Credit Facility; and
|
| |  | an uncommitted incremental term loan accordion
    facility in the amount of $150.0 million.                                                                                                                          











Use of Proceeds.


78



---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






Security.


Interest and Fees.


Eurodollar Prime Rate


|               |                                       |                   |     |  |                   |  |     |                   |  |  |     |  | 
|-------------- | ------------------------------------- | ----------------- | --- |  | ----------------- |  | --- | ----------------- |  |  | --- |  | 
|               |                                       | Spread            |     |  | ABR Spread        |  |     | ABR Spread        | 
|Leverage Ratio |                                       | (In basis points) |     |  | (In basis points) |  |     | (In basis points) | 
|               |                                       |                   |     |  |                   |  |     |                   | 
|Category 1     |                                       |                   | 275 |  |                   |  | 225 |                   |  |  | 175 | 
|               | Greater than or equal to 3.00 to 1.00 |                   |     |  |                   |  |     |                   |  |  |     |  | 
|Category 2     |                                       |                   | 250 |  |                   |  | 200 |                   |  |  | 150 | 
|               | Greater than or equal to 2.50 to      |                   |     |  |                   |  |     |                   |  |  |     |  | 
|               | 1.00 but less than 3.00 to 1.00       |                   |     |  |                   |  |     |                   |  |  |     |  | 
|Category 3     |                                       |                   | 225 |  |                   |  | 175 |                   |  |  | 125 | 
|               | Greater than or equal to 2.00 to      |                   |     |  |                   |  |     |                   |  |  |     |  | 
|               | 1.00 but less than 2.50 to 1.00       |                   |     |  |                   |  |     |                   |  |  |     |  | 
|Category 4     |                                       |                   | 200 |  |                   |  | 150 |                   |  |  | 100 | 
|               | Less than 2.00 to 1.00                |                   |     |  |                   |  |     |                   |  |  |     |  | 

79



---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


















80



---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Covenants.


Leverage Ratio.


|                                        |  |       |              | 
|--------------------------------------- |  | ----- | ------------ | 
|Period                                  |  | Ratio |             
|                                        |  |       |             
|August 2, 2004 through March 31, 2005   |  |       | 3.85 to 1.00 | 
|April 1, 2005 through December 31, 2005 |  |       | 3.75 to 1.00 | 
|January 1, 2006 through March 31, 2006  |  |       | 3.50 to 1.00 | 
|April 1, 2006 through March 31, 2007    |  |       | 3.25 to 1.00 | 
|April 1, 2007 through March 31, 2008    |  |       | 2.75 to 1.00 | 
|Thereafter                              |  |       | 2.25 to 1.00 | 

Interest Coverage Ratio.


|                                          |  |       |              | 
|----------------------------------------- |  | ----- | ------------ | 
|Date or Period                            |  | Ratio |             
|                                          |  |       |             
|August 2, 2004 through September 30, 2005 |  |       | 3.75 to 1.00 | 
|Thereafter                                |  |       | 4.00 to 1.00 | 





| |   |                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | incur additional indebtedness other than permitted additional
    indebtedness;                                                                                                                                                                                                                          
|
| |  | consolidate, merge or sell all or substantially all of the
    Companys assets;                                                                                                                                                                                                                         
|
| |  | make certain loans and investments including acquisitions of
    businesses, other than permitted acquisitions;                                                                                                                                                                                          
|
| |  | pay dividends or distributions other than distributions needed
    for the ESOP to satisfy its repurchase obligations, for the
    Company to satisfy any put right if exercised by mezzanine
    warrant holders and for certain payments required under the
    Companys equity based incentive plans;

81



---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |   |                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------
| |  | enter into transactions with the Companys shareholders and
    affiliates;                                   
|
| |  | enter into certain transactions not permitted under ERISA;                                                    
|
| |  | grant certain liens and security interests;                                                                   
|
| |  | enter into sale and leaseback transactions;                                                                   
|
| |  | change lines of business;                                                                                     
|
| |  | repay subordinated indebtedness and redeem or repurchase certain
    equity; or                               
|
| |  | use the proceeds of the Companys borrowings other than as
    permitted by the Term B Senior Credit Facility.

Events of Default.




| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | payment default;                                                                                                 
|
| |  | breach of representations and warranties;                                                                        
|
| |  | uncured covenant breaches;                                                                                       
|
| |  | default under certain other debt exceeding an agreed amount;                                                     
|
| |  | bankruptcy and insolvency events;                                                                                
|
| |  | notice of debarment, suspension or termination under a material
    government contract;                         
|
| |  | certain ERISA violations;                                                                                        
|
| |  | unstayed judgments in excess of an agreed amount;                                                                
|
| |  | failure of the subordinated note to be subordinated to the Term
    B Senior Credit Facility;                    
|
| |  | failure of the guarantee of the Term B Senior Credit Facility to
    be in effect;                               
|
| |  | failure of the security interests to be valid, perfected first
    priority security interests in the collateral;
|
| |  | failure of the Company to remain an S-corporation;                                                               
|
| |  | the Trust is subject to certain taxes in excess of an agreed
    amount;                                         
|
| |  | final negative determination that the ESOP is not a qualified
    plan; or                                       
|
| |  | change of control (as defined below).                                                                            



82



---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                        
| | -----------------------
| | Senior Credit Agreement













| |               
| | --------------
| | Mezzanine Note







83



---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                  
| | -----------------
| | Subordinated Note

(paid-in




| |                           
| | --------------------------
| | Other Notes and Agreements









|                                  |  |                      |      |  |      |                 |      |      |  |   |      |  |  |      |        |  |       |   |       |  |  |   |        | 
|--------------------------------- |  | -------------------- | ---- |  | ---- | --------------- | ---- | ---- |  | - | ---- |  |  | ---- | ------ |  | ----- | - | ----- |  |  | - | ------ | 
|                                  |  | 5-Fiscal Year Period |     
|                                  |  |                      |     
|                                  |  | 2006                 |      |  | 2007 |                 |      | 2008 |  |   | 2009 |  |  | 2010 |        |  | Total |  
|                                  |  |                      |      |  |      |                 |      |      |  |   |      |  |  |      |        |  |       |  
|                                  |  |                      |      |  |      | ($ In millions) |      |      |  |   |     
|Senior Secured Term B Loan(1)     |  | $                    | 1.44 |  |      | $               | 1.44 |      |  | $ | 1.44 |  |  | $    | 138.60 |  |       | $ |      |  |  | $ | 142.92 | 
|Subordinated Seller Note(2)       |  |                      |     |  |      |                 |     |      |  |   |     |  |  |      | 19.95  |  |       |   | 19.95 |  |  |   | 39.90  | 
|Subordinated Paid in Kind Note(3) |  |                      |     |  |      |                 |     |      |  |   |     |  |  |      | 7.18   |  |       |   | 7.18  |  |  |   | 14.36  | 
|                                  |  |                      |      |  |      |                 |      |      |  |   |      |  |  |      |        |  |       |  
|Total principal payments          |  | $                    | 1.44 |  |      | $               | 1.44 |      |  | $ | 1.44 |  |  | $    | 165.73 |  |       | $ | 27.13 |  |  | $ | 197.18 | 
|                                  |  |                      |      |  |      |                 |      |      |  |   |      |  |  |      |        |  |       |  






|    |                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Term B Senior Credit Facility requires the Company to repay
    1 percent of the principal balance outstanding under the
    senior term loan during the first four years (i.e., fiscal years
    2005 through 2008) of

84



---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | the Term B Senior Credit Facilitys term and
    96 percent of the principal balance outstanding during the
    fifth and final year of the term. The table reflects the balance
    drawn of $142.9 as of September 30, 2005, resulting in
    expected annual principal payments of approximately
    $1.4 million in each of fiscal years 2006, 2007, and 2008.
    During the fifth year, or 2009, we expect to pay principal in
    the amount of $138.6 million. The Term B Senior Credit
    Facility also requires 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 approximate $142.9 million includes,
    as of September 30, 2005, approximately $3.6 million
    of the remaining unamortized debt discount. Approximately
    $4.6 million of debt issuance costs were recorded as debt
    discount.
|   
|(2) | 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 September 30, 2005,
    approximately $4.8 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.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(3) | During the eight-year term of the Subordinated Note,
    approximately $14.4 million of principal accretes to the
    note through the PIK. These amounts are included in the
    principal payments in fiscal years 2009 and 2010. In fiscal
    years 2009 and 2010, interest 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

00-19,




|     |       
|---- | ------
|(10) | Leases



85



---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                     |                                         |                |        |       | 
|-------------------- | --------------------------------------- | -------------- | ------ | ----- | 
|Fiscal Years Ending  |                                         | (In Thousands) |       
|                     |                                         |                |       
|2006                 |                                         | $              | 19,035 |      
|2007                 |                                         |                | 16,698 |      
|2008                 |                                         |                | 15,415 |      
|2009                 |                                         |                | 12,292 |      
|2010                 |                                         |                | 7,888  |      
|and thereafter       |                                         |                | 4,493  |      
|                     |                                         |                |       
|Gross lease payments |                                         | $              | 75,821 |      
|                     | Less: non-cancelable subtenant receipts |                |        | 8,286 | 
|                     |                                         |                |       
|Net lease payments   |                                         | $              | 67,535 |      
|                     |                                         |                |       





|     |             
|---- | ------------
|(11) | Fixed Assets



|                                               |                  |                |        |        |      |   |        |        | 
|---------------------------------------------- | ---------------- | -------------- | ------ | ------ | ---- | - | ------ | ------ | 
|                                               |                  | 2005           |        |        | 2004 |  
|                                               |                  |                |        |        |      |  
|                                               |                  | (In thousands) |       
|Leasehold improvements                         |                  | $              | 2,302  |        |      | $ | 1,992  |       
|Equipment and software                         |                  |                | 17,395 |        |      |   | 13,358 |       
|                                               |                  |                |        |        |      |  
|                                               | Total cost       |                |        | 19,697 |      |   |        | 15,350 | 
|                                               |                  |                |        |        |      |  
|Less accumulated depreciation and amortization |                  |                | 8,523  |        |      |   | 4,572  |       
|                                               |                  |                |        |        |      |  
|                                               | Net fixed assets |                | $      | 11,174 |      |   | $      | 10,778 | 
|                                               |                  |                |        |        |      |  



86



---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|     |                          
|---- | -------------------------
|(12) | Stock Appreciation Rights



|                        |  |            |         |  |                |  |        |                 |  |  |             |            |  |              |             |  |  |  |         | 
|----------------------- |  | ---------- | ------- |  | -------------- |  | ------ | --------------- |  |  | ----------- | ---------- |  | ------------ | ----------- |  |  |  | ------- | 
|                        |  | Number of  |         |  | Number of SARs |  |        |                 |  |  |             |           
|                        |  | SARs       |         |  | Granted to     |  |        |                 |  |  |             | Cumulative | 
|                        |  | Granted to |         |  | Board          |  |        | Total Number of |  |  | Exercise    |            |  | Number of    |            
|Effective Date of Grant |  | Employees  |         |  | of Directors   |  |        | SARs Granted    |  |  | Price/Share |            |  | SARs Granted |            
|                        |  |            |         |  |                |  |        |                 |  |  |             |            |  |              |            
|December 23, 2002       |  |            | 64,250  |  |                |  | 29,400 |                 |  |  | 93,650      |            |  | $            | 10.00/share |  |  |  | 93,650  | 
|May 15, 2003            |  |            | 300     |  |                |  |       |                 |  |  | 300         |            |  | $            | 11.13/share |  |  |  | 93,950  | 
|June 5, 2003            |  |            | 300     |  |                |  |       |                 |  |  | 300         |            |  | $            | 11.13/share |  |  |  | 94,250  | 
|December 21, 2003       |  |            | 129,550 |  |                |  | 12,600 |                 |  |  | 142,150     |            |  | $            | 14.71/share |  |  |  | 236,400 | 





10-year




87



---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                        |  |            |         |  |                |  |        |                 |  |  |             |            |  |              |             |  |  |  |         | 
|----------------------- |  | ---------- | ------- |  | -------------- |  | ------ | --------------- |  |  | ----------- | ---------- |  | ------------ | ----------- |  |  |  | ------- | 
|                        |  | Number of  |         |  | Number of SARs |  |        |                 |  |  |             |           
|                        |  | SARs       |         |  | Granted to     |  |        |                 |  |  |             | Cumulative | 
|                        |  | Granted to |         |  | Board          |  |        | Total Number of |  |  | Exercise    |            |  | Number of    |            
|Effective Date of Grant |  | Employees  |         |  | of Directors   |  |        | SARs Granted    |  |  | Price/Share |            |  | SARs Granted |            
|                        |  |            |         |  |                |  |        |                 |  |  |             |            |  |              |            
|November 2004           |  |            |        |  |                |  | 12,600 |                 |  |  | 12,600      |            |  | $            | 19.94/share |  |  |  | 12,600  | 
|February 2005           |  |            | 164,750 |  |                |  |       |                 |  |  | 164,750     |            |  | $            | 19.94/share |  |  |  | 177,350 | 
|March 2005              |  |            | 2,000   |  |                |  |       |                 |  |  | 2,000       |            |  | $            | 19.94/share |  |  |  | 179,350 | 
|April 2005              |  |            | 33,000  |  |                |  |       |                 |  |  | 33,000      |            |  | $            | 29.81/share |  |  |  | 212,350 | 
|June 2005               |  |            | 2,000   |  |                |  |       |                 |  |  | 2,000       |            |  | $            | 29.81/share |  |  |  | 214,350 | 







|     |                      
|---- | ---------------------
|(13) | Phantom Stock Program





| |                           
| | --------------------------
| | Initial Phantom Stock Plan





|                            |  |                       |    |   |          |  |    |  
|--------------------------- |  | --------------------- | -- | - | -------- |  | -- | -
|                            |  | The Vested Amount for |   
|                            |  | Grant in              |   
|                            |  |                       |   
|                            |  | February              |    |   | November | 
|Anniversary from Grant Date |  | 2003                  |    |   | 2003     | 
|                            |  |                       |    |   |          | 
|1st                         |  |                       |   |   |          |  | 20 | %
|2nd                         |  |                       |   |   |          |  | 20 | %
|3rd                         |  |                       | 50 | % |          |  | 20 | %
|4th                         |  |                       | 25 | % |          |  | 20 | %
|5th                         |  |                       | 25 | % |          |  | 20 | %

88



---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                        |  |               |         |  |               |  |         | 
|----------------------- |  | ------------- | ------- |  | ------------- |  | ------- | 
|                        |  | Shares of     |         |  | Cumulative    | 
|                        |  | Phantom Stock |         |  | Shares of     | 
|                        |  | Awarded to    |         |  | Phantom Stock | 
|Effective Date of Grant |  | Employees     |         |  | Awarded       | 
|                        |  |               |         |  |               | 
|February 11, 2003       |  |               | 171,000 |  |               |  | 171,000 | 
|November 11, 2003       |  |               | 52,685  |  |               |  | 223,685 | 



| |                          
| | -------------------------
| | Second Phantom Stock Plan









|                        |  |               |         |     |               |  |         | 
|----------------------- |  | ------------- | ------- | --- | ------------- |  | ------- | 
|                        |  | Shares of     |         |     | Cumulative    | 
|                        |  | Phantom Stock |         |     | Shares of     | 
|                        |  | Awarded to    |         |     | Phantom Stock | 
|Effective Date of Grant |  | Employees     |         |     | Awarded       | 
|                        |  |               |         |     |               | 
|February 1, 2005        |  |               | 207,778 | (1) |               |  | 207,778 | 
|February 1, 2005        |  |               | 103,414 | (2) |               |  | 311,192 | 






|    |                                                           
|--- | ----------------------------------------------------------
|(1) | Awarded 207,778 shares of performance share phantom stock.
|   
|(2) | Awarded 103,414 shares of retention share phantom stock.  



89



---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|     |                                               
|---- | ----------------------------------------------
|(14) | Segment Information and Customer Concentration







|     |                      
|---- | ---------------------
|(15) | Business Combinations



| |                                            
| | -------------------------------------------
| | IITRI Acquisition and Pro Forma Information





| |                                                               
| | --------------------------------------------------------------
| | Acquisition of Innovative Technology Solutions
    Corporation

not-to




| |                                           
| | ------------------------------------------
| | Acquisition of Identix Public Sector, Inc.



90



---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                               
| | ----------------------------------------------
| | Acquisition of Assets of Countermeasures, Inc.





| |                                                          
| | ---------------------------------------------------------
| | Acquisition of ManTech Environmental Technology,
    Inc.





| |                                                 
| | ------------------------------------------------
| | Acquisition of Carmel Applied Technologies, Inc.

not-to not-to




| |                                 
| | --------------------------------
| | Investment in VectorCommand Ltd.





| |                                                                               
| | ------------------------------------------------------------------------------
| | Acquisition of John J. McMullen Associates, Inc. and Pro
    Forma Information



91



---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                |  |               |      | 
|------------------------------- |  | ------------- | ---- | 
|Form of Consideration           |  | Fair Value    |     
|                                |  |               |     
|                                |  | (In millions) |     
|Cash paid, net of cash acquired |  | $             | 52.9 | 
|Stock issued                    |  |               | 37.3 | 
|Future payments                 |  |               | 8.3  | 
|Acquisition costs               |  |               | 1.3  | 
|                                |  |               |     
|Total consideration             |  | $             | 99.8 | 



|                                               |  |   |       |  
|---------------------------------------------- |  | - | ----- | -
|Accounts receivable                            |  | $ | 21.5  |  
|Property and equipment                         |  |   | 1.0   |  
|Other assets                                   |  |   | 1.4   |  
|Identifiable intangible assets                 |  |   | 29.6  |  
|Goodwill                                       |  |   | 57.8  |  
|Accounts payable and other accrued liabilities |  |   | (11.5 | )

non-compete




|                                    |  |                                        |           |          |                                        |   |           |       |  |   |           |          |  |       |           |   |       |   |           |   |  |   |           |  
|----------------------------------- |  | -------------------------------------- | --------- | -------- | -------------------------------------- | - | --------- | ----- |  | - | --------- | -------- |  | ----- | --------- | - | ----- | - | --------- | - |  | - | --------- | -
|                                    |  | Twelve Months Ended September 30, 2005 |           |          | Twelve Months Ended September 30, 2004 |  
|                                    |  |                                        |           |          |                                        |  
|                                    |  |                                        |           | JJMA Pro |                                        |   | Alion Pro |       |  |   |           | JJMA Pro |  |       | Alion Pro |  
|                                    |  | Alion                                  |           |          | Forma                                  |   |           | Forma |  |   | Alion     |          |  | Forma |           |   | Forma |  
|                                    |  |                                        |           |          |                                        |   |           |       |  |   |           |          |  |       |           |   |       |  
|Pro Forma Revenue                   |  | $                                      | 369,231   |          |                                        | $ | 51,103    |       |  | $ | 420,334   |          |  | $     | 269,940   |   |       | $ | 101,418   |   |  | $ | 371,358   |  
|Pro Forma Loss                      |  | $                                      | (40,238   | )        |                                        | $ | (17,524   | )     |  | $ | (57,762   | )        |  | $     | (15,111   | ) |       | $ | (4,705    | ) |  | $ | (19,816   | )
|Weighted Average Shares Outstanding |  |                                        | 4,235,947 |          |                                        |   | 671,753   |       |  |   | 4,907,700 |          |  |       | 3,074,709 |   |       |   | 1,347,197 |   |  |   | 4,421,906 |  
|Loss Per Share                      |  | $                                      | (9.50     | )        |                                        | $ |          |       |  | $ | (11.77    | )        |  | $     | (4.91     | ) |       | $ |          |   |  | $ | (4.33     | )
|                                    |  |                                        |           |          |                                        |   |           |       |  |   |           |          |  |       |           |   |       |  



|     |                           
|---- | --------------------------
|(16) | Related Party Transactions



92



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##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|     |                              
|---- | -----------------------------
|(17) | Commitments and Contingencies



| |                     
| | --------------------
| | Earn Out Commitments







not-to not-to






| |                  
| | -----------------
| | Legal Proceedings



| |                   
| | ------------------
| | AB Tech Settlement







93



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##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                                                     
| | ----------------------------------------------------
| | Joseph Hudert vs. Alion; Frank Stotmeister vs. Alion















| |                  
| | -----------------
| | Government Audits



94



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##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|     |                                                     
|---- | ----------------------------------------------------
|(18) | Interim Period Information (Unaudited, in thousands)

|               |  |               |        |   |     |   |         |     |  |   |         |   |  |   |         |  
|-------------- |  | ------------- | ------ | - | --- | - | ------- | --- |  | - | ------- | - |  | - | ------- | -
|               |  | 2005 Quarters |       
|               |  |               |       
|               |  | 1st           |        |   | 2nd |   |         | 3rd |  |   | 4th     |  
|               |  |               |        |   |     |   |         |     |  |   |         |  
|Revenue        |  | $             | 69,221 |   |     | $ | 80,691  |     |  | $ | 110,795 |   |  | $ | 108,524 |  
|Net loss       |  | $             | (5,964 | ) |     | $ | (17,366 | )   |  | $ | (10,763 | ) |  | $ | (6,145  | )
|Loss per share |  | $             | (1.77  | ) |     | $ | (5.21   | )   |  | $ | (2.21   | ) |  | $ | (1.18   | )

|               |  |               |        |   |     |   |        |     |  |   |        |   |  |   |        |  
|-------------- |  | ------------- | ------ | - | --- | - | ------ | --- |  | - | ------ | - |  | - | ------ | -
|               |  | 2004 Quarters |       
|               |  |               |       
|               |  | 1st           |        |   | 2nd |   |        | 3rd |  |   | 4th    |  
|               |  |               |        |   |     |   |        |     |  |   |        |  
|Revenue        |  | $             | 58,591 |   |     | $ | 64,712 |     |  | $ | 69,808 |   |  | $ | 76,829 |  
|Net loss       |  | $             | (4,292 | ) |     | $ | (3,386 | )   |  | $ | (2,805 | ) |  | $ | (4,628 | )
|Loss per share |  | $             | (1.45  | ) |     | $ | (1.16  | )   |  | $ | (0.87  | ) |  | $ | (1.45  | )



|     |                 
|---- | ----------------
|(19) | Subsequent Event

Joint Spectrum Center Contract




Consolidated Financial Statement Schedule







|                              |  |              |       |  |            |   |      |            |  |   |               |   |  |                 |            |   |             |   |     |     |  |   |       | 
|----------------------------- |  | ------------ | ----- |  | ---------- | - | ---- | ---------- |  | - | ------------- | - |  | --------------- | ---------- | - | ----------- | - | --- | --- |  | - | ----- | 
|                              |  | Balance at   |       |  | Charged to |   |      | Charged to |  |   |               |   |  |                 |           
|Allowance for Doubtful        |  | Beginning of |       |  | Costs and  |   |      | Contract   |  |   |               |   |  |                 | Balance at |  
|Accounts Receivable           |  | Year         |       |  | Expenses   |   |      | Revenue    |  |   | Deductions(2) |   |  | Acquisitions(3) |            |   | End of Year |  
|                              |  |              |       |  |            |   |      |            |  |   |               |   |  |                 |            |   |             |  
|Fiscal year ended
    2003(1) |  | $            | 3,414 |  |            | $ | (525 | )          |  | $ | (18           | ) |  | $               | (387       | ) |             | $ |    |     |  | $ | 2,484 | 
|Fiscal year ended
    2004    |  | $            | 2,484 |  |            | $ | 659  |            |  | $ |              |   |  | $               | (791       | ) |             | $ | 544 | (3) |  | $ | 2,896 | 
|Fiscal year ended
    2005    |  | $            | 2,896 |  |            | $ | 700  |            |  | $ |              |   |  | $               | (970       | ) |             | $ | 913 | (4) |  | $ | 3,539 | 






|    |                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Beginning balance recorded pursuant to allocation of purchase
    price to assets acquired and liabilities assumed in Alions
    acquisition of the Selected Operations of IITRI.
|   
|(2) | Accounts receivable written off against the allowance for
    doubtful accounts.                                                                                                  
|   
|(3) | Adjustments pursuant to the allocation of purchase price to
    assets acquired and liabilities assumed in Alions
    acquisitions of ITSC and IPS.                              

95



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##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | Adjustments pursuant to the allocation of purchase price to
    assets acquired and liabilities assumed in Alions
    acquisitions of CATI, METI, and JJMA.

96



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##### 






INDEPENDENT AUDITORS REPORT














| |             
| | ------------
| | /s/ KPMG LLP







97



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##### 



SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE





CONSOLIDATED BALANCE SHEETS


As of September 30, 2002 and 2001


|                                        |                                                                                                                   |                                              |        |        |        |  |        |        |        | 
|--------------------------------------- | ----------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | ------ | ------ | ------ |  | ------ | ------ | ------ | 
|                                        |                                                                                                                   | September 30,                                |       
|                                        |                                                                                                                   |                                              |       
|                                        |                                                                                                                   | 2002                                         |        |        | 2001   | 
|                                        |                                                                                                                   |                                              |        |        |        | 
|                                        |                                                                                                                   | (In thousands)                               |       
|ASSETS                                 
|Current assets:                         |                                                                                                                   |                                              |        |        |        |  |        |       
|                                        | Cash                                                                                                              |                                              | $      | 396    |        |  | $      |       |       
|                                        | Restricted cash                                                                                                   |                                              |        | 512    |        |  |        | 2,396  |       
|                                        | Accounts receivable, less allowance of $3,613 at
    September 30, 2002 and $3,260 at September 30, 2001          |                                              |        | 49,051 |        |  |        | 56,095 |       
|                                        | Other current assets                                                                                              |                                              |        | 2,965  |        |  |        | 1,619  |       
|                                        |                                                                                                                   |                                              |        |        |        | 
|                                        |                                                                                                                   | Total current assets                         |        |        | 52,924 |  |        |        | 60,110 | 
|Fixed assets, net                       |                                                                                                                   |                                              | 8,388  |        |        |  | 5,835  |       
|Goodwill, less accumulated amortization |                                                                                                                   |                                              | 8,931  |        |        |  | 9,511  |       
|Other assets                            |                                                                                                                   |                                              | 853    |        |        |  | 853    |       
|                                        |                                                                                                                   |                                              |        |        |        | 
|                                        |                                                                                                                   | Total assets                                 |        | $      | 71,096 |  |        | $      | 76,309 | 
|                                        |                                                                                                                   |                                              |        |        |        | 
|                                       
|LIABILITIES AND OWNERS NET INVESTMENT 
|Current liabilities:                    |                                                                                                                   |                                              |        |        |        |  |        |       
|                                        | Bank overdraft                                                                                                    |                                              | $      |       |        |  | $      | 2,156  |       
|                                        | Current portion of long-term debt                                                                                 |                                              |        | 3,330  |        |  |        | 141    |       
|                                        | Trade accounts payable and accrued liabilities                                                                    |                                              |        | 9,890  |        |  |        | 8,965  |       
|                                        | Accrued payroll and related liabilities                                                                           |                                              |        | 12,058 |        |  |        | 8,722  |       
|                                        | Advance payments                                                                                                  |                                              |        | 512    |        |  |        | 2,396  |       
|                                        | Billings in excess of costs and estimated earnings on
    uncompleted contracts                                   |                                              |        | 1,703  |        |  |        | 3,699  |       
|                                        | Due to the Illinois Institute of Technology                                                                       |                                              |        | 72     |        |  |        | 775    |       
|                                        | Current portion of deferred gain on sale of building to the
    Illinois Institute of Technology                  |                                              |        | 487    |        |  |        | 493    |       
|                                        |                                                                                                                   |                                              |        |        |        | 
|                                        |                                                                                                                   | Total current liabilities                    |        |        | 28,052 |  |        |        | 27,347 | 
|                                        | Long-term debt, excluding current portion                                                                         |                                              |        | 1,654  |        |  |        | 11,886 |       
|                                        | Accrued post-retirement benefit obligation                                                                        |                                              |        | 1,520  |        |  |        | 1,345  |       
|                                        | Long-term deferred gain on sale of building to the Illinois
    Institute of Technology excluding current portion |                                              |        | 3,523  |        |  |        | 4,054  |       
|                                        |                                                                                                                   |                                              |        |        |        | 
|                                        |                                                                                                                   | Total liabilities                            |        |        | 34,749 |  |        |        | 44,632 | 
|Owners net investment                  |                                                                                                                   |                                              | 36,347 |        |        |  | 31,677 |       
|                                        |                                                                                                                   |                                              |        |        |        | 
|                                        |                                                                                                                   | Total liabilities and owners net investment |        |        | 71,096 |  |        |        | 76,309 | 
|                                        |                                                                                                                   |                                              |        |        |        | 



98



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SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE





CONSOLIDATED STATEMENTS OF INCOME


For the Years Ended September 30, 2002, 2001, and
2000


|                         |                               |                                                          |         |        |        |   |         |        |        |   |         |        |        | 
|------------------------ | ----------------------------- | -------------------------------------------------------- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                         |                               | Year Ended September                                     |        
|                         |                               |                                                          |        
|                         |                               | 2002                                                     |         |        | 2001   |   |         | 2000   |       
|                         |                               |                                                          |         |        |        |   |         |        |       
|                         |                               | (In thousands)                                           |        
|Contract revenue         |                               | $                                                        | 201,738 |        |        | $ | 193,152 |        |        | $ | 156,137 |       
|Direct contract expenses |                               |                                                          | 147,377 |        |        |   | 140,555 |        |        |   | 111,122 |       
|                         |                               |                                                          |         |        |        |   |         |        |       
|                         |                               | Excess of contract revenue over direct contract expenses |         |        | 54,361 |   |         |        | 52,597 |   |         |        | 45,015 | 
|                         |                               |                                                          |         |        |        |   |         |        |       
|Operating expenses:      |                               |                                                          |         |        |        |   |         |        |        |   |         |       
|                         | Indirect contract expenses    |                                                          |         | 11,153 |        |   |         | 13,145 |        |   |         | 12,348 |       
|                         | Research and development      |                                                          |         | 575    |        |   |         | 435    |        |   |         | 547    |       
|                         | General and administrative    |                                                          |         | 25,363 |        |   |         | 16,352 |        |   |         | 15,132 |       
|                         | Rental and occupancy expense  |                                                          |         | 7,796  |        |   |         | 7,083  |        |   |         | 7,536  |       
|                         | Depreciation and amortization |                                                          |         | 3,447  |        |   |         | 3,488  |        |   |         | 3,754  |       
|                         | Bad debt expense              |                                                          |         | 154    |        |   |         | 1,223  |        |   |         | 324    |       
|                         |                               |                                                          |         |        |        |   |         |        |       
|                         | Total operating expense       |                                                          |         | 48,488 |        |   |         | 41,726 |        |   |         | 39,641 |       
|                         |                               |                                                          |         |        |        |   |         |        |       
|                         |                               | Operating income                                         |         |        | 5,873  |   |         |        | 10,871 |   |         |        | 5,374  | 
|Other income (expense):  |                               |                                                          |         |        |        |   |         |        |        |   |         |       
|                         | Interest income               |                                                          |         | 40     |        |   |         | 50     |        |   |         | 105    |       
|                         | Interest expense              |                                                          |         | (563   | )      |   |         | (895   | )      |   |         | (1,389 | )     
|                         | Equity in loss of affiliate   |                                                          |         |       |        |   |         |       |        |   |         | (498   | )     
|                         | Gain on sale of land          |                                                          |         |       |        |   |         |       |        |   |         | 1,319  |       
|                         | Other                         |                                                          |         | (63    | )      |   |         | (277   | )      |   |         | (231   | )     
|                         |                               |                                                          |         |        |        |   |         |        |       
|                         |                               | Income before income taxes                               |         |        | 5,287  |   |         |        | 9,799  |   |         |        | 4,680  | 
|                         | Income tax expense            |                                                          |         | (589   | )      |   |         | (302   | )      |   |         | (398   | )     
|                         |                               |                                                          |         |        |        |   |         |        |       
|                         |                               | Net income                                               |         | $      | 4,698  |   |         | $      | 9,497  |   |         | $      | 4,282  | 
|                         |                               |                                                          |         |        |        |   |         |        |       



99



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SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE





CONSOLIDATED STATEMENTS OF CHANGES IN OWNERS NET
INVESTMENT


For the Years Ended September 30, 2000, 2001, and
2002


|                                                                         |  |                |        |  
|------------------------------------------------------------------------ |  | -------------- | ------ | -
|                                                                         |  | Owners Net    |       
|                                                                         |  | Investment     |       
|                                                                         |  |                |       
|                                                                         |  | (In thousands) |       
|Balance at September 30, 1999                                            |  | $              | 26,787 |  
|Net Income                                                               |  |                | 4,282  |  
|Distributions to the Illinois Institute of Technology                    |  |                | (1,315 | )
|Unreimbursed losses and capital funding of Life Sciences
    Operation   |  |                | (2,135 | )
|                                                                         |  |                |       
|Balance at September 30, 2000                                            |  |                | 27,619 |  
|Net Income                                                               |  |                | 9,497  |  
|Distributions to the Illinois Institute of Technology                    |  |                | (1,585 | )
|Unreimbursed losses and capital funding of Life Sciences
    Operation   |  |                | (3,854 | )
|                                                                         |  |                |       
|Balance at September 30, 2001                                            |  |                | 31,677 |  
|Net income                                                               |  |                | 4,698  |  
|Distributions to the Illinois Institute of Technology                    |  |                | (887   | )
|Unreimbursed losses and capital funding from Life Sciences
    Operation |  |                | 859    |  
|                                                                         |  |                |       
|Balance at September 30, 2002                                            |  | $              | 36,347 |  
|                                                                         |  |                |       



100



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SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE





CONSOLIDATED STATEMENTS OF CASH FLOW


For the Years Ended September 30, 2002, 2001, and
2000


|                                                         |                                                                                                      |                                                                                               |                                                |                                                     |       |        |        |         |       |        |         |        |        |        |        |  
|-------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------- | --------------------------------------------------- | ----- | ------ | ------ | ------- | ----- | ------ | ------- | ------ | ------ | ------ | ------ | -
|                                                         |                                                                                                      | Year Ended September 30,                                                                      |                                               
|                                                         |                                                                                                      |                                                                                               |                                               
|                                                         |                                                                                                      | 2002                                                                                          |                                                |                                                     | 2001  |        |        | 2000    |      
|                                                         |                                                                                                      |                                                                                               |                                                |                                                     |       |        |        |         |      
|                                                         |                                                                                                      | (In thousands)                                                                                |                                               
|Cash flows from operating activities:                    |                                                                                                      |                                                                                               |                                                |                                                     |       |        |        |         |       |        |         |       
|                                                         | Net Income (loss)                                                                                    |                                                                                               | $                                              | 4,698                                               |       |        | $      | 9,497   |       |        | $       | 4,282  |       
|                                                         | Adjustments to reconcile net income loss to net cash provided by
    (used in) operating activities: |                                                                                               |                                                |                                                     |       |        |        |         |       |        |         |        |       
|                                                         |                                                                                                      | Depreciation and amortization                                                                 |                                                |                                                     | 3,447 |        |        |         | 3,488 |        |         |        | 3,754  |       
|                                                         |                                                                                                      | Gain in investments                                                                           |                                                |                                                     | (77   | )      |        |         |      |        |         |        |       |       
|                                                         |                                                                                                      | Equity in loss of affiliate                                                                   |                                                |                                                     |      |        |        |         |      |        |         |        | 498    |       
|                                                         |                                                                                                      | Amortization of deferred gain on sale of building to the
    Illinois Institute of Technology |                                                |                                                     | (486  | )      |        |         | (379  | )      |         |        |       |       
|                                                         |                                                                                                      | Gain on sale of land                                                                          |                                                |                                                     |      |        |        |         |      |        |         |        | (1,319 | )     
|                                                         |                                                                                                      | Loss on disposal of fixed assets                                                              |                                                |                                                     |      |        |        |         | 84    |        |         |        |       |       
|                                                         |                                                                                                      | Changes in assets and liabilities, net of effect of acquisitions:                             |                                                |                                                     |       |        |        |         |       |        |         |        |        |       
|                                                         |                                                                                                      |                                                                                               | Accounts receivable, net                       |                                                     |       | 5,927  |        |         |       | 378    |         |        |        | (8,369 | )     
|                                                         |                                                                                                      |                                                                                               | Other assets                                   |                                                     |       | (654   | )      |         |       | (365   | )       |        |        | 1,088  |       
|                                                         |                                                                                                      |                                                                                               | Trade accounts payable and accrued liabilities |                                                     |       | 4,384  |        |         |       | (1,696 | )       |        |        | (136   | )     
|                                                         |                                                                                                      |                                                                                               | Other liabilities                              |                                                     |       | (2,526 | )      |         |       | (3,100 | )       |        |        | (5,104 | )     
|                                                         |                                                                                                      |                                                                                               |                                                |                                                     |       |        |        |         |      
|                                                         |                                                                                                      |                                                                                               |                                                | Net cash provided by (used in) operating activities |       |        | 14,713 |         |       |        | 7,907   |        |        |        | (5,306 | )
|                                                         |                                                                                                      |                                                                                               |                                                |                                                     |       |        |        |         |      
|Net cash flows from investing activities:                |                                                                                                      |                                                                                               |                                                |                                                     |       |        |        |         |       |        |         |       
|                                                         | Proceeds from sale of land                                                                           |                                                                                               |                                                |                                                    |       |        |        |        |       |        |         | 2,328  |       
|                                                         | Proceeds from sale of building to the Illinois Institute of
    Technology, net                      |                                                                                               |                                                |                                                    |       |        |        | 12,181  |       |        |         |       |       
|                                                         | Capital expenditures                                                                                 |                                                                                               |                                                | (3,643                                              | )     |        |        | (1,940  | )     |        |         | (2,795 | )     
|                                                         | Cash paid for acquisition of net assets of AB Tech                                                   |                                                                                               |                                                |                                                    |       |        |        | (378    | )     |        |         | (2,500 | )     
|                                                         | Cash paid for Daedalic                                                                               |                                                                                               |                                                | (823                                                | )     |        |        |        |       |        |         |       |       
|                                                         |                                                                                                      |                                                                                               |                                                |                                                     |       |        |        |         |      
|                                                         |                                                                                                      |                                                                                               |                                                | Net cash provided by (used in) investing activities |       |        | (4,466 | )       |       |        | 9,863   |        |        |        | (2,967 | )
|                                                         |                                                                                                      |                                                                                               |                                                |                                                     |       |        |        |         |      
|Cash flows from financing activities:                    |                                                                                                      |                                                                                               |                                                |                                                     |       |        |        |         |       |        |         |       
|                                                         | Increase in (repayment of) bank overdraft                                                            |                                                                                               |                                                | (2,156                                              | )     |        |        | 2,156   |       |        |         | 855    |       
|                                                         | Net borrwoings (repayments) under revolving bank credit
    agreement                                |                                                                                               |                                                | (7,526                                              | )     |        |        | (10,838 | )     |        |         | 14,373 |       
|                                                         | Payments under notes payable                                                                         |                                                                                               |                                                | (141                                                | )     |        |        | (3,649  | )     |        |         | (6,817 | )     
|                                                         | Distributions to the Illinois Institute of Technology                                                |                                                                                               |                                                | (887                                                | )     |        |        | (1,585  | )     |        |         | (1,315 | )     
|                                                         | Unreimbursed losses and capital funding (of) from Life
    Sciences Operation                        |                                                                                               |                                                | 859                                                 |       |        |        | (3,854  | )     |        |         | (2,135 | )     
|                                                         |                                                                                                      | Cash transferred to Alion in conjunction with the sale of the
    Business to Alion           |                                                |                                                     |      |        |        |         |      |        |         |        |       |       
|                                                         |                                                                                                      |                                                                                               |                                                |                                                     |       |        |        |         |      
|                                                         |                                                                                                      |                                                                                               |                                                | Net cash provided by (used in) financing activities |       |        | (9,851 | )       |       |        | (17,770 | )      |        |        | 4,961  |  
|                                                         |                                                                                                      |                                                                                               |                                                |                                                     |       |        |        |         |      
|                                                         |                                                                                                      |                                                                                               |                                                | Net increase (decrease) in cash                     |       |        | 396    |         |       |        |        |        |        |        | (3,312 | )
|Cash at beginning of period                              |                                                                                                      |                                                                                               |                                               |                                                     |       |        |       |         |       |        | 3,312   |       
|                                                         |                                                                                                      |                                                                                               |                                                |                                                     |       |        |        |         |      
|Cash at end of period                                    |                                                                                                      | $                                                                                             | 396                                            |                                                     |       | $      |       |         |       | $      |        |       
|                                                         |                                                                                                      |                                                                                               |                                                |                                                     |       |        |        |         |      
|Supplement disclosure of cash flow information:          |                                                                                                      |                                                                                               |                                                |                                                     |       |        |        |         |       |        |         |       
|                                                         | Cash paid for interest                                                                               |                                                                                               | $                                              | 776                                                 |       |        | $      | 1,561   |       |        | $       | 1,318  |       
|                                                         | Cash paid for income taxes                                                                           |                                                                                               |                                                | 489                                                 |       |        |        | 570     |       |        |         |       |       
|Supplemental disclosure of noncash financing activities: |                                                                                                      |                                                                                               |                                                |                                                     |       |        |        |         |       |        |         |       
|                                                         | Debt incurred related to earnout provisions of acquisitions                                          |                                                                                               | $                                              | 624                                                 |       |        | $      | 579     |       |        | $       | 2,952  |       
|                                                         |                                                                                                      |                                                                                               |                                                |                                                     |       |        |        |         |      



101



---



##### 



SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|    |                                    
|--- | -----------------------------------
|(1) | Nature of Organization and Business









|    |                                                      
|--- | -----------------------------------------------------
|(2) | Basis of Presentation and Principles of Consolidation









|    |                                           
|--- | ------------------------------------------
|(3) | Summary of Significant Accounting Policies



| |                 
| | ----------------
| | Use of Estimates



102



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##### 



SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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





| |                                
| | -------------------------------
| | Unaudited Financial Information





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













103



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##### 



SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








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





| |                                                                                                              
| | -------------------------------------------------------------------------------------------------------------
| | Costs and Estimated Earnings in Excess of Billings and
    Billings in Excess of Costs and Estimated Earnings





| |         
| | --------
| | Goodwill





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



104



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##### 



SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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









| |                          
| | -------------------------
| | Earnings per Common Share





| |                                 
| | --------------------------------
| | Derivative Financial Instruments





| |                                               
| | ----------------------------------------------
| | Segment Information and Customer Concentration







105



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##### 



SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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











106



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##### 



SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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





|    |                      
|--- | ---------------------
|(4) | Business Combinations











107



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##### 



SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|           |  |                |         | 
|---------- |  | -------------- | ------- | 
|           |  | 2000           |        
|           |  |                |        
|           |  | (In thousands) |        
|Revenue    |  | $              | 169,268 | 
|Net income |  | $              | 5,698   | 







|    |                               
|--- | ------------------------------
|(5) | Property, Plant, and Equipment

|                                               |                                    |                |        |        |      |   |        |        | 
|---------------------------------------------- | ---------------------------------- | -------------- | ------ | ------ | ---- | - | ------ | ------ | 
|                                               |                                    | 2002           |        |        | 2001 |  
|                                               |                                    |                |        |        |      |  
|                                               |                                    | (In thousands) |       
|Buildings and building improvements            |                                    | $              | 15,925 |        |      | $ | 15,780 |       
|Leasehold improvements                         |                                    |                | 922    |        |      |   | 469    |       
|Equipment and software                         |                                    |                | 28,647 |        |      |   | 25,201 |       
|                                               |                                    |                |        |        |      |  
|                                               | Total cost                         |                |        | 45,494 |      |   |        | 41,450 | 
|Less accumulated depreciation and amortization |                                    |                | 37,106 |        |      |   | 35,615 |       
|                                               |                                    |                |        |        |      |  
|                                               | Net property, plant, and equipment |                | $      | 8,388  |      |   | $      | 5,835  | 
|                                               |                                    |                |        |        |      |  





10-year




108



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##### 



SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |     
|--- | ----
|(6) | Debt





|                                                                         |                                           |                |       |       |      |   |        |        | 
|------------------------------------------------------------------------ | ----------------------------------------- | -------------- | ----- | ----- | ---- | - | ------ | ------ | 
|                                                                         |                                           | 2002           |       |       | 2001 |  
|                                                                         |                                           |                |       |       |      |  
|                                                                         |                                           | (In thousands) |      
|Note payable to First Union Bank, due in December 2002                   |                                           | $              | 3,330 |       |      | $ | 10,820 |       
|Other notes payable, primarily to previous owners of EMC and AB
    Tech |                                           |                | 1,654 |       |      |   | 1,207  |       
|                                                                         |                                           |                |       |       |      |  
|                                                                         | Total long-term debt                      |                |       | 4,984 |      |   |        | 12,027 | 
|Less current portion                                                     |                                           |                | 3,330 |       |      |   | 141    |       
|                                                                         |                                           |                |       |       |      |  
|                                                                         | Long-term debt, excluding current portion |                |       | 1,654 |      |   |        | 11,886 | 
|                                                                         |                                           |                |       |       |      |  







|    |             
|--- | ------------
|(7) | Income Taxes







|    |                                               
|--- | ----------------------------------------------
|(8) | Pensions and Postretirement and Other Benefits







109



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##### 



SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                                                                  |  |                |        |   |      |   |        |  
|--------------------------------------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                                                                                  |  | 2002           |        |   | 2001 |  
|                                                                                  |  |                |        |   |      |  
|                                                                                  |  | (In thousands) |       
|Accumulated postretirement benefit obligation:                                    |  |                |        |   |      |   |        |  
|Retirees                                                                          |  | $              | 287    |   |      | $ | 358    |  
|Fully eligible active plan participants                                           |  |                | 739    |   |      |   | 508    |  
|Other active plan participants                                                    |  |                | 1,296  |   |      |   | 1,144  |  
|                                                                                  |  |                |        |   |      |  
|                                                                                  |  | $              | 2,322  |   |      | $ | 2,010  |  
|                                                                                  |  |                |        |   |      |  
|Reconciliation of beginning and ending benefit obligation:                        |  |                |        |   |      |   |        |  
|Benefit obligation at October 1                                                   |  | $              | 2,010  |   |      | $ | 1,780  |  
|Service cost                                                                      |  |                | 112    |   |      |   | 61     |  
|Interest cost                                                                     |  |                | 253    |   |      |   | 152    |  
|Actuarial loss                                                                    |  |                | 158    |   |      |   | 135    |  
|Benefits paid                                                                     |  |                | (211   | ) |      |   | (118   | )
|                                                                                  |  |                |        |   |      |  
|Benefit obligation at September 30                                                |  | $              | 2,322  |   |      | $ | 2,010  |  
|                                                                                  |  |                |        |   |      |  
|Change in fair value of plan assets:                                              |  |                |        |   |      |   |        |  
|Fair value of plan assets at October 1                                            |  |                |       |   |      |   |       |  
|Funded status of the plan:                                                        |  |                |        |   |      |   |        |  
|obligation at September 30                                                        |  |                | (2,322 | ) |      |   | (2,010 | )
|Unrecognized net transition obligation                                            |  |                | 953    |   |      |   | 900    |  
|Unrecognized prior service cost                                                   |  |                | (156   | ) |      |   | (153   | )
|Unrecognized net loss (gain)                                                      |  |                | 5      |   |      |   | (82    | )
|                                                                                  |  |                |        |   |      |  
|Accrued postretirement benefits recognized in the consolidated
    balance sheets |  | $              | (1,520 | ) |      | $ | (1,345 | )
|                                                                                  |  |                |        |   |      |  



|                                                       |                                          |      |     |     |      |   |     |      |  |   |     |     | 
|------------------------------------------------------ | ---------------------------------------- | ---- | --- | --- | ---- | - | --- | ---- |  | - | --- | --- | 
|                                                       |                                          | 2002 |     |     | 2001 |   |     | 2000 | 
|                                                       |                                          |      |     |     |      |   |     |      | 
|Service cost                                           |                                          | $    | 112 |     |      | $ | 61  |      |  | $ | 112 |    
|Interest cost                                          |                                          |      | 253 |     |      |   | 152 |      |  |   | 253 |    
|Amortization of unrecognized net transition obligation |                                          |      | 94  |     |      |   | 94  |      |  |   | 94  |    
|Amortization of unrecognized prior-service cost        |                                          |      | (19 | )   |      |   | (19 | )    |  |   | (19 | )  
|                                                       |                                          |      |     |     |      |   |     |      | 
|                                                       | Net periodic postretirement benefit cost |      | $   | 440 |      |   | $   | 288  |  |   | $   | 440 | 
|                                                       |                                          |      |     |     |      |   |     |      | 



110



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##### 



SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|    |       
|--- | ------
|(9) | Leases



|                     |  |                |        | 
|-------------------- |  | -------------- | ------ | 
|Fiscal Years Ending: |  | (In Thousands) |       
|                     |  |                |       
|2003                 |  | $              | 8,544  | 
|2004                 |  |                | 7,913  | 
|2005                 |  |                | 7,511  | 
|2006                 |  |                | 5,637  | 
|2007                 |  |                | 5,664  | 
|and thereafter       |  |                | 11,040 | 
|                     |  |                |       
|                     |  | $              | 46,309 | 
|                     |  |                |       







|     |                                                                               
|---- | ------------------------------------------------------------------------------
|(10) | Transactions Between the Business and the Illinois Institute
    of Technology







111



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##### 



SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|     |                              
|---- | -----------------------------
|(11) | Commitments and Contingencies



| |                  
| | -----------------
| | Legal Proceedings





| |                        
| | -----------------------
| | AB Technologies Lawsuit











| |                  
| | -----------------
| | Government Audits





112



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##### 



SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|     |                                       
|---- | --------------------------------------
|(12) | Interim Period Information (Unaudited)



|                  |  |      |        |  |      |   |        |     |  |   |        |  |  |     |        |  |     |   |        |     |  |   |        |  |  |   |        |  |  |   |        | 
|----------------- |  | ---- | ------ |  | ---- | - | ------ | --- |  | - | ------ |  |  | --- | ------ |  | --- | - | ------ | --- |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                  |  | 2002 |        |  | 2001 |  
|                  |  |      |        |  |      |  
|                  |  | 1st  |        |  | 2nd  |   |        | 3rd |  |   | 4th    |  |  | 1st |        |  | 2nd |   |        | 3rd |  |   | 4th    | 
|                  |  |      |        |  |      |   |        |     |  |   |        |  |  |     |        |  |     |   |        |     |  |   |        | 
|Revenue           |  | $    | 43,701 |  |      | $ | 44,853 |     |  | $ | 64,485 |  |  | $   | 48,699 |  |     | $ | 40,700 |     |  | $ | 44,465 |  |  | $ | 59,611 |  |  | $ | 48,376 | 
|Net income (loss) |  | $    | 1,390  |  |      | $ | 1,037  |     |  | $ | 745    |  |  | $   | 745    |  |     | $ | 1,772  |     |  | $ | 2,090  |  |  | $ | 2,236  |  |  | $ | 3,399  | 



|     |                             
|---- | ----------------------------
|(13) | Sale of Business (Unaudited)





| |   |                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $58,571 cash, consisting of $56,721 paid to IITRI and
    $1,517 paid for certain transaction expenses on behalf
    of IITRI, and $333 paid for other transaction expenses;                                                                                       
|
| |  | $39,900 in seller notes to IITRI with detachable warrants
    representing approximately 26% of the outstanding common of
    stock of Alion (on a fully diluted basis) attached. The seller
    notes bear a weighted average interest rate of 6.7% per
    annum;
|
| |  | $20,343 in mezzanine notes to the IITRI with detachable
    warrants representing 12% of the outstanding common stock of
    Alion (on a fully diluted basis) attached. The mezzanine notes
    bear interest at 12% per annum;                                    
|
| |  | transaction costs of $2,300, less the $1,517 noted above;                                                                                                                                                                                                          
|
| |  | assumption of debt from Wachovia (formerly First Union) of
    $6,188; and                                                                                                                                                                                         
|
| |  | amounts due to IITRI of $2,094.                                                                                                                                                                                                                                    

113



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##### 








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9a. | Controls and Procedures

Disclosure Controls and Procedures.


Internal Control Over Financial Reporting.







|         |                  
|-------- | -----------------
|Item 9b. | Other Information

Sales of Unregistered Securities


8-K


114



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##### 






PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant





|                                     |  |     |    |  |          |                                                 |         |  |          |       |  |  |      | 
|------------------------------------ |  | --- | -- |  | -------- | ----------------------------------------------- | ------- |  | -------- | ----- |  |  | ---- | 
|                                     |  |     |    |  |          | Term                                            |         |  | Director |      
|Name                                 |  | Age |    |  | Position |                                                 | Expires |  |          | Since | 
|                                     |  |     |    |  |          |                                                 |         |  |          |       | 
|Bahman Atefi                         |  |     | 52 |  |          | President, Chief Executive Officer and Chairman |         |  | 2008     |       |  |  | 2001 | 
|Edward C. Pete Aldridge            |  |     | 67 |  |          | Director                                        |         |  | 2006     |       |  |  | 2003 | 
|Leslie Armitage                      |  |     | 37 |  |          | Director                                        |         |  | 2007     |       |  |  | 2002 | 
|Lewis Collens                        |  |     | 67 |  |          | Director                                        |         |  | 2007     |       |  |  | 2002 | 
|Admiral (Ret.) Harold W. Gehman, Jr. |  |     | 62 |  |          | Director                                        |         |  | 2007     |       |  |  | 2002 | 
|Donald E. Goss                       |  |     | 74 |  |          | Director                                        |         |  | 2006     |       |  |  | 2002 | 
|Robert L. Growney                    |  |     | 62 |  |          | Director                                        |         |  | 2006     |       |  |  | 2002 | 
|General (Ret.) George A. Joulwan     |  |     | 65 |  |          | Director                                        |         |  | 2008     |       |  |  | 2002 | 
|General (Ret.) Michael E. Ryan       |  |     | 63 |  |          | Director                                        |         |  | 2008     |       |  |  | 2002 | 





Bahman Atefi


Edward C.Pete Aldridge


115



---



##### 





Leslie Armitage


Lewis Collens


Admiral (Ret.) Harold W. Gehman, Jr.


Donald E. Goss


Robert L. Growney


General (Ret.) George A. Joulwan 1993-1997.


116



---



##### 



General (Ret.) Michael E. Ryan


Compensation of Directors








Establishment of Committees




|                                    |  |               |  |                                                              
|----------------------------------- |  | ------------- |  | -------------------------------------------------------------
|Committee                           |  | Chairperson   |  | Members                                                      
|                                    |  |               |  |                                                              
|Audit and Finance Committee         |  | Donald Goss   |  | Leslie Armitage, Robert Growney, Harold Gehman, Michael Ryan 
|Compensation Committee              |  | Lewis Collens |  | Pete Aldridge, Leslie Armitage, Harold Gehman, George Joulwan
|Governance and Compliance Committee |  | Bahman Atefi  |  | George Joulwan, Michael Ryan, Harold Gehman                  

S-K,




| |                                                                
| | ---------------------------------------------------------------
| | Compensation Committee Interlocks and Insider
    Participation



117



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##### 





Information Regarding the Executive Officers of the
Registrant




|                    |  |     |    |  |        |                                                                         |                |  |                | 
|------------------- |  | --- | -- |  | ------ | ----------------------------------------------------------------------- | -------------- |  | -------------- | 
|Name                |  | Age |    |  | Office |                                                                         | Position Since | 
|                    |  |     |    |  |        |                                                                         |                | 
|Bahman Atefi        |  |     | 52 |  |        | President,
    Chief Executive Officer and
    Chairman of the Board(1) |                |  | December 2001  | 
|Randy Crawford      |  |     | 54 |  |        | Sector Senior Vice President(1)                                         |                |  | May 2002       | 
|Rob Goff            |  |     | 59 |  |        | Sector Senior Vice President                                            |                |  | February 2004  | 
|Scott Fry           |  |     | 56 |  |        | Sector Senior Vice President                                            |                |  | October 2005   | 
|John (Jack ) Hughes |  |     | 53 |  |        | Executive Vice President, Chief Financial Officer and
    Treasurer(1)  |                |  | September 2005 | 
|Stacy Mendler       |  |     | 42 |  |        | Executive Vice President and Chief Administrative Officer(1)            |                |  | September 2005 | 
|James Fontana       |  |     | 47 |  |        | Senior Vice President, General Counsel and Secretary                    |                |  | January 2004   | 






|    |                             
|--- | ----------------------------
|(1) | Member of the ESOP committee



Randy Crawford


Rob Goff


Scott Fry


118



---



##### 





John Hughes


Stacy Mendler


James Fontana


Code of Ethics






119



---



##### 










|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation



|                              |                               |                     |      |              |              |  |         |         |           |  |                 |        |  |                 |   |   |              |  |   |      |  |  |           |          |         
|----------------------------- | ----------------------------- | ------------------- | ---- | ------------ | ------------ |  | ------- | ------- | --------- |  | --------------- | ------ |  | --------------- | - | - | ------------ |  | - | ---- |  |  | --------- | -------- | --------
|                              |                               |                     |      | Long-Term    |              |  |        
|                              |                               | Annual Compensation |      |              | Compensation |  |         |        
|                              |                               |                     |      |              |              |  |         |        
|                              |                               |                     |      | Other Annual |              |  |         |         | All Other | 
|Name and Principal Position   |                               | Year                |      |              | Salary       |  |         | Bonus   |           |  | Compensation(1) |        |  | LTIP Payouts(2) |   |   | Compensation | 
|                              |                               |                     |      |              |              |  |         |         |           |  |                 |        |  |                 |   |   |              | 
|Bahman Atefi                  |                               |                     | 2005 |              |              |  | 438,609 |         |           |  | 425,000         | (4)    |  |                 |  |   |              |  |  | (3)  |  |  | 1,081,488 | (5)     
|Chief Executive Officer       |                               |                     | 2004 |              |              |  | 406,156 |         |           |  | 410,000         |        |  |                 |  |   |              |  |  |      |  |  | 16,445    | (5)     
|                              |                               |                     | 2003 |              |              |  | 387,115 |         |           |  | 365,000         |        |  |                 |  |   |              |  |  |      |  |  | 873,078   | (5),(13)
|Stacy Mendler                 |                               |                     | 2005 |              |              |  | 262,450 |         |           |  | 215,000         | (4)    |  |                 |  |   |              |  |  | (6)  |  |  | 249,003   | (7)     
|Executive VP, Chief           |                               |                     | 2004 |              |              |  | 216,243 |         |           |  | 105,000         |        |  |                 |  |   |              |  |  |      |  |  | 14,655    | (7)     
|                              | Administrative Officer        |                     |      | 2003         |              |  |         | 196,238 |           |  |                 | 90,000 |  |                 |   |  |              |  |   |     |  |  |           | 227,930  | (7),(13)
|Randy Crawford                |                               |                     | 2005 |              |              |  | 286,982 |         |           |  | 125,000         | (4)    |  |                 |  |   |              |  |  | (8)  |  |  | 18,799    | (9)     
|Spectrum Engineering and      |                               |                     | 2004 |              |              |  | 257,752 |         |           |  | 90,000          |        |  |                 |  |   |              |  |  |      |  |  | 13,825    | (9)     
|                              | Information Technology Sector |                     |      |              |              |  |         |         |           |  |                 |        |  |                 |   |   |              |  |   |      |  |  |           |          |         
|                              | Senior VP and Sector Manger   |                     |      | 2003         |              |  |         | 245,475 |           |  |                 | 90,000 |  |                 |   |  |              |  |   |     |  |  |           | 285,441  | (9),(13)
|Rob Goff                      |                               |                     | 2005 |              |              |  | 284,169 | (10)    |           |  | 235,000         | (4)    |  |                 |  |   |              |  |  | (15) |  |  | 19,533    | (14)    
|Defense Operations            |                               |                     | 2004 |              |              |  | 243,271 | (10)    |           |  | 200,000         |        |  |                 |  |   |              |  |  |      |  |  | 14,261    | (14)    
|                              | Integration Sector Senior VP  |                     |      | 2003         |              |  |         | 221,349 |           |  |                 | 60,000 |  |                 |   |  |              |  |   |     |  |  |           | 15,999   | (14)    
|                              | and Sector Manager            |                     |      |              |              |  |         |         |           |  |                 |        |  |                 |   |   |              |  |   |      |  |  |           |          |         
|Jack Hughes                   |                               |                     | 2005 |              |              |  | 280,771 |         |           |  | 215,000         | (4)    |  |                 |  |   |              |  |  | (11) |  |  | 18,494    | (12)    
|Executive VP, Chief Financial |                               |                     | 2004 |              |              |  | 245,195 |         |           |  | 135,000         |        |  |                 |  |   |              |  |  |      |  |  | 14,957    | (12)    
|                              | Officer and Treasurer         |                     |      | 2003         |              |  |         | 220,677 |           |  |                 | 65,000 |  |                 |   |  |              |  |   |     |  |  |           | 11,675   | (12)    
|Thomas Diamant(16)            |                               |                     | 2005 |              |              |  | 223,114 | (17)    |           |  |                |        |  |                 |  |   |              |  |  |      |  |  | 210,196   | (18)    
|Senior Consultant to the CEO  |                               |                     |      |              |              |  |         |         |           |  |                 |        |  |                 |   |   |              |  |   |      |  |  |           |         






|    |                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Unless otherwise indicated, no executive officer named in this
    summary compensation table received personal benefits or
    perquisites with an aggregate value equal to or exceeding the
    lesser of $50,000 or 10% of his or her aggregate salary and
    bonus.                                                                                                                                                     
|   
|(2) | See the Long Term Incentive Plan  Awards in
    Last Fiscal Year table, set forth below, for details
    related to phantom stock grants. See the SAR Grants in
    Last Fiscal Year and Aggregate SAR Exercises in Last
    Fiscal Year and Fiscal Year End SAR Values tables, set
    forth below, for details related to SAR grants.                                                                               
|   
|(3) | In February 2005, Dr Atefi was awarded 65,926 shares of
    performance-base phantom stock and 43,951 shares of
    retention-based phantom stock under the Second Phantom Stock
    Plan. In November 2003 and February 2003, Dr. Atefi was
    awarded 18,695 shares and 65,000 shares, respectively,
    of phantom stock under the Initial Phantom Stock Plan. Each
    phantom stock plan is described more fully below.
|   
|(4) | Bonus amounts for fiscal year 2005 were paid in December 2005.                                                                                                                                                                                                                                                                                                                                                               

120



---



##### 





|    |                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | 2005 includes $1,051,005 paid to Dr. Atefi for the
    redemption of the amount due under his Deferred Compensation
    Agreement, Company matching contributions of $25,970 under
    Alions KSOP, $3,800 in club membership dues, and $673 in
    term life insurance premiums paid by Alion.



| |                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2004 includes Company matching contributions of $11,817 under
    Alions KSOP. Includes $648 in term life insurance premiums
    and $3,980 in club membership dues paid by Alion.                                                                                                                                                                 
|
| | 2003 includes Company matching contribution of $11,000 under
    Alions KSOP. Includes $857,000 vested under a deferred
    compensation arrangement with the Company. See below,
    Deferred Compensation Arrangement for Bahman Atefi.
    Includes $648 in term life insurance premiums and $4,430 in club
    membership dues paid by Alion.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(6) | In February 2005, Ms. Mendler was awarded
    24,151 shares of performance-base phantom stock and
    36,227 shares of retention-based phantom stock under the
    Second Phantom Stock Plan. In November 2003 and February 2003,
    Ms. Mendler was awarded 6,798 shares and
    28,500 shares, respectively, of phantom stock under the
    Initial Phantom Stock Plan. Each phantom stock plan is described
    more fully below.
|   
|(7) | 2005 includes $241,016 paid to Ms. Mendler for the
    redemption of the amount due her under the Executive Deferred
    Compensation Plan, Company matching contributions of $7,415
    under Alions KSOP plan, and $572 in term life insurance
    premiums paid by Alion.                                                                                                                                                        



| |                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2004 includes Company matching contributions of $14,185 under
    Alions KSOP plan. Includes $470 in term life insurance
    premiums paid by Alion.                                                                                                                                                                                                                                                           
|
| | 2003 includes Company matching contributions of $3,001
    under IITRIs 401(a) plan. These contributions cover
    the period October 1, 2002 to December 20, 2002, prior
    to the Transaction. Includes Company matching contribution of
    $9,504 under Alions KSOP. Includes $215,000 vested under a
    Retention Incentive Agreement. Includes $425 in term life
    insurance premiums paid by Alion.



|    |                                                                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(8) | In February 2005, Mr. Crawford was awarded
    25,075 shares of performance-based phantom stock under the
    Second Phantom Stock Plan. In November 2003 and February 2003,
    Mr. Crawford was awarded 6,798 shares and
    33,000 shares, respectively, of phantom stock under the
    Initial Phantom Stock Plan. Each phantom stock plan is described
    more fully below.
|   
|(9) | 2005 includes Company matching contributions of $18,198 under
    Alions KSOP. Includes $601 in term life insurance premiums
    paid by Alion.                                                                                                                                                                                                                                 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2004 includes Company matching contributions of $13,291 under
    Alions KSOP. Includes $534 in term life insurance premiums
    paid by Alion.                                                                                                                                                                                                                                                                                                          
|
| | 2003 includes Company matching contributions of $1,175 and
    $2,350 under IITRIs 403(b) and 401(a) plans, respectively.
    These contributions cover the period October 1, 2002 to
    December 20, 2002, prior to the Transaction. Includes
    Company matching contribution of $11,404 under Alions
    KSOP. Includes $270,000 vested under a Retention Incentive
    Agreement. Includes $512 in term life insurance premiums paid by
    Alion.



|     |                                                                                                                                                                                                                                                                                                                                                                                                                             
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | In February 2004, Mr. Goff was promoted to Sector Senior
    Vice President and Sector Manager.                                                                                                                                                                                                                                                                                                                             
|    
|(11) | In February 2005, Mr. Hughes was awarded 30,297 shares
    performance-base phantom stock and 45,445 shares of
    retention-based phantom stock under the Second Phantom Stock
    Plan. In November 2003 and February 2003, Mr. Hughes was
    awarded 10,000 shares and 6,798 shares, respectively,
    of phantom stock under the Initial Phantom Stock Plan. Each
    phantom stock plan is described more fully below.
|    
|(12) | 2005 includes Company matching contributions of $17,315 under
    Alions KSOP, $534 in term life insurance premiums, and
    $645 in club membership dues paid by Alion.                                                                                                                                                                                                                                                   



| |                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2004 includes Company matching contributions of $14,423 under
    Alions KSOP and $611 in term life insurance premiums paid
    by Alion.                                            
|
| | 2003 includes Company matching contribution of $10,687 under
    Alions KSOP. Includes $488 in term life insurance premiums
    paid by Alion. Includes $500 in club membership dues.

121



---



##### 





|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(13) | Retention Incentive Agreements. In September 2001, IITRI
    entered into and funded retention incentive agreements with
    Bahman Atefi, Stacy Mendler and Randy Crawford for $550,000,
    $295,000 and $270,000, respectively, via a non-qualified
    deferred compensation agreement. Alions acquisition of
    IITRIS assets constituted a change in control
    of IITRI and these retention incentive awards vested fully
    upon closing of the Transaction.
|    
|(14) | 2005 includes Company matching contributions of $18,509 under
    Alions KSOP, $425 in health club membership fees, and $599
    in term life insurance paid by Alion.                                                                                                                                                                                                                                                                                                  



| |                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2004 includes Company matching contributions of $13,753 under
    Alions KSOP and $508 in term life insurance paid by Alion.                                                                                                                                                                                                                                                         
|
| | 2003 includes Company matching contributions of $1,967 and
    $3,358 under IITRIs 403(b) and 401(a) plans, respectively.
    These contributions cover the period October 1, 2002 to
    December 20, 2002, prior to the Transaction. Includes
    Company matching contribution of $10,213 under Alions
    KSOP. Includes $461 in term life insurance premiums paid by
    Alion.



|     |                                                                                                                                                                                                                                                                                                                                                                                                                             
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(15) | In February 2005, Mr. Goff was awarded 25,075 shares
    of performance-based phantom stock under the Second Phantom
    Stock Plan. In February 2003, Mr. Goff was awarded
    3,999 shares of phantom stock under the Initial Phantom
    Stock Plan. Each phantom stock plan is described more fully
    below. In 2004, Mr. Goff received an award of 2,500 SARs.
    In 2003, Mr. Goff received an award of 1,200 SARs.
|    
|(16) | In September 2005, Mr. Diamant separated from the Company.                                                                                                                                                                                                                                                                                                                                                                  
|    
|(17) | The amount paid directly by Alion for the six-month period
    subsequent to the purchase of JJMA by Alion (i.e. April 1,
    2005 through September 30, 2005) of $223,114.                                                                                                                                                                                                                                                 
|    
|(18) | Includes $205,071 for settlement of employment agreement between
    Mr. Diamant and Alion. Includes Company matching
    contributions of $5,125 under Alions KSOP.                                                                                                                                                                                                                                                       

Stock Appreciation Rights Plans










122



---



##### 





10-year




5-year




Our board of directors may amend or terminate either SAR plan
at any time.


123



---



##### 





SAR Grants in Last Fiscal Year*


|                     |  |             |  |                 |  |              |  |                 |  |              |  |  |  |  |  |  |  |  |  | 
|-------------------- |  | ----------- |  | --------------- |  | ------------ |  | --------------- |  | ------------ |  |  |  |  |  |  |  |  |  | 
|                     |  |             |  | Percent of      |  |              |  |                 |  |             
|                     |  |             |  | SARs Granted    |  | Exercise of  |  |                 |  | Grant Date  
|                     |  | No. of SARs |  | to Employees in |  | Base         |  |                 |  | Present     
|Name                 |  | Granted     |  | FY              |  | Price        |  | Expiration Date |  | Value       
|                     |  |             |  |                 |  |              |  |                 |  |             
|                     |  |             |  |                 |  | (In dollars) |  |                 |  | (In dollars)
|Bahman Atefi(1)      |  |             |  |                 |  |              |  |                 |  |              |  |  |  |  |  |  |  |  |  | 
|Stacy Mendler(1)     |  |             |  |                 |  |              |  |                 |  |              |  |  |  |  |  |  |  |  |  | 
|Randy Crawford(1)    |  |             |  |                 |  |              |  |                 |  |              |  |  |  |  |  |  |  |  |  | 
|Jack Hughes(1)       |  |             |  |                 |  |              |  |                 |  |              |  |  |  |  |  |  |  |  |  | 
|Rob Goff(1)          |  |             |  |                 |  |              |  |                 |  |              |  |  |  |  |  |  |  |  |  | 
|Thomas Diamant(1)(2) |  |             |  |                 |  |              |  |                 |  |              |  |  |  |  |  |  |  |  |  | 






|    |                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Refers to the Alion Science and Technology Corporation
    2002 Stock Appreciation Rights (SAR) Plan and
    Alion Science and Technology Corporation 2004 Stock
    Appreciation Rights Plan (see above, Stock
    Appreciation Rights Plans for more information regarding
    the SAR Plans).
|   
|(1) | No SAR awards during the fiscal year ended September 30,
    2005.                                                                                                                                                                                                                                    
|   
|(2) | In September 2005, Mr. Diamant separated from the Company.                                                                                                                                                                                                                                            



Aggregated SAR Exercises in Last Fiscal Year and Fiscal Year
End/ SAR Values*


|                     |  |             |  |          |  |                              |  |                              |  |  |          |  |  |   |                | 
|-------------------- |  | ----------- |  | -------- |  | ---------------------------- |  | ---------------------------- |  |  | -------- |  |  | - | -------------- | 
|                     |  |             |  |          |  | Number of Securities         |  | Value of Unexercised        
|                     |  |             |  |          |  | Underlying Unexercised       |  | In-The-Money                
|                     |  | Shares      |  |          |  | Options/SARs at Fiscal       |  | Options/SARs at Fiscal      
|                     |  | Acquired    |  | Value    |  | Year End (Number)            |  | Year End (Dollars)          
|Name                 |  | on Exercise |  | Realized |  | Exercisable/Unexercisable(4) |  | Exercisable/Unexercisable(5)
|                     |  |             |  |          |  |                              |  |                             
|                     |  |             |  |          |  | (In dollars)*                |  |                             
|Bahman Atefi(1)      |  |             |  |          |  |                              |  |                              |  |  |          |  |  |   |                | 
|Stacy Mendler(1)     |  |             |  |          |  |                              |  |                              |  |  |          |  |  |   |                | 
|Randy Crawford(1)    |  |             |  |          |  |                              |  |                              |  |  |          |  |  |   |                | 
|Jack Hughes(1)       |  |             |  |          |  |                              |  |                              |  |  |          |  |  |   |                | 
|Rob Goff(1)(2)       |  |             |  |          |  |                              |  |                              |  |  | 480/720  |  |  | $ | 12,427/$18,640 | 
|(3)                  |  |             |  |          |  |                              |  |                              |  |  | 500/2000 |  |  | $ | 10,590/$42,360 | 
|Thomas Diamant(1)(6) |  |             |  |          |  |                              |  |                              |  |  |          |  |  |   |                | 






|    |                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Refers to the Alion Science and Technology Corporation
    2002 Stock Appreciation Rights (SAR) Plan and
    Alion Science and Technology Corporation 2004 Stock
    Appreciation Rights Plan (see above, Stock
    Appreciation Rights Plans for more information regarding
    the SAR Plans).                     
|   
|(1) | No SAR awards during the fiscal year ended September 30,
    2005.                                                                                                                                                                                                                                                         
|   
|(2) | In 2003, Mr. Goff was awarded 1,200 SARs at the exercise
    price of $10.00 per share. As of September 30, 2005,
    the value of Alion common stock is $35.89 per share.                                                                                                                                                 
|   
|(3) | In 2004, Mr. Goff was awarded 2,500 SARs at the exercise
    price of $14.71 per share. As of September 30, 2005,
    the value of Alion common stock is $35.89 per share.                                                                                                                                                 
|   
|(4) | The number of exercisable and unexercisable SARs is dependent on
    the plan vesting schedule. For example, as of September 30,
    2005, for Mr. Goff, only 40% of the 1,200 SARs awarded in
    2003 have vested, resulting in 480 exercisable SARs. As of
    September 30, 2005, the remaining SARs are unexercisable.

124



---



##### 





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | The value of exercisable and unexercisable SARs is dependent on
    the difference between the exercise price per share and the
    current fair value per share of Alion common stock. For example,
    as of September 30, 2005, for Mr. Goff, the exercise
    price for his SARs awarded in 2003 was $10 per share and
    the current value per share of Alion common stock is $35.89. The
    value of the exercisable SARs is $12,247 (480 shares
    multiplied by the difference between the current fair value per
    share of Alion stock, $35.89, and the exercise price per share,
    $10.00).
|   
|(6) | In September 2005, Mr. Diamant separated from the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

Phantom Stock Plans






| |                           
| | --------------------------
| | Initial Phantom Stock Plan



|                            |  |               |    |   |          |  |    |  
|--------------------------- |  | ------------- | -- | - | -------- |  | -- | -
|                            |  | Vested Amount |   
|                            |  | for Grant in  |   
|                            |  |               |   
|                            |  | February      |    |   | November | 
|Anniversary from Grant Date |  | 2003          |    |   | 2003     | 
|                            |  |               |    |   |          | 
|1st                         |  |               |   |   |          |  | 20 | %
|2nd                         |  |               |   |   |          |  | 20 | %
|3rd                         |  |               | 50 | % |          |  | 20 | %
|4th                         |  |               | 25 | % |          |  | 20 | %
|5th                         |  |               | 25 | % |          |  | 20 | %







| |   |                                                                                 
| | - | --------------------------------------------------------------------------------
| |  | 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.                                                 



125



---



##### 







| |                          
| | -------------------------
| | Second Phantom Stock Plan















| |   |                                                           
| | - | ----------------------------------------------------------
| |  | Date of grant;                                            
|
| |  | Number of shares of the phantom stock awarded; and        
|
| |  | Provisions governing vesting of the phantom stock awarded.



126



---



##### 

















|                  |  |               |         |     |                   |                   |         |                  |  |  |           |     
|----------------- |  | ------------- | ------- | --- | ----------------- | ----------------- | ------- | ---------------- |  |  | --------- | ----
|                  |  |               |         |     |                   | Cumulative Shares |        
|                  |  | Shares Issued |         |     | Cumulative Shares |                   |         | Authorized Under | 
|Date of Issuance  |  | by Plan       |         |     | Issued by Plan    |                   |         | all Plans        | 
|                  |  |               |         |     |                   |                   |         |                  | 
|February 14, 2003 |  |               | 171,000 | (1) |                   |                   | 171,000 | (1)              |  |  | 173,000   | (1) 
|November 11, 2003 |  |               | 52,685  | (1) |                   |                   | 223,685 | (1)              |  |  | 225,000   | (1),
|February 1, 2005  |  |               | 311,645 | (2) |                   |                   | 311,645 | (2)              |  |  | 2,000,000 | (2),






|    |                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Number of shares authorized under the Initial Phantom Stock Plan
    as periodically amended and approved by the compensation
    committee of Alions board of directors.

127



---



##### 





|    |                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Number of shares authorized under the Second Phantom Stock Plan
    as periodically amended and approved by the compensation
    committee of Alions board of directors.



|               |  |                |        |              |  |              |                  |  |  |  |                  | 
|-------------- |  | -------------- | ------ | ------------ |  | ------------ | ---------------- |  |  |  | ---------------- | 
|               |  | Number of      |        |              |  |             
|               |  | Shares, Units, |        | Full Vesting |  | Period Until
|Name           |  | or Rights      |        | Period       |  | Payout      
|               |  |                |        |              |  |             
|Bahman Atefi   |  |                | 65,500 | (1)          |  |              | February 2008(2) |  |  |  | February 2008(3) | 
|               |  |                | 18,695 | (1)          |  |              | November 2008(2) |  |  |  | November 2008(3) | 
|               |  |                | 65,926 | (4)          |  |              | February 2008(5) |  |  |  | February 2010(5) | 
|               |  |                | 43,951 | (4)          |  |              | February 2010(5) |  |  |  | February 2010(5) | 
|Stacy Mendler  |  |                | 28,500 | (1)          |  |              | February 2008(2) |  |  |  | February 2008(3) | 
|               |  |                | 6,798  | (1)          |  |              | November 2008(2) |  |  |  | November 2008(3) | 
|               |  |                | 24,151 | (6)          |  |              | February 2008(5) |  |  |  | February 2010(5) | 
|               |  |                | 36,227 | (6)          |  |              | February 2010(5) |  |  |  | February 2010(5) | 
|Randy Crawford |  |                | 33,000 | (1)          |  |              | February 2008(2) |  |  |  | February 2008(3) | 
|               |  |                | 6,798  | (1)          |  |              | November 2008(2) |  |  |  | November 2008(3) | 
|               |  |                | 25,075 | (7)          |  |              | February 2008(5) |  |  |  | February 2010(5) | 
|Jack Hughes    |  |                | 10,000 | (1)          |  |              | February 2008    |  |  |  | February 2008(3) | 
|               |  |                | 6,798  | (1)          |  |              | November 2008    |  |  |  | November 2008(3) | 
|               |  |                | 30,297 | (8)          |  |              | February 2008(5) |  |  |  | February 2010(5) | 
|               |  |                | 45,445 | (8)          |  |              | February 2010(5) |  |  |  | February 2010(5) | 
|Robert Goff    |  |                | 3,399  | (1)          |  |              | November 2008(3) |  |  |  | November 2008(3) | 
|               |  |                | 18,695 | (1)          |  |              | November 2008(4) |  |  |  | November 2008(5) | 
|               |  |                | 25,075 | (9)          |  |              | February 2008(5) |  |  |  | November 2008(5) | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The initial set of awards made in February 2003 was made solely
    to Alions executive management team. The awards made in
    November 2003 were made to executive and senior management of
    Alion.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(2) | Pursuant to the Initial Phantom Stock Plan, recipients will
    become fully vested on the fifth year from the grant date, or
    approximately February 2008 and November 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(3) | Pursuant to the Initial Phantom Stock plan, or applicable award
    agreement, recipients will be paid commencing on the fifth year
    from the date of grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(4) | Pursuant to the Second Phantom Stock Plan, in February 2005,
    Dr. Atefi was awarded 65,926 shares of
    performance-based phantom stock and 43,951 shares of
    retention-based phantom stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(5) | Pursuant to the Second Phantom Stock Plan, recipients may be
    awarded performance-based or retention-based phantom stock.
    Under this plan, performance-based phantom stock will become
    fully vested one third from the date of grant, or approximately
    February 2008; retention-based phantom stock will become fully
    vested as specified in the individual agreements. To date, all
    individual retention-based agreements made have specified that
    phantom stock will become fully vested on the fifth year from
    date of grant, or approximately February 2010. Under this plan,
    recipients of performance-based and retention-based phantom
    stock will be paid commencing on the fifth year from date of
    grant, or approximately February 2010.
|   
|(6) | Pursuant to the Second Phantom Stock Plan, in February 2005,
    Ms. Mendler was awarded 24,151 shares of
    performance-based phantom stock and 36,227 shares of
    retention-based phantom stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(7) | Pursuant to the Second Phantom Stock Plan, in February 2005,
    Mr. Crawford was awarded 25,075 shares of
    performance-based phantom stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(8) | Pursuant to the Second Phantom Stock Plan, in February 2005,
    Mr. Hughes was awarded 30,297 shares of
    performance-based phantom stock and 45,445 shares of
    retention-based phantom stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

128



---



##### 





|    |                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------
|(9) | Pursuant to the Second Phantom Stock Plan, in February 2003,
    Mr. Goff was awarded 25,075 shares of
    performance-based phantom stock.

Employment Agreements








| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Dr. Atefis annual base salary at the time of
    termination, for the unexpired term of the employment agreement
    up to a maximum of three years; or
|
| |  | an amount equal to Dr. Atefis base salary plus
    $100,000.                                                                                           





| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | his authority or responsibility is materially diminished;                                                                                         
|
| |  | he is assigned duties inconsistent with his position,
    responsibility and status;                                                              
|
| |  | there is an adverse change in his title or office;                                                                                                
|
| |  | his base pay or incentive compensation is reduced; and                                                                                            
|
| |  | his principal work location is more than ten miles away from his
    principal work location immediately prior to the change of
    control event.





129



---



##### 





| |   |                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Ms. Mendlers annual base salary at the time of
    termination for the unexpired term of the employment agreement
    up to a maximum of two years; or
|
| |  | an amount equal to Ms. Mendlers base salary.                                                                                                          





| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | her authority or responsibility is materially diminished;                                                                                         
|
| |  | she is assigned duties inconsistent with her position,
    responsibility and status;                                                             
|
| |  | there is an adverse change in her title or office;                                                                                                
|
| |  | her base pay or incentive compensation is reduced; and                                                                                            
|
| |  | her principal work location is more than ten miles away from her
    principal work location immediately prior to the change of
    control event.







| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Mr. Crawfords annual base salary at the time of
    termination for the unexpired term of the employment agreement
    up to a maximum of two years; or
|
| |  | an amount equal to Mr. Crawfords base salary.                                                                                                          





| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | his authority or responsibility is materially diminished;                                                                                         
|
| |  | he is assigned duties inconsistent with his position,
    responsibility and status;                                                              
|
| |  | there is an adverse change in his title or office;                                                                                                
|
| |  | his base pay or incentive compensation is reduced; and                                                                                            
|
| |  | his principal work location is more than ten miles away from his
    principal work location immediately prior to the change of
    control event.





130



---



##### 









| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | his authority or responsibility is materially diminished;                                                                                         
|
| |  | he is assigned duties inconsistent with his position,
    responsibility and status;                                                              
|
| |  | there is an adverse change in his title or office;                                                                                                
|
| |  | his base pay or incentive compensation is reduced; and                                                                                            
|
| |  | his principal work location is more than ten miles away from his
    principal work location immediately prior to the change of
    control event.









| |   |                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | his authority or responsibility is materially diminished;                                                                                                                                                    
|
| |  | he is assigned duties inconsistent with his position,
    responsibility and status;                                                                                                                         
|
| |  | there is an adverse change in his title or office;                                                                                                                                                           
|
| |  | his base pay or incentive compensation is reduced; and his
    principal work location is more than ten miles away from his
    principal work location immediately prior to the change of
    control event.

Deferred Compensation Arrangement for Bahman Atefi




131



---



##### 





Deferred Compensation Plans













|         |                                                                                                    
|-------- | ---------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholders Matters



|                                                      |  |                |              |                   |           |  |            |             |  |  |      | 
|----------------------------------------------------- |  | -------------- | ------------ | ----------------- | --------- |  | ---------- | ----------- |  |  | ---- | 
|                                                      |  |                |              | Amount and Nature |           |  |           
|                                                      |  |                |              | of Beneficial     |           |  | Percentage |            
|Name of Beneficial Owner                              |  | Title of Class |              |                   | Ownership |  |            | of Class(1) | 
|                                                      |  |                |              |                   |           |  |            |             | 
|Five Percent Security Holders:                        |  |                |              |                   |           |  |            |             |  |  |      | 
|Illinois Institute of Technology(2)                   |  |                | Common stock |                   |           |  | 1,585,339  | (3)         |  |  | 23.5 | 
|Directors(4) and Executive Officers:                  |  |                |              |                   |           |  |            |             |  |  |      | 
|Bahman Atefi                                          |  |                | Common stock |                   |           |  | 88,298     | (5)         |  |  | 1.7  | 
|Jack Hughes                                           |  |                | Common stock |                   |           |  | 6,379      | (6)         |  |  | *    | 
|Stacy Mendler                                         |  |                | Common stock |                   |           |  | 71,452     | (7)         |  |  | 1.4  | 
|Randy Crawford                                        |  |                | Common stock |                   |           |  | 47,980     | (8)         |  |  | *    | 
|Rob Goff                                              |  |                | Common stock |                   |           |  | 9,281      | (9)         |  |  | *    | 
|All Directors and Officers as a Group
    (5 Persons) |  |                | Common stock |                   |           |  | 223,390    | (10)        |  |  | 4.4  | 






| |   |              
| | - | -------------
| | * | less than 1%.



|    |                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Applicable percentages based on 5,149,840 shares
    outstanding on September 30, 2005, and also includes shares
    of Common Stock subject to warrants that may be exercised within
    60 days of September 30,

132



---



##### 



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | 2005. Such shares are deemed to be outstanding for the purposes
    of computing the percentage ownership of the individual or
    entity holding the shares, but are not deemed outstanding for
    purposes of computing the percentage of any other person shown
    in the table. This table is based upon information in the
    Companys possession and believed to be accurate. Unless
    indicated in the footnotes to this table and subject to
    community property laws where applicable, the Company believes
    that each of the shareholders named in this table has sole
    voting and investment power with respect to the shares indicated
    as beneficially owned.
|   
|(2) | Illinois Institute of Technologys address is 3300 South
    Federal Street, Chicago, IL 60616.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(3) | The number of shares deemed to be beneficially held by IIT
    represents currently exercisable warrants held by IIT under
    the Mezzanine Warrant and the Subordinated Warrant for an
    aggregate of 1,585,339 shares of Common Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(4) | No directors (other than Dr. Atefi) are believed by us to
    be beneficial owners of our common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(5) | Includes warrants to purchase 22,062 shares of common
    stock pursuant to Dr. Atefis Deferred Compensation
    Arrangement with Alion and interests to
    purchase 66,236 shares of Alions common stock
    pursuant to The Alion Science and Technology Corporation
    Employee Ownership, Savings and Investment Plan, which we refer
    to as the KSOP.                                                                                                                                                                                                                                                                                                                           
|   
|(6) | Includes interests to purchase 6,379 shares of
    Alions common stock pursuant to the KSOP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(7) | Includes interests to purchase 71,452 shares of
    Alions common stock pursuant to the KSOP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(8) | Includes interests to purchase 47,980 shares of
    Alions common stock pursuant to the KSOP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(9) | Includes interests to purchase 9,281 shares of
    Alions common stock pursuant to the KSOP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



|     |                                                                                                                                                                                                             
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Includes 223,390 shares of KSOP interests beneficially
    owned by the Named Executive Officers as of September 30,
    2005, and warrants to purchase 22,062 shares of common
    stock held by Dr. Atefi.

Changes in Control









|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services



133



---



##### 





|                      |  |      |         |  |      |   |         | 
|--------------------- |  | ---- | ------- |  | ---- | - | ------- | 
|Fee Category          |  | 2005 |         |  | 2004 |  
|                      |  |      |         |  |      |  
|Audit Fees(1)         |  | $    | 728,334 |  |      | $ | 536,772 | 
|Audit-Related Fees(2) |  | $    | 65,988  |  |      | $ | 382,661 | 
|Tax fees and other    |  | $    |        |  |      | $ |        | 
|                      |  |      |         |  |      |  
|Total Fees            |  | $    | 794,322 |  |      | $ | 919,433 | 
|                      |  |      |         |  |      |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Audit fees consist of fees for the audit of the Companys
    financial statements, the review of the interim financial
    statements included in the Companys quarterly reports on
    Form 10-Q, and
    other professional services provided in connection with
    statutory and regulatory filings or engagements.                                                                                                                                                                                                                                                                                                                                  
|   
|(2) | Audit-related fees consist of fees for assurance and related
    services that are reasonably related to the performance of the
    audit and the review of our financial statements and which are
    not reported under Audit Fees. In fiscal years 2005
    and 2004, these services related primarily to audit services
    provided in conjunction with acquisitions, accounting
    consultations, and audits of employee benefit plans. In fiscal
    2005, these services related primarily to audit of employee
    benefit plan and Sarbanes-Oxley Section 404 assistance.
    These services were approved by the Audit and Finance Committee.

134



---



##### 






PART IV







|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules

The following documents are filed as part of the Annual
Report on
Form 10-K:


|                                                                                         |                                                                                                                                                 |  |     |    | 
|---------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- |  | --- | -- | 
|Consolidated Financial Statements of Alion Science and
    Technology Corporation        |                                                                                                                                                 |  |     |   
|Report of Independent Registered Public Accounting Firm                                  |                                                                                                                                                 |  | 63  |   
|Consolidated Financial Statements:                                                       |                                                                                                                                                 |  |     |   
|                                                                                         | Consolidated Balance Sheets as of September 30, 2005 and
    2004                                                                               |  |     | 64 | 
|                                                                                         | Consolidated Statements of Operations for the years ended
    September 30, 2005, 2004 and 2003                                                 |  |     | 65 | 
|                                                                                         | Consolidated Statements of Shareholders Equity (Deficit),
    Subject to Redemption, for the years ended September 30,
    2005, 2004 and 2003 |  |     | 66 | 
|                                                                                         | Consolidated Statements of Cash Flows for the years ended
    September 30, 2005, 2004 and 2003                                                 |  |     | 67 | 
|                                                                                         | Notes to Consolidated Financial Statements                                                                                                      |  |     | 69 | 
|Consolidated Financial Statement Schedule                                                |                                                                                                                                                 |  |     |   
|                                                                                         | Schedule II  Valuation and Qualifying Accounts                                                                                                 |  |     | 94 | 
|Consolidated Financial Statements of Selected Operations
    of IIT Research Corporation |                                                                                                                                                 |  |     |   
|Report of Independent Auditors Report                                                   |                                                                                                                                                 |  | 95  |   
|Consolidated Financial Statements:                                                       |                                                                                                                                                 |  |     |   
|                                                                                         | Consolidated Balance Sheets as of September 30, 2002 and
    2001                                                                               |  |     | 96 | 
|                                                                                         | Consolidated Statements of Income for the years ended
    September 30, 2002, 2001, and 2000                                                    |  |     | 97 | 
|                                                                                         | Consolidated Statements of Changes in Owners Net
    Investment for the years ended September 30, 2002, 2001,
    and 2000                     |  |     | 98 | 
|                                                                                         | Consolidated Statements of Cash Flows for the years ended
    September 30, 2002, 2001, and 2000                                                |  |     | 99 | 
|Notes to Consolidated Financial Statements                                               |                                                                                                                                                 |  | 100 |   

(b) The following exhibits required by Item 601 of
Regulation 8-K


|        |   |             |  |                                                                                                                                                                         
|------- | - | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |   |            
|No.     |   | Description
|        |   |            
|        | 2 | .1          |  | Stock Purchase Agreement by and among Identix Public Sector,
    Inc. Identix Incorporated and Alion Science and Technology
    Corporation, dated February 13, 2004.(4)
|       
|        | 3 | .1          |  | Third Amended and Restated Certificate of Incorporation of Alion
    Science and Technology Corporation.(16)                                                            
|       
|        | 3 | .2          |  | Amended and Restated By-laws of Alion Science and Technology
    Corporation.                                                                                           
|       
|        | 4 | .1          |  | Amended and Restated Alion Science and Technology Corporation
    Employee Ownership, Savings and Investment Plan.(1)                                                   
|       
|        | 4 | .2          |  | First Amendment to The Alion Science and Technology Corporation
    Employee Ownership, Savings and Investment Plan.(2)                                                 
|       
|        | 4 | .3          |  | Second Amendment to The Alion Science and Technology Corporation
    Employee Ownership, Savings and Investment Plan.(3)                                                
|       
|        | 4 | .4          |  | Third Amendment to The Alion Science and Technology Corporation
    Employee Ownership, Savings and Investment Plan.(3)                                                 
|       
|        | 4 | .5          |  | Fourth Amendment to The Alion Science and Technology Corporation
    Employee Ownership, Savings and Investment Plan.(3)                                                
|       
|        | 4 | .6          |  | Fifth Amendment to The Alion Science and Technology Corporation
    Employee Ownership, Savings and Investment Plan.(5)                                                 
|       
|        | 4 | .7          |  | Sixth Amendment to The Alion Science and Technology Corporation
    Employee Ownership, Savings and Investment Plan.(5)                                                 

135



---



##### 



|        |    |             |  |                                                                                                                                                                                                                             
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|       
|        | 4  | .8          |  | Seventh Amendment to The Alion Science and Technology
    Corporation Employee Ownership, Savings and Investment Plan.(5)                                                                                                   
|       
|        | 4  | .9          |  | Eighth Amendment to The Alion Science and Technology Corporation
    Employee Ownership, Savings and Investment Plan.(5)                                                                                                    
|       
|        | 4  | .10         |  | Ninth Amendment to The Alion Science and Technology Corporation
    Employee Ownership, Savings and Investment Plan.(9)                                                                                                     
|       
|        | 4  | .11         |  | Tenth Amendment to The Alion Science and Technology Corporation
    Employee Ownership, Savings and Investment Plan.                                                                                                        
|       
|        | 4  | .12         |  | Eleventh Amendment to The Alion Science and Technology
    Corporation Employee Ownership, Savings and Investment Plan.                                                                                                     
|       
|        | 10 | .5          |  | Seller Note Securities Purchase Agreement by and
    between IITRI and Alion Science and Technology
    Corporation.(2)                                                                                                     
|       
|        | 10 | .8          |  | Rights Agreement.(2)                                                                                                                                                                                                        
|       
|        | 10 | .9          |  | First Amendment to The Alion Science and Technology Corporation
    2002 Stock Appreciation Rights Plan.(3)*                                                                                                                
|       
|        | 10 | .14         |  | Employment Agreement between Alion Science and Technology
    Corporation and Bahman Atefi.(2)*                                                                                                                             
|       
|        | 10 | .15         |  | Employment Agreement between Alion Science and Technology
    Corporation and Stacy Mendler.(2)*                                                                                                                            
|       
|        | 10 | .16         |  | Employment Agreement between Alion Science and Technology
    Corporation and Randy Crawford.(2)*                                                                                                                           
|       
|        | 10 | .17         |  | Employment Agreement between Alion Science and Technology
    Corporation and Barry Watson.(2)*                                                                                                                             
|       
|        | 10 | .18         |  | Employment Agreement between Alion Science and Technology
    Corporation and John Hughes.(2)*                                                                                                                              
|       
|        | 10 | .23         |  | Alion Executive Deferred Compensation Plan.(2)*                                                                                                                                                                             
|       
|        | 10 | .24         |  | Alion Director Deferred Compensation Plan.(2)*                                                                                                                                                                              
|       
|        | 10 | .25         |  | First Amendment to The Alion Science and Technology Corporation
    Director Deferred Compensation Plan.(3)*                                                                                                                
|       
|        | 10 | .26         |  | Alion Science and Technology Corporation Phantom Stock Plan.(2)*                                                                                                                                                            
|       
|        | 10 | .27         |  | First Amendment to The Alion Science and Technology Corporation
    Employee Phantom Stock Plan.(9)*                                                                                                                        
|       
|        | 10 | .29         |  | First Amendment to the Credit Agreement by and among LaSalle
    Bank National Association as agent, various lenders and Alion
    Science and Technology Corporation.(6)                                                   
|       
|        | 10 | .30         |  | Second Amendment to the Credit Agreement by and among LaSalle
    Bank National Association as agent, various lenders and Alion
    Science and Technology Corporation.(8)                                                  
|       
|        | 10 | .31         |  | Agreement between Alion Science and Technology Corporation and
    James Fontana.(8)*                                                                                                                                       
|       
|        | 10 | .32         |  | Employment Agreement between Alion Science and Technology
    Corporation and Leroy R. Goff III.(8)*                                                                                                                        
|       
|        | 10 | .33         |  | Third Amendment to the Credit Agreement by and among LaSalle
    Bank National Association as agent, various lenders and Alion
    Science and Technology Corporation.(7)                                                   
|       
|        | 10 | .34         |  | Addendum to Employment Agreement between Alion Science and
    Technology Corporation and James Fontana.(7)*                                                                                                                
|       
|        | 10 | .35         |  | Second Amendment to the Alion Science and Technology Corporation
    Phantom Stock Plan.(7)*                                                                                                                                
|       
|        | 10 | .36         |  | Senior Secured Credit facility that includes a revolving credit
    facility and Term B note, by and among Credit Suisse First
    Boston as arranger, various lenders, and Alion Science and
    Technology Corporation.(9)
|       
|        | 10 | .37         |  | First Amendment to the Mezzanine Warrant Agreement.(9)                                                                                                                                                                      
|       
|        | 10 | .38         |  | First Amendment to the Seller Warrant Agreement.(9)                                                                                                                                                                         

136



---



##### 



|        |    |             |  |                                                                                                                                                                                                                                                                                                             
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|       
|        | 10 | .39         |  | First Amendment to the Alion Mezzanine Warrant Agreement between
    Alion Science and Technology Corporation, Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Trust, and Bahman Atefi. (9)*                                                                    
|       
|        | 10 | .40         |  | Third Amendment to the Alion Science and Technology Corporation
    Phantom Stock Plan.(10)*                                                                                                                                                                                                                
|       
|        | 10 | .41         |  | Alion Science and Technology Corporation Performance Shares and
    Retention Phantom Stock Plan. (10)*                                                                                                                                                                                                     
|       
|        | 10 | .42         |  | Second Amendment to the Alion Science and Technology Corporation
    2002 Stock Appreciation Rights Plan. (10)*                                                                                                                                                                                             
|       
|        | 10 | .43         |  | Alion Science and Technology Corporation 2004 Stock Appreciation
    Rights Plan. (10)*                                                                                                                                                                                                                     
|       
|        | 10 | .44         |  | Second Amendment to the Alion Science and Technology Corporation
    Directors Deferred Compensation Plan. (10)*                                                                                                                                                                                           
|       
|        | 10 | .45         |  | Second Amendment to the Alion Science and Technology Corporation
    Executive Deferred Compensation Plan. (10)*                                                                                                                                                                                            
|       
|        | 10 | .46         |  | Second Amendment to the Seller Warrant Agreement.(10)                                                                                                                                                                                                                                                       
|       
|        | 10 | .47         |  | Second Amendment to the Mezzanine Warrant Agreement.(10)                                                                                                                                                                                                                                                    
|       
|        | 10 | .48         |  | Second Amendment to the Alion Mezzanine Warrant Agreement
    between Alion Science and Technology Corporation, Alion Science
    and Technology Corporation Employee Ownership, Savings and
    Investment Trust, and Bahman Atefi.(10)                                                                    
|       
|        | 10 | .49         |  | Commitment letter by and between Alion Science and Technologies,
    Inc. and Credit Suisse First Boston for the $72 million
    Term Loan Facility, for Amendment One to existing Term
    Loan Facility. (11)                                                                                             
|       
|        | 10 | .50         |  | Third Amendment to the Seller Warrant Agreement.(12)                                                                                                                                                                                                                                                        
|       
|        | 10 | .51         |  | Third Amendment to Mezzanine Warrant Agreement.(12)                                                                                                                                                                                                                                                         
|       
|        | 10 | .52         |  | Third Amendment to the Alion Mezzanine Warrant Agreement between
    Alion Science and Technology Corporation, Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Trust, and Bahman Atefi.(12)                                                                     
|       
|        | 10 | .53         |  | Stock Purchase Agreement by and among Alion Science and
    Technology, Inc, John J. Mc Mullen Associates, Inc., Marshall
    and Ilsley Trust Company, N.A. as Trustee to the John J.
    McMullen, Inc. Employee Stock Ownership Trust and P. Thomas
    Diamant, Anthony Serro, and David Hanafourde.(13)
|       
|        | 10 | .54         |  | Incremental Term Loan Assumption Agreement and Amendment
    Number One to existing Term Loan Facility with Credit
    Suisse First.(14)                                                                                                                                                                    
|       
|        | 10 | .55         |  | Employment Agreement between Alion Science and Technology, Inc.
    and Anthony Serro. (15)*                                                                                                                                                                                                                
|       
|        | 10 | .56         |  | Employment Agreement between Alion Science and Technology, Inc.
    and P. Thomas Diamant. (15)*                                                                                                                                                                                                            
|       
|        | 10 | .57         |  | Alion Science and Technology Corporation Board of Directors
    Phantom Stock Plan. (16)*                                                                                                                                                                                                                   
|       
|        | 10 | .58         |  | Amended and Restated Alion Science and Technology Corporation
    Phantom Stock Plan. (16)*                                                                                                                                                                                                                 
|       
|        | 10 | .59         |  | Amended and Restated Alion Science and Technology Corporation
    Performance Shares and Retention Phantom Stock Plan. (16)*                                                                                                                                                                                
|       
|        | 10 | .60         |  | Amended and Restated Alion Science and Technology Corporation
    2002 Stock Appreciation Rights Plan. (16)*                                                                                                                                                                                                
|       
|        | 10 | .61         |  | Amended and Restated Alion Science and Technology Corporation
    2004 Stock Appreciation Rights Plan. (16)*                                                                                                                                                                                                
|       
|        | 10 | .62         |  | Amended and Restated Alion Science and Technology Corporation
    Executive Deferred Compensation Plan. (16)*                                                                                                                                                                                               
|       
|        | 10 | .63         |  | Amended and Restated Alion Science and Technology Corporation
    Director Deferred Compensation Plan. (16)*                                                                                                                                                                                                

137



---



##### 



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|       
|        | 21 |             |  | Subsidiaries of Alion Science and Technology Corporation:(i)
    Human Factors Applications, Inc., incorporated in the
    Commonwealth of Pennsylvania, (ii) Innovative Technology
    Solutions Corporation, incorporated in the State of New Mexico,
    (iii) Alion-IPS Corporation, incorporated in the
    Commonwealth of Virginia, (iv) Alion-METI Corporation,
    incorporated in the Commonwealth of Virginia, (v) Alion-
    CATI Corporation, incorporated in the State of California,
    (vi) Alion-JJMA Corporation, incorporated in the State of
    New York, (vii) Alion Technical Services Corporation,
    incorporated in the Commonwealth of Virginia, (viii) Alion
    Canada (U.S.), Inc., incorporated in the State of Delaware, and
    (ix) Alion Science and Technology (Canada) Corporation,
    incorporated in the Province of Nova Scotia, are wholly-owned
    (either directly or indirectly) by Alion Science and Technology
    Corporation.
|       
|        | 23 | .1          |  | Independent Auditors Consent.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|       
|        | 23 | .2          |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|       
|        | 31 | .1          |  | Certification of Chief Executive Officer of Alion Science and
    Technology Corporation pursuant to Rule 15d-14(a)
    promulgated under the Securities Exchange Act of 1934, as
    amended.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|       
|        | 31 | .2          |  | Certification of Chief Financial Officer of Alion Science and
    Technology Corporation pursuant to 15d-14(a) promulgated under
    the Securities Exchange Act of 1934, as amended.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|       
|        | 32 | .1          |  | Certification of Chief Executive Officer of Alion Science and
    Technology Corporation, pursuant to 18 U.S.C.
    Section 1350 as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | 32 | .2          |  | Certification of Chief Financial Officer of Alion Science and
    Technology Corporation, pursuant to 18 U.S.C.
    Section 1350 as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       






|    |                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to the Companys
    Pre-Effective Amendment No. 3 to the Registration Statement
    on Form S-1 filed
    with the Securities and Exchange Commission on October 7,
    2002 (File no. 333-89756).              
|   
|(2) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to the Companys
    Post-Effective Amendment No. 3 to the Registration
    Statement on
    Form S-1 filed
    with the Securities and Exchange Commission on March 24,
    2003 (File no. 333-89756).          
|   
|(3) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to the Companys quarterly
    report on
    Form 10-Q for the
    quarterly period ended July 4, 2003, filed with the
    Securities and Exchange Commission on August 15, 2003 (File
    no. 333-89756).       
|   
|(4) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to Companys current report
    on Form 8-K/ A,
    filed with the Securities and Exchange Commission on
    March 5, 2004 (File no.
    333-89756).                                                             
|   
|(5) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to the Companys
    Registration Statement on
    Form S-8 filed
    with the Securities and Exchange Commission on April 28,
    2004 (File no. 333-89756).                                                    
|   
|(6) | 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, 2004
    (File no. 333-89756).
|   
|(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 June 30, 2004, filed with the
    Securities and Exchange Commission on August 13, 2004 (File
    no. 333-89756).      
|   
|(8) | 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 March 31, 2004, filed with the
    Securities and Exchange Commission on May 17, 2004 (File
    no. 333-89756).        
|   
|(9) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to the Companys annual
    report on
    Form 10-K for the
    fiscal year ended September 30, 2004, filed with the
    Securities and Exchange Commission on December 28, 2004
    (File no. 333-89756).       

138



---



##### 





|     |                                                                                                                                                                                                                                                                                                    
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Companys Post-effective Amendment No. 5 to the
    Registration Statement on
    Form S-1 filed
    with the Securities and Exchange Commission on January 24,
    2005 (File no. 333-89756).                                                                                                     
|    
|(11) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to the Companys
    Form 8-K filed
    with the Securities and Exchange Commission on March 9,
    2005 (File no. 333-89756).                                                                           
|    
|(12) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to the Companys
    Form 8-K filed
    with the Securities and Exchange Commission on March 14,
    2005 (File no. 333-89756).                                                                          
|    
|(13) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to the Companys
    Form 8-K filed
    with the Securities and Exchange Commission on April 6,
    2005 (File no. 333-89756).                                                                           
|    
|(14) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to the Companys
    Form 8-K filed
    with the Securities and Exchange Commission on April 6,
    2005 (File no. 333-89756).                                                                           
|    
|(15) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to the Companys
    Form 8-K filed
    with the Securities and Exchange Commission on April 7,
    2005 (File no. 333-89756).                                                                           
|    
|(16) | 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 March 31, 2005, filed with the
    Securities and Exchange Commission on May 13, 2005 (File
    no. 333-89756).
|    
|(17) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to the Companys
    Form 8-K filed
    with the Securities and Exchange Commission on December 2,
    2005, 2005 (File no.
    333-89756).                                                              



| |   |                                                                  
| | - | -----------------------------------------------------------------
| | * | Denotes management contract and/or compensatory plan/arrangement.

139



---



##### 



SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, as amended, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.




| |                                             
| | --------------------------------------------
| | Alion Science and
    Technology Corporation
| | (Registrant)                                



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

| |                                               
| | ----------------------------------------------
| |                                               
| | Bahman Atefi                                  
| | Chairman, Chief Executive Officer and Director





|                                          |  |                                                         |  |                  |  | 
|----------------------------------------- |  | ------------------------------------------------------- |  | ---------------- |  | 
|Signature                                 |  | Title                                                   |  | Date            
|                                          |  |                                                         |  |                 
|                                         
|/s/ Bahman AtefiBahman Atefi              |  | Chairman, Chief Executive Officer and Director          |  | January 31, 2006
|                                         
|/s/ John M. HughesJohn M. (Jack) Hughes |  | Chief Financial Officer (Principal Financial Officer)   |  | January 31, 2006
|                                         
|/s/ Gary N. AmstutzGary N. Amstutz        |  | Senior Vice President and Executive Director of Finance |  | January 31, 2006
|                                         
|/s/ Leslie ArmitageLeslie Armitage        |  | Director                                                |  | January 31, 2006
|                                         
|/s/ Lewis CollensLewis Collens            |  | Director                                                |  | January 31, 2006
|                                         
|Harold Gehman                             |  | Director                                                |  |                 
|                                         
|/s/ Donald E. GossDonald E. Goss          |  | Director                                                |  | January 31, 2006
|                                         
|/s/ Robert L. GrowneyRobert L. Growney    |  | Director                                                |  | January 31, 2006
|                                         
|George A. Joulwan                         |  | Director                                                |  |                 
|                                         
|/s/ Michael E. RyanMichael E. Ryan        |  | Director                                                |  | January 31, 2006
|                                         
|Edward C. Aldridge, Jr.                   |  | Director                                                |  |                 

140



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##### 



Supplemental Information to be Furnished with Reports Filed
Pursuant to Section 15(d) of the Act by Registrants which
Have Not Registered Securities Pursuant to Section 12 of
the Act




141