##### 









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| 
|  |  | For the fiscal year ended September 30,
    2004                                        



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(ALION LOGO)

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)




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

None


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.     o Yes          þ No

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K.     þ

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act
Rule 12b-2).     o Yes          þ No

Aggregate market value of the voting and
non-voting common equity held by non-affiliates computed by
reference to the price at which the common equity was last sold
as of the last business day of the registrants most
recently completed second fiscal quarter: None

The number of shares outstanding of Alion Science
and Technology common stock as of September 30, 2004 was
3,376,197.

Documents Incorporated by Reference:

None




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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                                                                         |  |  | 26  | 
|         | Item 4.    |  |  | Submission of Matters to a Vote of Security
    Holders                                   |  |  | 26  | 
|        
|PART II 
|         | Item 5.    |  |  | Market for Registrants Common Stock and
    Related Stockholder Matters                  |  |  | 26  | 
|         | Item 6.    |  |  | Selected Financial Data                                                                   |  |  | 27  | 
|         | Item 7.    |  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  |  | 32  | 
|         | Item 7a.   |  |  | Quantitative and Qualitative Disclosures about
    Market Risk                            |  |  | 52  | 
|         | Item 8.    |  |  | Financial Statements and Supplementary Data                                               |  |  | 54  | 
|         | Item 9.    |  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |  |  | 96  | 
|         | Item 9a.   |  |  | Controls and Procedures                                                                   |  |  | 96  | 
|         | Item 9b.   |  |  | Other Information                                                                         |  |  | 96  | 
|        
|PART III
|         | Item 10.   |  |  | Directors and Executive Officers of the Registrant                                        |  |  | 97  | 
|         | Item 11.   |  |  | Executive Compensation                                                                    |  |  | 102 | 
|         | Item 12.   |  |  | Security Ownership of Certain Beneficial Owners
    and Management                        |  |  | 112 | 
|         | Item 13.   |  |  | Certain Relationships and Related Transactions                                            |  |  | 113 | 
|         | Item 14.   |  |  | Principal Accounting Fees and Services                                                    |  |  | 114 | 
|        
|PART IV 
|         | Item 15.   |  |  | Exhibits, Financial Statement Schedules                                                   |  |  | 115 | 
|         | Signatures |  |  |                                                                                           |  |  | 118 | 

1



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PART I






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

Some of the statements under
Business, Managements Discussion and
Analysis of Financial Condition and Results of Operations,
and elsewhere in this Form 10-K constitute forward-looking
statements,which involve known and
unknown risks and uncertainties. These statements relate to our
future plans, objectives, expectations and intentions and are
for illustrative purposes only. These statements may be
identified by the use of words such as believe,
expect, intend, plan,
anticipate, likely, will,
pro forma, forecast,
projections, could,
estimate, may, potential,
should, would and similar expressions.

The factors that could cause actual results to
differ materially from those anticipated include, but are not
limited to, the following: changes to the ERISA laws related to
the Companys Employee Ownership, Savings and Investment
Plan; changes to the tax laws relating to the treatment and
deductibility of goodwill, the Companys subchapter S
status, or any change in the Companys effective tax rate;
additional costs associated with compliance with the
Sarbanes-Oxley Act of 2002, including any changes in the
SECs rules, and other corporate governance requirements;
failure of government customers to exercise options under
contracts; funding decisions relating to U.S. Government
projects; government contract procurement (such as bid protest)
and termination risks; competitive factors such as pricing
pressures and/or competition to hire and retain employees; the
results of current and/or future legal proceedings and
government agency proceedings which may arise out of our
operations (including our contracts with government agencies)
and the attendant risks of fines, liabilities, penalties,
suspension and/or debarment; undertaking acquisitions that could
increase our costs or liabilities or be disruptive; taking on
additional debt to fund acquisitions; failure to adequately
integrate acquired businesses; material changes in laws or
regulations applicable to the Companys businesses; as well
as other risk factors discussed elsewhere in this annual report.

Readers are cautioned not to place undue reliance
on these forward-looking statements, which reflect
managements view only as of December 22, 2004. We
undertake no obligation to update any of these factors or to
publicly announce any change to our forward-looking statements
made herein, whether as a result of new information, future
events, changes in expectations or otherwise.



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

On December 20, 2002, Alion acquired
Selected Operations of IIT Research Institute
(IITRI) in a business combination accounted for
using the purchase method (the Transaction). Prior to
December 20, 2002, Alion was a shell company with limited
operating activity. All operating data for the fiscal years
ended September 30, 2003 and 2002 are pro forma as
described and presented in Item 6, Selected Financial
Data and assume that the acquisition was completed on
October 1, 2001. All pro forma information included in this
annual report is based upon the assumptions described in
Item 6.

Overview

Alion Science and Technology Corporation
(Alion, the Company, we,
our) is an employee-owned company. We apply our
scientific and engineering experience to research and develop
technological solutions for problems relating to national
defense, public health and safety, and nuclear safety and
analysis. We provide our research and development and
engineering services primarily to agencies of the federal
government, but also to departments of state and local
government and foreign governments, as well as commercial
customers both in the U.S. and abroad.

Our revenue for fiscal year ended
September 30, 2004 was $269.9 million, a 26.6%
increase over the prior fiscal year. As of September 30,
2004, our contract backlog was $1,954.0 million, of which
$160.6 million was funded. As of September 30, 2003,
our contract backlog was $1,542.0 million, of which
$107.0 million was funded. Federal government contracts
accounted for approximately 98% of our revenues in the fiscal
year ended September 30, 2004, of which approximately 91%
came from the U.S. Department of Defense (DoD)

2



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##### 



alone. For the fiscal year ended
September 30, 2003, federal government contracts accounted
for approximately 98% of our revenues and approximately 95% came
from the U.S. Department of Defense.


We apply our expertise to a range of specialized
fields, which we refer to as core business areas. The core
business areas are further described below. The estimated
percentage distribution of our annual revenues, by core business
area, is provided in the table below.

Estimated Revenue by Fiscal Year*

|                                                              |  |               |     |      |  |      |     |   |  |   |     |  |  |  |     |   |  |   |     |  |  |  |     |  
|------------------------------------------------------------- |  | ------------- | --- | ---- |  | ---- | --- | - |  | - | --- |  |  |  | --- | - |  | - | --- |  |  |  | --- | -
|                                                              |  |               |     |      |  |     
|Core Business Area                                            |  | 2004          |     | 2003 |  | 2002
|                                                              |  |               |     |      |  |     
|                                                              |  |               |     |      |  |      |     |   |  |  
|                                                              |  |              
|                                                              |  | (In millions)
|- Wireless Communications                                     |  | $             | 37  |      |  |      | 14  | % |  | $ | 47  |  |  |  | 22  | % |  | $ | 43  |  |  |  | 21  | %
|- Defense Operations(a)                                       |  | $             | 106 |      |  |      | 39  | % |  | $ | 111 |  |  |  | 52  | % |  | $ | 77  |  |  |  | 38  | %
|- Modeling & Simulation(a)                                    |  | $             | 22  |      |  |      | 8   | % |  | $ | N/A |  |  |  | N/A | % |  | $ | N/A |  |  |  | N/A | %
|- Information Technology                                      |  | $             | 35  |      |  |      | 13  | % |  | $ | 21  |  |  |  | 10  | % |  | $ | 30  |  |  |  | 15  | %
|- Industrial Technology Solutions                             |  | $             | 36  |      |  |      | 13  | % |  | $ | 13  |  |  |  | 6   | % |  | $ | 34  |  |  |  | 17  | %
|- Chemical, Environmental, and Biodefense
    Technologies(b) |  | $             | N/A |      |  |      | N/A | % |  | $ | 9   |  |  |  | 4   | % |  | $ | 6   |  |  |  | 3   | %
|- Explosive Science(b)                                        |  | $             | N/A |      |  |      | N/A | % |  | $ | 10  |  |  |  | 5   | % |  | $ | 10  |  |  |  | 5   | %
|- Chemical, Biological, and Explosive Science(b)              |  | $             | 26  |      |  |      | 10  | % |  | $ | N/A |  |  |  | N/A | % |  | $ | N/A |  |  |  | N/A | %
|- Transport Systems(c)                                        |  | $             | N/A |      |  |      | N/A | % |  | $ | 2   |  |  |  | 1   | % |  | $ | 2   |  |  |  | 1   | %
|- Nuclear Safety & Analysis(d)                                |  | $             | 7   |      |  |      | 3   | % |  | $ | N/A |  |  |  | N/A | % |  | $ | N/A |  |  |  | N/A | %
|                                                              |  |               |     |      |  |      |     |   |  |   |     |  |  |  |     |   |  |   |     |  |  |  |     |  
|                                                              |  | $             | 270 |      |  |      | 100 | % |  | $ | 213 |  |  |  | 100 | % |  | $ | 202 |  |  |  | 100 | %
|                                                              |  |               |     |      |  |      |     |   |  |   |     |  |  |  |     |   |  |   |     |  |  |  |     |  



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|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|a) | For fiscal years ended September 30, 2003
    and 2002, revenues associated with the Modeling and Simulation
    business were included in Defense Operations business area.
    Beginning in fiscal year 2004, revenue associated with the
    Modeling and Simulation business area is separately identified.                                                                                                                                                                                   
|  
|b) | For fiscal years ended September 30, 2003
    and 2002, revenue associated with the Chemical, Environmental
    and Biodefense Technologies business area was separate from
    revenues associated with Explosive Science business area.
    Beginning fiscal year 2004, revenue in the Chemical,
    Environmental and Biodefense Technologies business area is
    combined with the Explosive Science business area to form the
    Chemical, Biological, and Explosive Science business area.
|  
|c) | Beginning in fiscal year 2004, revenues in the
    Transport Systems business area were combined with the Modeling
    and Simulation business area.                                                                                                                                                                                                                                                                                                                                              
|  
|d) | Revenue associated with the Nuclear Safety and
    Analysis business area began in fiscal year 2004 as it relates
    to our acquisition of Innovative Technology Solutions
    Corporation (ITSC), which occurred in October 2003.                                                                                                                                                                                                                                                               



|  |                                                            
|- | -----------------------------------------------------------
|* | Revenues and percentages based on management
    estimates.

Wireless Communications.We provide wireless communications
research and spectrum engineering services primarily to the
U.S. Department of Defense, but also to other agencies of
the federal government. To a lesser extent, we provide wireless
communications research and spectrum engineering services to
commercial customers and foreign governments. We have expertise
in four primary areas:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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

3



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

Defense Operations.Our defense operations units provide
the following services to the U.S. Department of Defense,
including individual service components:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Homeland security:we provide integrated solutions and vulnerability analysis for
    protecting people and systems, and we provide critical
    infrastructure tools for decision support, risk assessment,
    information assurance, and physical security.                                                                                                                                                             
|
| |  | Strategic planning and operational
    analysis:we assist the U.S. Army
    in its objective to become a more technologically sophisticated
    and versatile combat force by providing readiness studies that
    employ decision support tools to improve strategic planning and
    decision making.                                                                                                                   
|
| |  | 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 and integrate command, control,
    communication and computer intelligence (C4I) 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.                                                                                                                                             
|
| |  | 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).                                                                                                            
|
| |  | Distance learning
    services:we develop policy and
    technology solutions to permit training and education from
    remote locations. 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.

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Modeling and
Simulation.Our modeling and
simulation operations assist our customers in examining the
outcome of events by providing services such as:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 and 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Transport systems: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.

Information
Technology.Our information technology
operations provide the following research primarily to agencies
of the federal government, including the U.S. Department of
Defense, the Internal Revenue Service and the National
Institutes of Health, but also to commercial customers:



| |   |                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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, and call center modeling.
|
| |  | Independent verification and
    validation:we implement modeling and
    simulation, test and evaluation, and database monitoring.                                              

Industrial Technology
Solutions.We provide the following
services to the U.S. Department of Defense and, to a lesser
extent, to commercial customers:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Facilities
    engineering: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 and analysis centers
    such as the: Reliability Analysis Center (RAC), Advanced
    Materials and Processes Technology Information Analysis Center
    (AMPTIAC), Manufacturing Technology Information Analysis Center
    (MTIAC), Electronic Packaging and Interconnection Technology
    Center and DuPage Manufacturing Research Center.

5



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| |   |                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Acoustic
    engineering:we test and evaluate
    various components for sound transmission, absorption and
    intensity.                                                                     
|
| |  | Aerospace coating production and
    application:we develop and apply
    coatings to protect government and commercial satellites.                                                            
|
| |  | Innovative manufacturing
    technologies:we develop and integrate
    systems for low-volume productivity (e.g., laser cladding of
    parts), micro-machines and rapid manufacturing systems.

Chemical, Biological and Explosive
Science.Our chemical, biological and
explosive science operations provide a wide range of research
primarily to the U.S. Department of Defense and the
U.S. Environmental Protection Agency, but also to other
departments of federal, state and local governments, including:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Chemical and biological
    research:we provide research that
    examines the fundamentals necessary to improve defense strategy
    against chemical and biological weapons.                                                                                                                                                                                                                                                                                                             
|
| |  | Analytical and design
    methods:we provide analytical methods
    to enhance safe handling of chemical substances and design
    methods to convert harmful chemical and biological materials
    into harmless materials.                                                                                                                                                                                                                                                               
|
| |  | Threat reduction: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.                                                                                                                                                                                                                  
|
| |  | Laboratory support:we provide support to U.S. Environmental Protection Agency
    laboratories in their pursuit of identifying and monitoring
    chemical contaminants in soil, air and water at specified
    Superfund sites.                                                                                                                                                                                                                                                           
|
| |  | Explosive sciences:we provide unexploded ordnance services to the U.S. Army
    Corps of Engineers and to other departments of the
    U.S. military. Through our wholly-owned subsidiary, Human
    Factors Applications, Inc. (HFA), we develop and use
    technologies for detection, recovery and disposal of unexploded
    ordnance in the U.S. and abroad. We also perform decontamination
    and demolition of buildings and equipment contaminated with
    explosive materials.
|
| |  | Ordnance management:we provide ordnance management services to the U.S. Navy,
    which includes the maintenance of, and accounting for, weapons
    inventories.                                                                                                                                                                                                                                                                                                                          

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:we provide services in the
    areas of computational fluid dynamics, structural response,
    materials behavior, and neutronics.                                                  
|
| |  | Safety and risk performance
    analysis:we provide services in the
    areas of probabilistic safety assessments, accident consequence
    analysis, and source term dose assessment.                          
|
| |  | Design and performance
    assessments:we provide services
    related to nuclear power facilities in the areas of control room
    habitability, power rate analysis, and license extension.                   
|
| |  | Management systems and program
    services:we provide technical
    expertise in the areas of compliance (e.g., regulatory analysis,
    policy development, and audits), project management, and
    training.
|
| |  | Regulatory compliance support
    services:we provide technical support
    in the areas of nuclear plant operational readiness reviews and
    conduct of operations.                                          

6



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Software Tools and Technology
Products.We have developed a series
of software tools and technology products that complement our
core business areas. Examples include:



| |   |                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                      
|
| |  | Individual Isolation Pod
    (IIPTM).
    This transport pod is designed to isolate and transport
    individuals contaminated with biological or chemical agents. The
    transport pod is designed to enable first responders to
    administer emergency medical treatment.                                 
|
| |  | 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.     
|
| |  | 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.                                                                  

Corporate History

Alion Science and Technology Corporation,
formerly known as Beagle Holdings, Inc., was organized on
October 10, 2001, as a for-profit Delaware corporation for
the purposes of purchasing substantially all of the assets and
assuming certain liabilities of IITRI, a not-for-profit
Illinois corporation. Alion is an employee-owned company that is
the successor in interest to IITRI, a government contractor
in existence for more than sixty years. On December 20,
2002, some of the eligible employees of IITRI directed
funds from their eligible retirement account balances into
Alions Employee Stock Ownership Plan (ESOP). State Street
Bank and Trust Company, the ESOP Trustee, used these proceeds,
together with funds described elsewhere in this annual report,
to purchase substantially all of IITRIs assets and
certain liabilities (hereafter referred to as the Selected
Operations of IITRI). We refer to this purchase as
the Transaction. Given the significance of the
Transaction, and its effect on Alions capital structure,
summary descriptions of the acquisition and the related deal
terms, the purchase of Alion common stock by the ESOP, and
Alions ESOP are provided below.



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

Acquired Business.On December 20, 2002, Alion acquired substantially all of
the assets, rights and liabilities of IITRIs business
except for, amongst others, those assets, rights and liabilities
associated with the Life Sciences Operation (other than its
accounts receivable, which Alion did acquire), and IITRIs
real property, some of which we leased upon completion of the
acquisition.

7



---



##### 



Purchase Price.The
aggregate purchase price we paid to IITRI for its assets
was approximately $127.3 million that included the
following components:

|                                                                                                                                                                                                                                        |                                                                                                                                  |                                |                               |                                                            |  |  | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------- | ------------------------------ | ----------------------------- | ---------------------------------------------------------- |  |  | 
| 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.Alion assumed
substantially all of the liabilities of IITRIs
business, with certain identified exceptions.

Indemnification.IITRI agreed to indemnify us, within limits agreed to by the
parties, against any losses resulting from its breach of any of
its representations, warranties or covenants and against losses
resulting from liabilities retained by IITRI. We, in turn,
indemnified IITRI, within limits agreed to by the parties,
against losses resulting from our breach of any of our
representations, warranties or covenants and against losses
resulting from liabilities we assumed.



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

On December 20, 2002, we entered into a
stock purchase agreement with the ESOP trust pursuant to which
at closing we issued 2,575,408 shares of our common stock
at $10 per share, in exchange for the funds our employees
directed to be invested in the ESOP component of the KSOP (a
KSOP is an employee benefit plan that consists of an
ESOP and a 401(k) element, which allows employees to have
diversified retirement savings in other investments) in the
initial one-time ESOP investment election.

8



---



##### 



Representations and
Warranties.Within the stock purchase
agreement, we made representations and warranties to the ESOP
trust that are customary to transactions of this type, related
to, but not limited, to:



| |   |                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.As part
of the stock purchase agreement, we agreed with the ESOP trust
that:



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

Certain of the covenants listed above will lapse
if the ESOP trust fails to own or otherwise control at least 20%
of the voting power of all our capital stock.

Indemnification.We
agreed to indemnify the ESOP trust, within limits agreed to by
the parties, against any losses resulting from our breach of any
of our representations, warranties or covenants. The ESOP trust
will indemnify us, within limits agreed to by the parties,
against losses resulting from its breach of any of its
representations, warranties or covenants.



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

The Alion Science and Technology Corporation
Employee Ownership, Savings and Investment Plan, which we refer
to as the KSOP, is a qualified retirement plan and is comprised
of what we refer to as an ESOP component and a non-ESOP
component. The ESOP component of the KSOP owns 100% of the
Companys outstanding shares of common stock.

9



---



##### 



Eligible employees of the Company can purchase
beneficial interests in the Companys common stock by:



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

The Companys ESOP trustee, State Street
Bank & Trust Company, uses the monies that eligible
employees invest in the ESOP to purchase shares of the
Companys common stock, for allocation to those
employees ESOP accounts.

The Company makes retirement plan contributions
to all its employees who are eligible participants in the Alion
KSOP. These retirement plan contributions are made to eligible
employees accounts in both the ESOP and the non-ESOP
components of the KSOP. The Company also makes matching
contributions on behalf of eligible employees, in the ESOP
component, based on their pre-tax deferrals of their Alion
salary.

The ESOP trustee holds record title to all of the
shares of Company common stock allocated to the employees
ESOP accounts, and except in certain limited circumstances, the
ESOP trustee will vote those shares on behalf of the employees
at the direction of the ESOP committee. The ESOP committee is
comprised of four members of Alions management team and
three other Alion employees and is responsible for the financial
management and administration of the ESOP component.

By law, Alion is required to value the common
stock held in the ESOP component at least once a year. Alion has
elected to have the common stock in the ESOP component valued by
the ESOP trustee twice a year  as of March 31
and September 30. Because all ESOP transactions must occur
at the current fair market value of the common stock held in the
ESOP trust, having bi-annual valuations affords eligible
employees the opportunity to invest in Company common stock and,
when applicable, request distributions of their ESOP accounts at
the end of each semi-annual period, rather than waiting until
the end of each plan year.

Growth Strategy

Our objective is to continue to grow by
capitalizing on our highly educated work force, our established
position in our core business areas and by synergistic
acquisitions. Our strategies for meeting this objective are:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | To build on our experience in wireless
    communications.We anticipate that
    U.S. Department of Defense budgets for the next few years
    will reflect an increased 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 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.                                                                                                                                                                                                                                                                                                         

10



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##### 





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.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 2004, Alion completed the
    following acquisitions:                                                                                                                                                                                                                                                                           



| |   |                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Integrated Technology Solutions Corporation
    (ITSC)  On October 31, 2003, Alion completed the
    acquisition of ITSC, a New Mexico corporation that had
    approximately 53 employees, the majority of whom were located in
    New Mexico. ITSC provides nuclear safety and analysis services
    to the U.S. Department of Energy (DOE) as well as to
    the commercial nuclear power industry.
|
| |  | Identix Public Sector, Inc. (IPS)  On
    February 13, 2004, Alion completed the acquisition of IPS,
    a Virginia-based company that provides program and acquisition
    management support, integrated logistics support, and foreign
    military support primarily to U.S. Navy customers. IPS was
    a wholly-owned subsidiary of Identix Incorporated.                                        

Market and Industry Background



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

Funding for our federal government contracts is
linked to trends in U.S. defense spending. We believe that
domestic defense spending will grow over the next several years
as a result of the following trends and developments:



| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | Department of Defense spending. Congress
    appropriated $391 billion in defense spending for fiscal
    year 2005



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increased Spending on National
    Defense.The terrorist attacks of
    September 11, 2001 and subsequent events have intensified
    the federal governments commitment to strengthen our
    countrys military, intelligence, and homeland security
    capabilities. Department of Defense appropriations, excluding
    military construction and supplemental appropriations to pay for
    the ongoing efforts in Iraq and Afghanistan, were increased from
    $366 billion in federal fiscal year 2004 to
    $391 billion for federal fiscal year 2005 and grew at an
    average annual growth rate over the past five years of 5.9%. In
    addition, the federal fiscal year 2005 Homeland Security budget
    proposal totaled $47 billion, with $27 billion
    allocated to initiatives in the Department of Homeland Security,
    $8 billion allocated to the Department of Defense, and
    $12 billion allocated to other federal agencies.
|
| |  | Increased interest in procurement and
    development.We expect that the
    U.S. Department of Defense budget for research and
    development, testing and evaluation (R,D,T&E), all of which
    fund our programs, will grow proportionately with overall
    defense spending.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

11



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##### 



We believe that the increase in spending for
defense and homeland security will result in a growth of our
revenues because of the correlation between the areas of
projected growth in spending and our core business areas. The
following areas of projected growth in spending for defense and
homeland security, as identified in the U.S. Budget for
fiscal year 2005, have a direct correlation with our core
business areas:



| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | 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 increase in spending for homeland
    defense.                        



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

For fiscal years ended September 30, 2004,
2003 (on a pro forma basis), and 2002 (on a pro forma basis),
revenue that we obtained from federal government contracts was
approximately 98% of our total revenue for each respective year.
The U.S. Department of Defense is our largest customer. We
expect that most of our revenues will continue to result from
contracts with the federal government. We perform our government
contracts as a prime contractor or as a subcontractor. As a
prime contractor, we have direct contact with the applicable
government agency. As a subcontractor, we perform work for a
prime contractor, which serves as the point of contact with the
government agency overseeing the program.

Our federal government contracts are generally
multi-year contracts but are funded on an annual basis at the
discretion of Congress. Congress usually appropriates funds for
a given program on an October 1 fiscal year commencement
basis. That means that at the outset of a major program, the
contract is usually only partially funded, and normally the
procuring agency commits additional monies to the contract only
as Congress makes appropriations for future fiscal years. The
government can modify or discontinue any contract at its
discretion or due to default by the contractor. Termination or
modification of a contract at the governments discretion
may be for any of a variety of reasons, including funding
constraints, modified government priorities or changes in
program requirements. If one of our contracts is terminated at
the governments discretion, we typically get reimbursed
for all of our services performed and costs incurred up to the
point of termination, a negotiated amount of the fee on the
contract, and termination-related costs we incur.

Contract Types.As
of September 30, 2004, we had over 275 active contract
engagements, each employing one of three types of price
structures: cost-reimbursement, time-and-materials, or
fixed-price.



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

Our historical contract mix, measured as a
percentage of total revenue for the fiscal years ended
September 30, 2004 and on a pro forma basis for fiscal
years ended September 30, 2003 and 2002, is summarized in
the table below.

|                   |  |      |    |           |  |           |    |   |  |  |    |  
|------------------ |  | ---- | -- | --------- |  | --------- | -- | - |  |  | -- | -
|                   |  |      |    | Pro Forma |  | Pro Forma
|                   |  | 2004 |    | 2003      |  | 2002     
|                   |  |      |    |           |  |          
|Cost-reimbursement |  |      | 59 | %         |  |           | 62 | % |  |  | 60 | %
|Time-and-material  |  |      | 25 | %         |  |           | 22 | % |  |  | 22 | %
|Fixed-price        |  |      | 16 | %         |  |           | 16 | % |  |  | 18 | %

12



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##### 



Any costs we incur prior to the award of a new
contract or prior to modification of an existing contract are at
our own risk. This is a practice that is customary in our
industry, particularly when a contractor has received verbal
advice of a contract award, but has not yet received the
authorizing contract documentation. In most cases the contract
is later executed or modified and we receive full reimbursement
for our costs. We cannot be certain, however, when we commence
work prior to authorization of a contract, that the contract
will be executed or that we will be reimbursed for our costs. As
of September 30, 2004, we had incurred $2.0 million in
pre-contract costs at our own risk.

Government
Oversight.Our contract administration
and cost accounting policies and practices are subject to
oversight by federal government inspectors, technical
specialists and auditors. All costs associated with a federal
government contract are subject to audit by the federal
government. An audit may reveal that some of the costs that we
may have charged against a government contract are not in fact
allowable, either in whole or in part. In these circumstances,
we would have to return to the federal government any monies
paid to us for non-allowable costs, plus interest and possibly
penalties. The federal government has audited all indirect costs
for our government contracts through fiscal year 2001, and any
impact of these audits is reflected in our financial statements.
Our contracts for fiscal year 2002 and subsequent periods have
not yet been audited. The findings of an audit could result in
adjustments that may change the financial data reported for
fiscal year 2002 and subsequent periods.

Backlog.Contract
backlog represents an estimate, as of a specific date, of the
remaining future revenues anticipated from our existing
contracts. It consists of two elements:



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

Options not yet exercised by a customer for
additional years and other extension opportunities included in
contracts are included in unfunded backlog. Contract backlog
does include pre-negotiated options to continue existing
contracts. Changes in our contract backlog calculation result
from additions for future revenues as a result of the execution
of new contracts or the extension or renewal of existing
contracts, reductions as a result of completing contracts,
reductions due to early termination of contracts, and
adjustments due to changes in estimates of the revenues to be
derived from previously included contracts. Estimates of future
revenues from contract backlog are by their nature inexact and
the receipt and timing of these revenues are subject to various
contingencies, many of which are outside of our control. The
table below shows the value of our funded and unfunded contract
backlog as of September 30, 2004, 2003, and 2002,
respectively.

|         |       |               |   |       |       |      |   |       |       |  |   |       |       | 
|-------- | ----- | ------------- | - | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|         |       |              
|         |       | September 30,
|         |       |              
|         |       | 2004          |   | 2003  |       | 2002
|         |       |               |   |       |       |     
|         |       |              
|         |       | (In millions)
|Backlog: |       |               |   |       |       |      |   |       |       |  |   |      
|         |       | Funded        |   | $     | 161   |      |   | $     | 107   |  |   | $     | 72    | 
|         |       | Unfunded      |   |       | 1,793 |      |   |       | 1,435 |  |   |       | 1,431 | 
|         |       |               |   |       |       |      |   |       |       |  |   |      
|         | Total |               | $ | 1,954 |       |      | $ | 1,542 |       |  | $ | 1,503 |      
|         |       |               |   |       |       |      |   |       |       |  |   |      

Proposal backlog represents an estimate, as of a
specific date, of the proposals we have in process or submitted
and for which we are waiting to hear results of the award. It
consists of two elements:



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

The amount of our proposal backlog that
ultimately may be realized as revenues depends upon our success
in the competitive proposal process, and on the receipt of
tasking and associated funding under the

13



---



##### 



ensuing contracts. We will not be successful in
winning contract awards for all of the proposals that we submit
to potential customers. Our past success rates for winning
contract awards from our proposal backlog should not be viewed
as an indication of our future success rates. The table below
shows the value of our proposal backlog as of September 30,
2004, 2003, and 2002, respectively.


|           |       |               |     |      |  |      |     |     |  |   |     |     | 
|---------- | ----- | ------------- | --- | ---- |  | ---- | --- | --- |  | - | --- | --- | 
|           |       |              
|           |       | September 30,
|           |       |              
|           |       | 2004          |     | 2003 |  | 2002
|           |       |               |     |      |  |     
|           |       |              
|           |       | (In millions)
|In-process |       | $             | 56  |      |  | $    | 31  |     |  | $ | 168 |    
|Submitted  |       |               | 425 |      |  |      | 397 |     |  |   | 372 |    
|           |       |               |     |      |  |      |     |     |  |   |     |    
|           | Total |               | $   | 481  |  |      | $   | 428 |  |   | $   | 540 | 
|           |       |               |     |      |  |      |     |     |  |   |     |    

Seasonality and Cyclicality

We believe that our business may be subject to
seasonal fluctuations. The federal governments fiscal year
end (i.e., September 30) can trigger increased purchase
requests from our customers for equipment and materials. Any
increased purchase requests we receive as a result of the
federal governments fiscal year end would serve to
increase our fourth quarter revenues but will generally decrease
profit margins for that quarter, as these activities typically
are not as profitable as our normal service offerings. In
addition, expenditures by our customers tend to vary in cycles
that reflect overall economic conditions as well as budgeting
and buying patterns. Our revenue has in the past been, and may
in the future be materially affected by a decline in the defense
budget or in the economy in general. Such future declines could
alter our current or prospective customers spending
priorities or budget cycles which has the affect of extending
our sales cycle.

Corporate Culture

Employees and
Recruiting.We strive to create
organizational culture that promotes excellence in job
performance, respect for the ideas and judgment of our
colleagues and recognition of the value of the unique skills and
capabilities of our professional staff. We seek to attract
highly qualified and ambitious staff. We strive to establish an
environment in which all employees can make their best personal
contribution and have the satisfaction of being part of a unique
team. We believe that we have in the past successfully attracted
and retained highly skilled employees because of the quality of
our work environment, the professional challenges of our
assignments, and the financial and career advancement
opportunities we make available to our staff.

We view our employees as our most valuable
asset.Our success depends in large
part on attracting and retaining talented, innovative and
experienced professionals at all levels. We rely on the
availability of skilled technical and administrative employees
to perform our research, development and technological services
for our customers. The market for certain skills in areas such
as information technology and wireless communications is at
times extremely competitive. This makes recruiting and retention
of employees in these and other specialized areas extremely
important. We recognize that our benefits package, work
environment, incentive compensation, and employee-owned culture
will be important in recruiting and retaining these highly
skilled employees.

As of September 30, 2004, we had 1,880
employees, of which 1,730 were full-time, 56 half-time, and
94 part-time employees. Over 70% of our employees have
federal government security clearances. Approximately 5% of our
employees have Ph.D.s, approximately 34% have masters
degrees, and approximately 65% of our employees have
undergraduate degrees. We also use consultants from time to time
for technical work, promotional activities, and proposal
preparation. We believe that our relationship with our employees
is good. None of our employees are covered by a collective
bargaining agreement.

Our facilities include laboratory facilities at
locations in Chicago, Illinois; Annapolis, Maryland; West
Conshohocken, Pennsylvania; Lanham, Maryland; Geneva, Illinois;
Huntsville, Alabama; Rome, New York; and Albuquerque, New
Mexico, where we provide our engineers and scientists with
advanced tools to research and apply new technologies to issues
of national significance.

14



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Our Customers

During the fiscal year ended September 30,
2004, we derived approximately 98% of our revenue from contracts
with various agencies or departments of the federal government.
Of our total revenue, we derived 91% from contracts with the
U.S. Department of Defense. On a pro forma basis, for the
fiscal year ended September 30, 2003, approximately 98% of
our revenue was from contracts with the federal government, and
95% was derived from contracts with the U.S. Department of
Defense. The balance of our revenue was from a variety of
commercial customers, U.S. state and local governments and
foreign governments. We derived less than 1% of our revenues
from international customers in the fiscal years ended
September 30, 2004, 2003, and 2002. The table below shows
revenues, by customer, for fiscal years 2004, 2003, and 2002,
respectively:

|                                                     |  |                                  |     |           |  |           |     |   |  |   |     |  |  |  |     |   |  |   |     |  |  |  |     |  
|---------------------------------------------------- |  | -------------------------------- | --- | --------- |  | --------- | --- | - |  | - | --- |  |  |  | --- | - |  | - | --- |  |  |  | --- | -
|                                                     |  |                                 
|                                                     |  | For the Year Ended September 30,
|                                                     |  |                                 
|                                                     |  |                                  |     |           |  |          
|                                                     |  | 2004                             |     | 2003      |  | 2002     
|                                                     |  |                                  |     |           |  |          
|                                                     |  |                                  |     |           |  |          
|                                                     |  |                                  |     | Pro Forma |  | Pro Forma
|                                                     |  | Revenue                          |     | Revenue   |  | Revenue  
|                                                     |  |                                  |     |           |  |          
|                                                     |  |                                  |     |           |  |           |     |   |  |   |     | 
|                                                     |  |                                 
|                                                     |  | (In millions)                   
|U.S. Department of Defense (DoD)                     |  | $                                | 245 |           |  |           | 91  | % |  | $ | 202 |  |  |  | 95  | % |  | $ | 182 |  |  |  | 90  | %
|Other U.S. Federal, state, and local
    governments |  |                                  | 19  |           |  |           | 7   |   |  |   | 7   |  |  |  | 3   |   |  |   | 16  |  |  |  | 8   |  
|Commercial and international                         |  |                                  | 6   |           |  |           | 2   |   |  |   | 4   |  |  |  | 2   |   |  |   | 4   |  |  |  | 2   |  
|                                                     |  |                                  |     |           |  |           |     |   |  |   |     |  |  |  |     |   |  |   |     |  |  |  |     |  
|                                                     |  | $                                | 270 |           |  |           | 100 | % |  | $ | 213 |  |  |  | 100 | % |  | $ | 202 |  |  |  | 100 | %
|                                                     |  |                                  |     |           |  |           |     |   |  |   |     |  |  |  |     |   |  |   |     |  |  |  |     |  

Competition

Our industry is very competitive. In most
significant federal government procurements, we compete with
much larger, well-established companies, as well as a number of
smaller companies. They include Booz-Allen Hamilton, Computer
Sciences Corporation, Science Applications International
Corporation, Litton Industries, Sverdrup, Battelle Memorial
Institute, Lockheed Martin Corporation, Northrop Grumman
Corporation, and Mitretek Systems, Inc. In the commercial arena,
we compete most often with smaller, but highly specialized
technical companies, as well as a number of larger companies.
They include CRIL Technology, Tadiran Communications Ltd.,
Spectrocan, Orthstar Incorporated, and Elite Electronic
Engineering.

In most cases, government contracts for which we
compete are awarded based on a competitive process. We believe
that in general, the key factors considered in awarding
contracts are:



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

It is our experience that in awarding contracts
to perform complex technological programs, the two most
important considerations for a customer are technical
capabilities and price.

S Corporation Status

The Internal Revenue Code provides that a
corporation that meets certain requirements may elect to be
taxed as an S corporation for federal income tax purposes.
These requirements provide that an S corporation may only
have:



| |   |                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------
| |  | one class of stock;                                                                                                   
|
| |  | up to 75 shareholders; and                                                                                            
|
| |  | certain types of shareholders, such as
    individuals, trusts and some tax-exempt organizations, including
    ESOPs.

15



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Since the ESOP (which counts as one shareholder
for S corporation purposes) is our only stockholder, we
currently meet the requirements to be taxed as an
S corporation.

Alion filed an election with the IRS to be
treated as an S corporation under the Internal Revenue
Code. The election was accepted and became effective on
October 11, 2001. An S corporation, unlike a C
corporation, generally does not pay federal corporate income tax
on its net income. Rather, such income is allocated to the
S corporations shareholders. Shareholders must take
into account their allocable share of income when filing their
income tax returns. An ESOP is a tax-exempt entity and does not
pay tax on its allocable share of S corporation income.
Because neither we nor the ESOP should be required to pay
federal corporate income tax, we expect to have substantially
more cash available to repay our debt and invest in our
operations than we would if Alion were to be taxed as a C
corporation.

Many states follow the federal tax treatment of
S corporations. In some states, Alion is subject to
different tax treatment for state income tax purposes than for
federal income tax purposes. The Company and its subsidiaries
operate in several states where we are subject to state income
taxes. The Company is also subject to other taxes such as
franchise and business taxes in certain jurisdictions.

The Companys wholly-owned operating
subsidiaries are qualifying subchapter S subsidiaries. For
federal income tax purposes, these subsidiaries are consolidated
into Alions federal income tax returns.

Under a provision of the Internal Revenue Code,
significant penalties can be imposed on a subchapter S employer
which maintains an ESOP (i) if the amount of ESOP stock
allocated to certain disqualified persons exceeds
certain statutory limits or (ii) if disqualified persons
together own 50% or more of the companys stock. For this
purpose, a disqualified person is generally someone
who owns 10% or more of the subchapter S employers stock
(including deemed ownership through stock options, warrants,
stock appreciation rights, or SARs, phantom stock, and similar
rights). The KSOP, the SAR plan and the phantom stock plan
include provisions designed to prohibit allocations in violation
of these Internal Revenue Code limits. We expect never to exceed
the 50% limit. Apart from the warrants representing
approximately 38% of our common stock that were issued
to IITRI at the closing of the Transaction (and
subsequently transferred to the Illinois Institute of
Technology), no one person is expected to hold ownership
interests representing more than 5% of Alion.



| |                                                    
| | ---------------------------------------------------
| | Business Development and Promotional
    Activities

We primarily promote our contract research
services by meeting face-to-face with customers or potential
customers, by obtaining repeat work from satisfied customers,
and by responding to requests for proposals, referred to as
RFPs, and international tenders that our customers and
prospective customers publish or direct to our attention from
time to time. We use our knowledge of and experience with
federal government procurement procedures, and relationships
with government personnel, to help anticipate the issuance of
RFPs or tenders and to maximize our ability to respond
effectively and in a timely manner to these requests. We use our
resources to respond to RFPs and tenders that we believe we have
a good opportunity to win and that represent either our core
research fields or logical extensions to those fields for new
research. In responding to an RFP or tender, we draw on our
expertise in our various business areas to reflect the technical
skills we could bring to the performance of that contract.

Our technical staff is an integral part of our
promotional efforts. They develop relationships with our
customers over the course of contracts that can lead to
additional work. They also become aware of new research
opportunities in the course of performing tasks on current
contracts.

We hold weekly company-wide business development
meetings to review specific proposal opportunities and to agree
on our strategy in pursuing these opportunities. At times we
also use independent consultants for promoting business,
developing proposal strategies and preparing proposals.

We spent approximately $0.4 million on
internal research and development in fiscal year 2004, and, on a
pro forma basis, approximately $0.2 million and
$0.6 million in fiscal years 2003 and 2002, respectively.
This is in addition to the substantial research and development
activities that we have undertaken on projects funded by our
customers. We believe that actively fostering an environment of
innovation is critical to our future

16



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success in that it allows us to be proactive in
addressing issues of national concern in public health, safety,
and national defense.


Resources

For most of our work, we use computer and
laboratory equipment and other supplies that are readily
available from multiple vendors. As such, disruption in
availability of these types of resources from any particular
vendor should not have a material impact on our ability to
perform our contracts. In some of the specialized work we
perform in a laboratory, we depend on the supply of special
materials and equipment whose unavailability could have adverse
effects on the experimental tasks performed at the laboratory.
However, we believe that the overall impact of these types of
delays or disruptions on our total operations and financial
condition is likely to be minimal.

Patents and Proprietary Information

Our patent portfolio consists of sixteen issued
and active U.S. patents, seven pending U.S. patents,
three active foreign patents and thirteen pending foreign
patents. We routinely enter into intellectual property
assignment agreements with our employees to protect our rights
to any patents or technologies developed during their employment
with us. However, our research and development and engineering
services do not depend on patent protection.

Our federal government contracts often provide
the federal government with certain rights to our inventions and
copyright works, including use of the inventions by government
agencies, and a right to exploit these inventions or have them
exploited by third-party contractors, including our competitors.
Similarly, our federal government contracts often license to us
patents and copyright works owned by others.

Foreign Operations

In fiscal years 2004 and 2003, nearly 100% of the
Companys revenue was derived from services provided under
contracts with U.S.-based customers. The Company treats revenues
resulting from U.S. government customers as sales within
the United States regardless of where the services are performed.

Company Information Available on the
Internet

The Companys internet address is
www.alionscience.com. The Company makes available free of charge
through its internet site, via a hyperlink to the
U.S. Securities and Exchange Commission EDGAR filings web
site, its annual report on Form 10-K; quarterly reports on
Form 10-Q; current reports on Form 8-K; and any
amendments to those reports filed or furnished pursuant to the
Securities Exchange Act of 1934, or the Exchange
Act, as soon as reasonably practicable after such material
is electronically filed with, or furnished to, the
U.S. Securities and Exchange Commission.

Environmental Matters

Our operations are subject to federal, state and
local laws and regulations relating to, among other things:



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

Operating and maintenance costs associated with
environmental compliance and prevention of contamination at our
facilities are a normal, recurring part of our operations, are
not material relative to our total operating costs or cash
flows, and are generally allowable as contract costs under our
contracts with the federal government. These costs have not been
material in the past and, based on information presently
available to us and on federal government environmental policies
relating to allowable costs in effect at this time, all of which

17



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##### 



are subject to change, we do not expect these to
have a materially adverse effect on us. Based on historical
experience, we expect that a significant percentage of the total
environmental compliance costs associated with our facilities
will continue to be allowable costs.


Under existing U.S. environmental laws,
potentially responsible parties are jointly and severally liable
and, therefore, we would be potentially liable to the government
or third parties for the full cost of remediating contamination
at our sites or at third-party sites in the event contamination
is identified and remediation is required. In the unlikely event
that we were required to fully fund the remediation of a site,
the statutory framework would allow us to pursue rights of
contribution from other potentially responsible parties.

Risk Factors



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



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

Our business, financial condition and results of
operations may be affected by various economic factors.
Unfavorable economic conditions may make it more difficult for
us to maintain and continue our revenue growth. In an economic
recession, or under other adverse economic conditions, customers
and vendors may be more likely to be unable to meet contractual
terms or their payment obligations. A decline in economic
conditions may have a material adverse effect on 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.

We operate in highly competitive markets and
generally encounter intense competition to win contracts. If we
are unable to successfully compete for new business, our revenue
growth and operating margins may decline. Many of our
competitors are larger and have greater financial, technical,
marketing, and public relations resources, larger client bases,
and greater brand or name recognition than we do. Larger
competitors include federal systems integrators such as Computer
Sciences Corporation and Science Applications International
Corporation, and divisions of large defense contractors such as
Lockheed Martin Corporation and Northrop Grumman Corporation.
Our larger competitors may be able to compete more effectively
for very large-scale government contracts. Our larger
competitors also may be able to provide clients with different
or greater capabilities or benefits than we can provide in areas
such as technical qualifications, past performance on
large-scale contracts, geographic presence, price, and the
availability of key professional personnel. Our competitors also
have established or may establish relationships among themselves
or with third parties, including through mergers and
acquisitions, to increase their ability to address client needs.
Accordingly, it is possible that new competitors or alliances
among competitors may emerge.



| |                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

In order to complete the acquisition
of IITRIs assets, we incurred a substantial amount of
indebtedness. On August 2, 2004, we refinanced the Company
which makes available approximately $180 million of debt
financing which may be used to fund future acquisitions,
refinance existing debt, and provide working capital. Our
consolidated debt was approximately $103.2 million at
September 30, 2004. We do not have extensive experience in
functioning as a highly leveraged company.

Our indebtedness could:



| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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;                            

18



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##### 





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

Our ability to meet our payment obligations and
to comply with the financial covenants contained in the
agreements relating to our indebtedness is subject to a variety
of factors, including changes in:



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

These factors will also affect our ability in the
future to meet our obligations related to the put rights
associated with the warrants and to our repurchase obligations
under the KSOP. We also have significant debt obligations which
become due in 2009 and 2010.

We may not generate sufficient cash flows to
comply with our financial covenants and to meet our payment
obligations when they become due. If we are unable to comply
with our financial covenants, or if we are unable to generate
sufficient cash flow or otherwise obtain funds necessary to make
the required payments on our indebtedness, then we may be
required to refinance our indebtedness. We cannot be certain
that our indebtedness could be refinanced on terms that are
favorable to us, if at all. In the absence of a refinancing, our
lenders would be able to accelerate the maturity of our
indebtedness, which could cause us to default under our other
indebtedness, dispose of assets or declare bankruptcy.



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



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

Approximately 98% of our revenues for fiscal year
2004 were derived from contracts with the federal government.
Contracts with the U.S. Department of Defense accounted for
approximately 91%, and contracts with other government agencies
accounted for approximately 7%, of our total revenues in fiscal
year 2004. On a pro forma basis for fiscal year 2003, contracts
with the U.S. Department of Defense accounted for
approximately 95% of our revenues, and contracts with other
government agencies accounted for approximately 3% of our
revenues. We expect that government contracts are likely to
continue to account for a significant portion of our revenues in
the future. A significant decline in government expenditures, or
a shift of expenditures away from government programs that we
support, could cause a decline in 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.

On an annual basis, Congress must approve budgets
that govern spending by each of the federal agencies we support.
When Congress is unable to agree on budget priorities, and thus
is unable to pass the annual

19



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##### 



budget on a timely basis, then Congress typically
enacts a continuing resolution. A continuing resolution allows
government agencies to operate at spending levels approved in
the previous budget cycle. When government agencies must operate
on the basis of a continuing resolution it may delay funding we
expect to receive from clients on work we are already performing
and will likely result in any new initiatives being delayed, and
in some cases being cancelled, both of which may adversely
affect our business.




| |                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

The following five large federal government
contracts accounted for approximately 61% of our revenues for
the fiscal year ended September 30, 2004:



| |    |                                                                                                                                                                     
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Information Technology Services for General
    Services Administration  U.S. Department of
    Defense (18%);                                                     
|
| | 2. | Joint Spectrum Center Engineering Support
    Services for the U.S. Department of Defense Joint Spectrum
    Center (18%);                                          
|
| | 3. | Modeling and Simulation Information Analysis
    Center for the U.S. Department of Defense 
    Defense Information Systems Agency (13%);                          
|
| | 4. | Modeling and Simulation for the
    U.S. Department of Defense  Defense Logistics
    Agency (7%); and                                                             
|
| | 5. | Subcontract (to Parsons Corporation) for
    decommissioning and demilitarization services to the
    U.S. Armys Newport Chemical Agent Disposal Facility
    (5%).

These contracts, some of which are performed for
multiple customers, are likely to continue to account for a
significant percentage of our revenues in the future.
Termination of these contracts or our inability to renew or
replace them when they expire could cause our revenues to
decrease.



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

Generally, government agencies can terminate
contracts with their suppliers at any time without cause. If a
government agency does terminate one of its contracts with us
without cause, we will likely be entitled to receive
compensation for the services provided or costs incurred up to
the date of termination as well as a negotiated amount of the
fee on the contract and termination-related costs we incur.
Further, if a government contract is terminated because we
defaulted under the terms of the contract, we will likely be
entitled to receive compensation for the services provided and
accepted up to the date of termination plus a percentage of the
fee relating to the provided and accepted services. However, if
a default were to occur, we may be liable for excess costs the
government incurs in procuring the undelivered portion of the
contract from another source. Termination of any of our large
government contracts may negatively impact our revenues.



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

Government agencies have conflict of interest
policies that may prevent us from bidding on or performing
certain contracts. Typically, a conflict of interest policy
prohibits a contractor that assisted the government agency in
the design of a program and/or the associated procurement
process from competing to perform the resulting contract. When
dealing with government agencies that have conflict of interest
policies, we must decide, at times with insufficient
information, whether to participate in the design process and
lose the chance of performing the contract or to turn down the
opportunity to assist in the design process for the chance of
performing on the contract. We have, on occasion, declined to
bid on particular projects because of actual or perceived
conflicts of interest, and we are likely to continue
encountering such conflicts of interest in the future,
particularly if we acquire other government contractors. Future
conflicts of interest could cause us to be unable to secure key
research and technology contracts with government customers.

20



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

The maximum contract value specified under a
government contract is not necessarily indicative of revenues
that we will realize under that contract. Congress normally
appropriates funds for a given program on a fiscal year basis,
even though actual contract performance may take many years. As
a result, contracts ordinarily are only partially funded at the
time of award, and normally the procuring agency commits
additional monies to the contract only as Congress makes
appropriations in subsequent fiscal years. The portion of a
government contract which has not yet been performed is referred
to as backlog. The original value of a government contract is
used in estimating the amount of our backlog. We define backlog
to include both funded and unfunded orders for services under
existing signed contracts, assuming the exercise of all options
relating to those contracts that have been priced. We define
funded backlog to be the portion of backlog for which funding
currently is appropriated and obligated to us under a contract
or other authorization for payment which an authorized
purchasing authority signs, less the amount of revenue we have
previously recognized under the contract. We define unfunded
backlog as the total estimated value of signed contracts, less
funding to date. Unfunded backlog includes all contract options
that have been priced but not yet funded. Estimates of future
revenues attributed to backlog are not necessarily precise and
the receipt and timing of any of these revenues are subject to
various contingencies such as changed federal government
spending priorities and government decisions not to exercise
options on existing contracts. Many of these contingencies are
beyond our control. The backlog on a given contract may not
ultimately be funded or may only be partially funded, which may
cause our revenues to be lower than anticipated.



| |                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

Government contract payments received that are in
excess of allowable costs are subject to adjustment and
repayment after government audit of the contract payments.
Government audits have been completed on indirect costs related
to our federal government contracts through fiscal year 2001,
and are continuing for subsequent periods. We have included
estimated reserves in our financial statements for excess
billings and contract losses, which we believe are adequate
based on our interpretation of contracting regulations and past
experience. These reserves, however, may not be adequate. If our
reserves are not adequate, revenues attributed to our contracts
may be 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.

As a prime contractor, we often rely
significantly upon other companies as subcontractors to perform
work we are obligated to deliver to our customers. A failure by
one or more of our subcontractors to satisfactorily perform the
agreed-upon services on a timely basis may cause us to be unable
to perform our duties as a prime contractor. We have limited
involvement in the work our subcontractors perform, and as a
result, we may have exposure to problems our subcontractors
cause. Performance deficiencies on the part of our
subcontractors could result in a government customer terminating
our contract for default. A default termination could expose us
to liability for the customers costs of reprocurement,
damage our reputation, and hurt our ability to compete for
future contracts.



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

Any costs we incur before the execution of a
contract or contract renewal are incurred at our risk, and it is
possible that the customer will not reimburse us for these
pre-contract costs. At September 30, 2004, we had
pre-contract costs of $2.0 million. While such costs were
associated with specific anticipated contracts and we believe
their recoverability from such contracts is probable, we cannot
be certain that contracts or contract renewals will be executed
or that we will recover the related pre-contract costs.

21



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##### 





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

Cost-reimbursement contracts provided
approximately 59% of our revenues for the fiscal year ended
September 30, 2004, 62% of our pro forma revenues for the
fiscal year ended September 30, 2003 and 60% of our pro
forma revenues for the fiscal year ended September 30,
2002. Fixed-price contracts provided approximately 16% of our
revenues for fiscal year 2004, and 16% of our pro forma revenues
for the fiscal year ended September 30, 2003, and 18% of
our pro forma revenues for the fiscal year ended
September 30, 2002.

In a cost-reimbursement contract, we are allowed
to recover our approved costs plus a negotiated fee. The total
price on a cost-reimbursement contract is based primarily on
allowable costs incurred, but generally is subject to a maximum
contract funding limit. Federal government regulations require
us to notify our customers of any cost overruns or underruns on
a cost-reimbursement contract. If we incur costs in excess of
the funding limitation specified in the contract, we may not be
able to recover those cost overruns. As a result, on a
cost-reimbursement contract we may not earn the full amount of
the anticipated fee.

In a fixed-price contract, we estimate the costs
of the project and agree to deliver the project for a definite,
predetermined price regardless of our actual costs to be
incurred over the life of the project. We must fully absorb cost
overruns. Our failure to anticipate technical problems, estimate
costs accurately or control costs during performance of a
fixed-price contract may reduce the fee margin of a fixed-price
contract or cause a loss. Although we have not historically
experienced significant contract losses on fixed-price
contracts, the provisions in our financial statements for
estimated losses on our fixed-price contracts may not be
adequate to cover all actual future losses.



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

In general, cost-reimbursement contracts are the
least profitable of our contract types. Our government customers
typically determine what type of contract will be awarded to us.
Cost-reimbursement contracts accounted for 59%, 62%, and 60% of
our revenue for fiscal 2004, pro forma revenue for fiscal 2003,
and pro forma revenue for fiscal 2002, respectively. To the
extent that we enter into more or larger cost-reimbursement
contracts in proportion to our total contract mix in the future,
our operating margins and operating results may suffer.



| |                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

We have historically earned higher relative
profits on our fixed-price contracts. Fixed-price contracts
accounted for 16%, 16%, and 18% of our revenue for fiscal 2004,
pro forma revenue for fiscal 2003, and pro forma revenue for
fiscal 2002, respectively. If the volume of services we deliver
under fixed-price contracts decreases, or shifts to other types
of contracts, our operating margins and operating results may
suffer. Furthermore, we cannot assure you that we will be able
to maintain our historic levels of profitability on fixed-price
contracts in general.



| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

We must comply with and are affected by laws and
regulations relating to the formation, administration and
performance of federal government contracts, which may impose
added costs on our business. If a government review or
investigation uncovers improper or illegal activities, we may be
subject to civil and criminal penalties and administrative
sanctions, including termination of contracts, forfeiture of
fees, suspension of payments, fines and suspension or debarment
from doing business with federal government agencies, which may
impair our ability to conduct our business. To the knowledge of
management, we are not at present the subject of any
investigation that may adversely affect our ability to secure
future government work.

22



---



##### 





| |                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

As of September 30, 2004, we have
approximately one hundred U.S. Department of Defense (DoD)
classified contracts that require the Company to maintain
facility security clearances at our fifteen sites. Approximately
1,400 of our employees hold security clearances to enable
performance on these classified contracts. Each cleared facility
has a Facility Security Officer and Key Management Personnel
whom the DoD-Defense Security Service requires to be cleared to
the level of the facility security clearance. In addition to
these clearances, individual employees are selected to be
cleared, based on the task requirement of the specific
classified contract, for their technical, administrative or
management expertise. Once the security clearance is granted,
the employee is allowed access to the classified information on
the contract based on the clearance and need to know for the
information within the contract. Protection of classified
information with regard to a classified contract is paramount.
Loss of a facility clearance or an employees inability to
obtain and/or maintain a security clearance could result in a
government customer terminating an existing contract or choosing
not to renew a contract upon its expiration. If we cannot
maintain or obtain the required security clearances for our
facilities or our employees, or if these clearances are not
obtained in a timely manner, we may be unable to perform on a
contract. Lack of required clearances could also impede our
ability to bid on or win new contracts, which may result in the
termination of current research activities. Termination of
current research activities may damage our reputation and our
revenues would likely decline.



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

We obtain most of our government contracts
through a competitive bidding process that subjects us to risks
associated with:



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

Upon expiration, government contracts may be
subject to a competitive rebidding process. We may not be
successful in winning contract awards or renewals in the future.
Our failure to win contract awards, or to renew or replace
existing contracts when they expire, would negatively impact our
future business and the value of your investment.



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

We expect to encounter significant competition
for government contracts from other companies, especially in our
information technology and defense operations units. Some of our
competitors will have substantially greater financial, technical
and marketing resources than we do.

Our ability to compete for these contracts will
depend on:



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

If we do not continue to compete effectively and
win contracts, our future business will be materially
compromised.

23



---



##### 





| |                                    
| | -----------------------------------
| | 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.

We believe that our future success will be due,
in part, to the continued services of our senior management
team. The loss of any one of these individuals could cause our
operations to suffer. On December 20, 2002, we entered into
new employment agreements with most of these individuals for
five-year terms. We do not, however, maintain key man life
insurance policies on any members of management.

In addition, competition for certain employees,
such as scientists and engineers, is intense. Our ability to
implement our business plan is dependent on our ability to hire
and retain these technically skilled professionals. Our failure
to recruit and retain qualified scientists and engineers may
cause us to be unable to obtain and perform future contracts.



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

The availability of highly trained and skilled
professional, administrative and technical personnel is critical
to our future growth and profitability. Competition for
scientists, engineers, technicians, management and professional
personnel is intense and competitors aggressively recruit key
employees. Due to our growth and this competition for
experienced personnel, particularly in highly specialized areas,
it has become more difficult to meet all of our needs for these
employees in a timely manner. We intend to continue to devote
significant resources to recruit, train and retain qualified
employees; however, we cannot be certain that we will be able to
attract and retain such employees on acceptable terms. Any
failure to do so could have a material adverse effect on our
operations. If we are unable to recruit and retain a sufficient
number of these employees, our ability to maintain and grow our
business could be negatively impacted. In addition, some of our
contracts contain provisions requiring us to commit to staff a
program with certain personnel the customer considers key to our
successful performance under the contract. In the event we are
unable to provide these key personnel or acceptable
substitutions, the customer may terminate the contract, and we
may not be able to recover our costs.



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

We are exposed to the risk that employee fraud or
other misconduct could occur. Misconduct by employees could
include intentional failures to comply with federal government
procurement regulations, engaging in unauthorized activities,
seeking reimbursement for improper expenses or falsifying time
records. Employee misconduct could also involve the improper use
of our customers sensitive or classified information,
which could result in regulatory sanctions against us and
serious harm to our reputation. It is not always possible to
deter employee misconduct, and the precautions we take to
prevent and detect this activity may not be effective in
controlling unknown or unmanaged risks or losses, which could
harm our business.



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

Sustaining our companys growth has placed
significant demands on management, as well as on our
administrative, operational and financial resources. To continue
to manage our growth, we must continue to improve our
operational, financial and management information systems and
expand, motivate and manage our workforce. If we are unable to
successfully manage our growth without compromising our quality
of service and our profit margins, or if new systems we
implement to assist in managing our growth do not produce the
expected benefits, our business, prospects, financial condition
or operating results could be adversely affected.



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

One of our key operating strategies is to
selectively pursue acquisitions. We have made a number of
acquisitions in the past, are currently pursuing a number of
potential acquisition opportunities, and will consider other
acquisitions in the future. We may not be able to consummate the
acquisitions we are currently

24



---



##### 



pursuing on favorable terms, or at all. We may
not be able to locate other suitable acquisition candidates at
prices we consider appropriate or to finance acquisitions on
terms that are satisfactory to us. If we do identify an
appropriate acquisition candidate, we may not be able to
successfully negotiate the terms of an acquisition, finance the
acquisition or, if the acquisition occurs, integrate the
acquired business into our existing business. Negotiations of
potential acquisitions and the integration of acquired business
operations could disrupt our business by diverting management
away from day-to-day operations. Acquisitions of businesses or
other material operations may require additional debt or equity
financing, resulting in additional leverage or dilution of
ownership. The difficulties of integration may be increased by
the necessity of coordinating geographically dispersed
organizations, integrating personnel with disparate business
backgrounds and combining different corporate cultures. We also
may not realize cost efficiencies or synergies that we
anticipated when selecting our acquisition candidates. In
addition, we may need to record write-downs from future
impairments of intangible assets, which could reduce our future
reported earnings. At times, acquisition candidates may have
liabilities or adverse operating issues that we fail to discover
through due diligence prior to the acquisition, but which we
generally assume as part of an acquisition. Such liabilities
could have a material adverse effect on our financial condition.




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

Our credit facility contains covenants that limit
or restrict, among other things, our ability to borrow money
outside of the amounts committed under the credit facility, make
other restricted payments, sell or otherwise dispose of assets
other than in the ordinary course of business, or make
acquisitions, in each case without the prior written consent of
our lenders. Our credit facility also requires us to maintain
specified financial covenants relating to the interest coverage
and maximum debt coverage. Our ability to satisfy these
financial ratios can be affected by events beyond our control,
and we cannot assure ourselves that we will meet these ratios.
Default under our credit facility could allow the lenders to
declare all amounts outstanding to be immediately due and
payable. We have pledged substantially all of our assets, to
secure the debt under our credit facility. If the lenders
declare amounts outstanding under the credit facility to be due,
the lenders could proceed against those assets. Any event of
default, therefore, could have a material adverse effect on our
business if the creditors determine to exercise their rights. We
also may incur future debt obligations that might subject us to
restrictive covenants that could affect our financial and
operational flexibility, or subject the company to other events
of default. Any such restrictive covenants in any future debt
obligations the company incurs could limit our ability to fund
our business operations or expand our business.

From time to time we may require consents or
waivers from our lenders to permit actions that are prohibited
by our credit facility. If, in the future, our lenders refuse to
provide waivers of our credit facilitys restrictive
covenants and/or financial ratios, then we may be in default
under the terms of the credit facility, and we may be prohibited
from undertaking actions that are necessary or desirable to
maintain and expand its business.



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

Our operations are subject to federal, state and
local environmental laws and regulations, as well as
environmental laws and regulations in the various countries in
which we operate. In addition, our operations are subject to
environmental laws and regulations relating to the discharge,
storage, treatment, handling, disposal and remediation of
regulated substances and waste products, such as radioactive
materials and explosives. The following may require us to incur
substantial costs in the future:



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

25



---



##### 








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

Our principal operating facilities are located in
Chicago, Illinois and McLean, Virginia, and consist of
approximately 49,231 square feet and 21,573 square
feet of office space, respectively, held under leases. We also
lease an additional 34 office facilities totaling approximately
482,125 square feet. Of these, our largest offices are
located in Fairfax, Virginia; Washington, DC; Hampton, Virginia;
West Conshohocken, Pennsylvania; Huntsville, Alabama; Rockville,
Maryland; Annapolis, Maryland; Waldorf, Maryland; Lanham,
Maryland; Orlando, Florida; Rome, New York; Fairborn, Ohio;
O Fallon, Illinois; Mt. Clements, Michigan;
Charlottesville, Virginia; Warren, Michigan; Ishpeming,
Michigan; King George County, Virginia; San Diego,
California; Albuquerque, New Mexico; Los Alamos, New Mexico;
Naperville, Illinois; and two in Alexandria, Virginia.

We lease twelve laboratory facilities totaling
119,872 square feet, for research functions in connection
with the performance of our contracts. Of these, our largest
laboratories are located in Geneva, Illinois; Lanham, Maryland;
Annapolis, Maryland; West Conshohocken, Pennsylvania;
Huntsville, Alabama; Rome, New York; Orlando, Florida; and three
in Chicago, Illinois. The lease terms are annual, varying from
one to eight years, and are generally at market rates.

Aggregate average monthly base rental expense for
fiscal year 2004 was $953,120 and, on a pro forma basis, the
aggregate average monthly base rental expense for fiscal year
2003 was $667,043.

We periodically enter into other lease agreements
that are, in most cases, directly chargeable to current
contracts. These obligations are usually either covered by
currently available contract funds or cancelable upon
termination of the related contracts.

All leased space is considered to be adequate for
the operation of our business, and no difficulties are foreseen
in meeting any future space requirements.






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

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

As a government contractor, the Company may be
subject from time to time to federal government inquiries
relating to its operations and audits by the Defense Contract
Audit Agency. Contractors found to have violated the False
Claims Act, or which are indicted or convicted of violations of
other federal laws, may be suspended or debarred from federal
government contracting for some period. Such an event could also
result in fines or penalties. Given the Companys
dependence on federal government contracts, suspension or
debarment could have a material adverse effect on it. The
Company is not aware of any such pending federal government
claims or investigations.






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

No matters were submitted to the vote of security
holders for the fourth quarter of the fiscal year ended
September 30, 2004.




PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Stock
    and Related Stockholders Matters

There is no established public trading market for
Alions common stock. As of September 30, 2004, the
ESOP was the only holder of our common stock.

In September 2004, the Company raised
approximately $1.5 million in cash through a private
placement of its common stock. The Company sold
87,971 shares to the ESOP Trust at $16.56 per share
and 4,957 shares at $19.94 per share. The Company
issued an additional 108,395 shares to the ESOP Trust, at

26



---



##### 



$19.94 per share as a contribution to the
KSOP Plan. The shares of stock were offered pursuant to an
exemption from registration under Section 4(2) of the
Securities Act of 1933.




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

Unlike regular C corporations,
S corporations do not pay dividends. Rather,
S corporations make distributions. Use of the
term distributions in this context is unrelated to
the term when used in the context of our repurchase obligations
under the KSOP. To avoid confusion, when referring to a
distribution that would constitute a dividend in a C
corporation, we will use the term distribution/dividend. We do
not expect to pay any distributions/dividends. We currently
intend to retain future earnings, if any, for use in the
operation of our business. Any determination to pay cash
distributions/dividends in the future will be at the discretion
of our board of directors and will be dependent on our results
of operations, financial condition, contractual restrictions and
other factors our board of directors determines to be relevant,
as well as applicable law. The terms of the senior credit
facility and the subordinated note prohibit us from paying
distributions/dividends without the consent of the respective
lenders.






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

The following table presents selected historical
and pro forma consolidated financial data for Alion or the
Selected Operations of IITRI for each of the fiscal years
in the five-year period ended September 30, 2004. The
information set forth below should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our historical
consolidated financial statements and notes to those statements
included elsewhere in this annual report. The consolidated
operating data for the fiscal years ended September 30,
2004 and 2003 and the consolidated balance sheet data as of
September 30, 2004 and 2003 are derived from, and are
qualified by reference to, the consolidated financial statements
of Alion included elsewhere in this annual report.

The consolidated operating data for the fiscal
years ended September 30, 2002, 2001, and 2000 and the
consolidated balance sheet data as of September 30, 2002
and 2001 are derived from and are qualified by reference to, the
consolidated financial statements of Selected Operations
of IIT Research Institute, included elsewhere in this
annual report. The consolidated balance sheet data as of
September 30, 2000 is derived from unaudited financial data
that is not included in this annual report. The historical
consolidated financial information has been carved out from the
consolidated financial statements of IITRI using the
historical results of operations and bases of assets and
liabilities of the portion of IITRIs business that
was sold and gives effect to allocations of expenses
from IITRI.

Alion completed the acquisition of substantially
all of the assets and certain of the liabilities of IITRI
on December 20, 2002 (the Transaction). The pro forma
consolidated data for fiscal years ended September 30, 2003
and 2002, assume that the acquisition had been consummated as of
October 1, 2001.

Our historical consolidated financial information
may not be indicative of our future performance and does not
necessarily reflect what our financial position and results of
operations would have been had we operated as a separate,
stand-alone entity during the periods presented.

27



---



##### 



Selected Financial Data of Alion Science and
Technology Corporation

For Years Ended September 30,


|                                                                                                               |                      |                                                 |           |         |   |         |           |         |   |         |           |           |   |           |         |         |   |   |         |        |   |   |         |   |  |   |         |   | 
|-------------------------------------------------------------------------------------------------------------- | -------------------- | ----------------------------------------------- | --------- | ------- | - | ------- | --------- | ------- | - | ------- | --------- | --------- | - | --------- | ------- | ------- | - | - | ------- | ------ | - | - | ------- | - |  | - | ------- | - | 
|                                                                                                               |                      |                                                 |           |         |   |         |           |         |   |         |           | Pro Forma |   | Pro Forma
|                                                                                                               |                      | 2004(1)                                         |           | 2003(2) |   | 2002(3) |           | 2001(3) |   | 2000(3) |           | 2003(11)  |   | 2002(11) 
|                                                                                                               |                      |                                                 |           |         |   |         |           |         |   |         |           |           |   |          
|                                                                                                               |                      |                                                
|                                                                                                               |                      | (In thousands, except share and per share data)
|Consolidated Operating Data                                                                                    |                      |                                                 |           |         |   |         |           |         |   |         |           |           |   |           |         |         |   |   |         |        |   |   |         |   |  |   |         |  
|Contract revenue                                                                                               |                      | $                                               | 269,940   |         |   | $       | 165,917   |         |   | $       | 201,738   |           |   | $         | 193,152 |         |   | $ | 156,137 |        |   | $ | 213,182 |   |  | $ | 201,738 |  
|Direct contract expenses                                                                                       |                      |                                                 | 196,388   |         |   |         | 120,559   |         |   |         | 147,377   |           |   |           | 140,555 |         |   |   | 111,122 |        |   |   | 155,214 |   |  |   | 147,377 |  
|Operating expenses(4)                                                                                          |                      |                                                 | 73,703    |         |   |         | 46,273    |         |   |         | 48,488    |           |   |           | 41,726  |         |   |   | 39,641  |        |   |   | 64,842  |   |  |   | 57,942  |  
|                                                                                                               |                      |                                                 |           |         |   |         |           |         |   |         |           |           |   |           |         |         |   |   |         |        |   |   |         |   |  |   |         |  
|Operating income (loss)                                                                                        |                      |                                                 | (151      | )       |   |         | (915      | )       |   |         | 5,873     |           |   |           | 10,871  |         |   |   | 5,374   |        |   |   | (6,874  | ) |  |   | (3,581  | )
|Other income (expense)(5)                                                                                      |                      |                                                 | (14,943   | )       |   |         | (11,701   | )       |   |         | (586      | )         |   |           | (1,072  | )       |   |   | (694    | )      |   |   | (13,847 | ) |  |   | (9,652  | )
|Income tax (expense) benefit(6)                                                                                |                      |                                                 | (17       | )       |   |         |          |         |   |         | (589      | )         |   |           | (302    | )       |   |   | (398    | )      |   |   | (27     | ) |  |   | (589    | )
|                                                                                                               |                      |                                                 |           |         |   |         |           |         |   |         |           |           |   |           |         |         |   |   |         |        |   |   |         |   |  |   |         |  
|Net income (loss)(7)                                                                                           |                      | $                                               | (15,111   | )       |   | $       | (12,616   | )       |   | $       | 4,698     |           |   | $         | 9,497   |         |   | $ | 4,282   |        |   | $ | (20,748 | ) |  |   | (13,822 | )
|                                                                                                               |                      |                                                 |           |         |   |         |           |         |   |         |           |           |   |           |         |         |   |   |         |        |   |   |         |   |  |   |         |  
|Basic and diluted loss per share                                                                               |                      |                                                 | (4.91     | )       |   |         | (6.05     | )       |   |         |           |           |   |           |         |         |   |   |         |        |   |   |         |   |  |   |         |  
|Basic and diluted weighted-average common shares
    outstanding                                               |                      |                                                 | 3,074,709 |         |   |         | 2,085,274 |         |   |         |           |           |   |           |         |         |   |   |         |        |   |   |         |   |  |   |         |  
|                                                                                                               |                      |                                                 |           |         |   |         |           |         |   |         |           |           |   |           |         |         |   |   |         |        |   |   |         |   |  |   |         |  
|Unaudited pro forma as adjusted basic and diluted
    earnings (loss) per common share(8)                      |                      |                                                 |           |         |   |         |           |         |   |         |           |           |   |           |         |         |   |   |         |        |   |   | (7.83   | ) |  |   | (5.37   | )
|                                                                                                               |                      |                                                 |           |         |   |         |           |         |   |         |           |           |   |           |         |         |   |   |         |        |   |   |         |   |  |   |         |  
|Consolidated Balance Sheet Data at End of
    Period                                                           |                      |                                                 |           |         |   |         |           |         |   |         |           |           |   |           |         |         |   |   |         |        |   |   |         |   |  |   |         |  
|Net accounts receivable                                                                                        |                      | $                                               | 68,949    |         |   | $       | 42,775    |         |   | $       | 49,051    |           |   | $         | 56,095  |         |   | $ | 56,473  |        |   |   |         |   |  |   |         |  
|Total assets                                                                                                   |                      |                                                 | 188,461   |         |   |         | 144,754   |         |   |         | 71,096    |           |   |           | 76,309  |         |   |   | 82,702  |        |   |   |         |   |  |   |         |  
|Current portion of long-term debt                                                                              |                      |                                                 | 468       |         |   |         | 5,000     |         |   |         | 3,330     |           |   |           | 141     |         |   |   | 3,646   |        |   |   |         |   |  |   |         |  
|Long-term debt, excluding current portion                                                                      |                      |                                                 | 99,631    |         |   |         | 74,719    |         |   |         | 1,654     |           |   |           | 11,886  |         |   |   | 22,289  |        |   |   |         |   |  |   |         |  
|Redeemable common stock warrants                                                                               |                      |                                                 | 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                                                                                  |                      | $                                               | 13,447    |         |   | $       | 9,553     |         |   | $       | 3,447     |           |   | $         | 3,488   |         |   | $ | 3,754   |        |   |   |         |   |  |   |         |  
|Capital expenditures                                                                                           |                      |                                                 | 3,678     |         |   |         | 1,329     |         |   |         | 3,643     |           |   |           | 1,940   |         |   |   | 2,795   |        |   |   |         |   |  |   |         |  
|Cash flows provided by (used in):                                                                              |                      |                                                 |           |         |   |         |           |         |   |         |           |           |   |           |         |         |   |   |         |        |   |   |         |   |  |   |         |  
|                                                                                                               | Operating activities |                                                 | $         | 5,675   |   |         | $         | 14,264  |   |         | $         | 14,713    |   |           | $       | 7,907   |   |   | $       | (5,306 | ) |   |         |   |  |   |         |   | 
|                                                                                                               | Investing activities |                                                 |           | (23,625 | ) |         |           | (61,428 | ) |         |           | (4,466    | ) |           |         | 9,863   |   |   |         | (2,967 | ) |   |         |   |  |   |         |   | 
|                                                                                                               | Financing activities |                                                 |           | 22,173  |   |         |           | 47,652  |   |         |           | (9,851    | ) |           |         | (17,770 | ) |   |         | 4,961  |   |   |         |   |  |   |         |   | 
|Funded contract backlog(9)                                                                                     |                      |                                                 | 161,000   |         |   |         | 107,000   |         |   |         | 72,000    |           |   |           | 67,000  |         |   |   | 88,000  |        |   |   |         |   |  |   |         |  
|Unfunded contract backlog(10)                                                                                  |                      |                                                 | 1,793,000 |         |   |         | 1,435,000 |         |   |         | 1,431,000 |           |   |           | 737,000 |         |   |   | 849,000 |        |   |   |         |   |  |   |         |  
|Number of employees                                                                                            |                      |                                                 | 1,880     |         |   |         | 1,604     |         |   |         | 1,622     |           |   |           | 1,458   |         |   |   | 1,334   |        |   |   |         |   |  |   |         |  



---



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | On October 31, 2003, Alion acquired 100% of
    the outstanding shares of Innovative Technologies Solutions
    Corporation (ITSC) for $4.0 million. The transaction
    is subject to an earnout provision not-to-exceed
    $2.5 million. ITSC is a New Mexico corporation with
    approximately 53 employees, the majority of whom are located in
    New Mexico. ITSC provides nuclear safety and analysis services
    to the U.S. Department of Energy (DOE) as well as to
    the commercial nuclear power industry. As of September 30,
    2004, the Company has recorded approximately $3.5 million
    of goodwill relating to this acquisition.



| |  |                                                                                                                                                                                                                   
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On February 13, 2004, Alion acquired 100% of
    the outstanding stock of Identix Public Sector, Inc.
    (IPS) for $8.0 million in cash. At closing, the
    Company reimbursed IPSs parent company $0.9 million

28



---



##### 



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | for intercompany payables. Subsequent payments
    totaling approximately $1.7 million for intercompany
    payables were made in the three successive months following the
    closing. Per the agreement, a contingent payment of
    $0.5 million was placed in escrow and may be due from the
    Company in the future. The payment is contingent on the Company
    having the opportunity to compete or bid for services on certain
    government solicitations. While the allocation of purchase price
    is preliminary, as of September 30, 2004, the Company has
    recorded approximately $6.1 million of goodwill and
    approximately $1.1 million of intangible assets relating to
    this acquisition. Founded in 1980, IPS is based in Fairfax,
    Virginia and provides program and acquisition management,
    integrated logistics support, and foreign military support
    primarily to U.S. Navy customers. IPS, formerly ANADAC, was
    a wholly-owned subsidiary of Identix Incorporated.
|
| |  | Operating results for these businesses are
    included in our consolidated totals from the respective dates of
    acquisitions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | For historical 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.                                                                                                                                                                                                                                                                                                                                                   
|
| | (3) | Represents consolidated operating and balance
    sheet data of the Selected Operations of IIT Research
    Institute which was acquired by Alion on December 20, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | (4) | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | (5) | 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. For the years ended
    September 30, 2004 and 2003, other income
    (expense) includes approximately $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. For
    the year ended September 30, 2000, other income includes a
    gain of $1.3 million on the sale of land in Annapolis,
    Maryland and a $0.5 million loss in equity of an affiliate.                                                   
|
| | (6) | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | (7) | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | (8) | IITRI has 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.
|
| | (9) | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     



|     |                                                                                                                                                                 
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Unfunded backlog refers to the estimated total
    value of contracts which have been awarded but whose funding has
    not yet been authorized for expenditure.

29



---



##### 





|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(11) | 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.                                                                                

30



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION

Unaudited Pro Forma Consolidated Statements of
Operations

For the Years Ended September 30, 2003
and 2002


|                                                                 |                                       |                                              |        |                               |        |             |         |           |         |            |       |             |      |           |         |         |         |   |         |        |        |   |        |        |      |   |         |        |         |  
|---------------------------------------------------------------- | ------------------------------------- | -------------------------------------------- | ------ | ----------------------------- | ------ | ----------- | ------- | --------- | ------- | ---------- | ----- | ----------- | ---- | --------- | ------- | ------- | ------- | - | ------- | ------ | ------ | - | ------ | ------ | ---- | - | ------- | ------ | ------- | -
|                                                                 |                                       |                                              |        |                              
|                                                                 |                                       | Year Ended September 30, 2003                |        | Year Ended September 30, 2002
|                                                                 |                                       |                                              |        |                              
|                                                                 |                                       | Selected                                     |        |                               |        | Selected    |         |          
|                                                                 |                                       | Operations                                   |        |                               |        | Operations  |         |          
|                                                                 |                                       | of IITRI                                     |        | Alion                         |        | Pro Forma   |         |           |         | of IITRI   |       | Pro Forma   |      |          
|                                                                 |                                       | Historical                                   |        | Historical                    |        | Adjustments |         | Pro Forma |         | Historical |       | Adjustments |      | Pro Forma
|                                                                 |                                       |                                              |        |                               |        |             |         |           |         |            |       |             |      |          
|                                                                 |                                       |                                             
|                                                                 |                                       | (In thousands, except per share information)
|Contract revenue                                                 |                                       | $                                            | 47,265 |                               |        | $           | 165,917 |           |         |            |       |             |      | $         | 213,182 |         |         | $ | 201,738 |        |        |   |        |        |      | $ | 201,738 |       
|Direct contract expense                                          |                                       |                                              | 34,655 |                               |        |             | 120,559 |           |         |            |       |             |      |           | 155,214 |         |         |   | 147,377 |        |        |   |        |        |      |   | 147,377 |       
|                                                                 |                                       |                                              |        |                               |        |             |         |           |         |            |       |             |      |           |         |         |         |   |         |        |        |   |        |        |      |   |         |       
|                                                                 |                                       | Gross profit                                 |        |                               | 12,610 |             |         |           | 45,358  |            |       |             |      |           |         |         | 57,968  |   |         |        | 54,361 |   |        |        |      |   |         |        | 54,361  |  
|                                                                 |                                       |                                              |        |                               |        |             |         |           |         |            |       |             |      |           |         |         |         |   |         |        |        |   |        |        |      |   |         |       
|Operating expenses:                                              |                                       |                                              |        |                               |        |             |         |           |         |            |       |             |      |           |         |         |         |   |         |        |        |   |        |        |      |   |         |       
|                                                                 | Indirect contract expense             |                                              |        | 2,568                         |        |             |         | 8,685     |         |            |       |             |      |           |         | 11,253  |         |   |         | 11,153 |        |   |        |        |      |   |         | 11,153 |        
|                                                                 | Research and development              |                                              |        | 36                            |        |             |         | 177       |         |            |       |             |      |           |         | 213     |         |   |         | 575    |        |   |        |        |      |   |         | 575    |        
|                                                                 | General and administrative            |                                              |        | 4,732                         |        |             |         | 19,909    |         |            |       | 29          | (1)  |           |         | 24,670  |         |   |         | 19,093 |        |   |        | 126    | (1)  |   |         | 19,219 |        
|                                                                 | Stock-based and deferred compensation |                                              |        |                              |        |             |         | 856       |         |            |       |             |      |           |         | 856     |         |   |         |       |        |   |        |        |      |   |         |       |        
|                                                                 | Non-recurring transaction expense     |                                              |        | 6,000                         |        |             |         | 726       |         |            |       |             |      |           |         | 6,726   |         |   |         | 6,361  |        |   |        |        |      |   |         | 6,361  |        
|                                                                 | Rental and occupancy expense          |                                              |        | 2,089                         |        |             |         | 6,892     |         |            |       | 112         | (2)  |           |         | 9,093   |         |   |         | 7,796  |        |   |        | 483    | (2)  |   |         | 8,279  |        
|                                                                 | Depreciation and amortization         |                                              |        | 886                           |        |             |         | 9,553     |         |            |       | (474        | )(3) |           |         | 12,436  |         |   |         | 3,447  |        |   |        | (1,953 | )(3) |   |         | 12,201 |        
|                                                                 |                                       |                                              |        |                               |        |             |         |           |         |            | 2,471 | (4)         |      |           |         |         |         |   |         |        |        |   | 10,707 | (4)    |      |   |         |       
|                                                                 | Bad debt expense (recovery)           |                                              |        | 120                           |        |             |         | (525      | )       |            |       |             |      |           |         | (405    | )       |   |         | 154    |        |   |        |        |      |   |         | 154    |        
|                                                                 |                                       |                                              |        |                               |        |             |         |           |         |            |       |             |      |           |         |         |         |   |         |        |        |   |        |        |      |   |         |       
|Total operating expenses                                         |                                       |                                              | 16,431 |                               |        |             | 46,273  |           |         |            |       |             |      |           | 64,842  |         |         |   | 48,579  |        |        |   |        |        |      |   | 57,942  |       
|                                                                 |                                       |                                              |        |                               |        |             |         |           |         |            |       |             |      |           |         |         |         |   |         |        |        |   |        |        |      |   |         |       
|                                                                 |                                       | Operating income (loss)                      |        |                               | (3,821 | )           |         |           | (915    | )          |       |             |      |           |         |         | (6,874  | ) |         |        | 5,782  |   |        |        |      |   |         |        | (3,581  | )
|Other income (expense):                                          |                                       |                                              |        |                               |        |             |         |           |         |            |       |             |      |           |         |         |         |   |         |        |        |   |        |        |      |   |         |       
|                                                                 | Interest income                       |                                              |        | 22                            |        |             |         | 21        |         |            |       |             |      |           |         | 43      |         |   |         | 40     |        |   |        |        |      |   |         | 40     |        
|                                                                 | Interest expense                      |                                              |        | (51                           | )      |             |         | (11,724   | )       |            |       | (1,685      | )(5) |           |         | (13,869 | )       |   |         | (563   | )      |   |        | (7,298 | )(5) |   |         | (9,629 | )      
|                                                                 |                                       |                                              |        |                               |        |             |         |           |         |            | (106  | )(6)        |      |           |         |         |         |   |         |        |        |   | (459   | )(6)   |      |   |         |       
|                                                                 |                                       |                                              |        |                               |        |             |         |           |         |            | (303  | )(7)        |      |           |         |         |         |   |         |        |        |   |        |        |      |   |         |       
|                                                                 | Other                                 |                                              |        | (23                           | )      |             |         | 2         |         |            |       |             |      |           |         | (21     | )       |   |         | (63    | )      |   |        |        |      |   |         | (63    | )      
|                                                                 |                                       |                                              |        |                               |        |             |         |           |         |            |       |             |      |           |         |         |         |   |         |        |        |   |        |        |      |   |         |       
|                                                                 |                                       | Income (loss) before income taxes            |        |                               | (3,873 | )           |         |           | (12,616 | )          |       |             |      |           |         |         | (20,721 | ) |         |        | 5,196  |   |        |        |      |   |         |        | (13,233 | )
|                                                                 |                                       | Income tax expense                           |        |                               | (27    | )           |         |           |        |            |       |             |      |           |         |         | (27     | ) |         |        | (589   | ) |        |        |      |   |         |        | (589    | )
|                                                                 |                                       |                                              |        |                               |        |             |         |           |         |            |       |             |      |           |         |         |         |   |         |        |        |   |        |        |      |   |         |       
|                                                                 |                                       | Net income (loss)                            |        | $                             | (3,900 | )           |         | $         | (12,616 | )          |       |             |      |           |         | $       | (20,748 | ) |         | $      | 4,607  |   |        |        |      |   |         | $      | (13,822 | )
|                                                                 |                                       |                                              |        |                               |        |             |         |           |         |            |       |             |      |           |         |         |         |   |         |        |        |   |        |        |      |   |         |       
|Basic and diluted (loss) per share                               |                                       |                                              |        |                               |        |             |         |           |         |            |       |             |      | $         | (7.83   | )(8)    |         |   |         |        |        |   |        |        |      | $ | (5.37   | )(8)  
|Basic and diluted weighted average common shares
    outstanding |                                       |                                              |        |                               |        |             |         |           |         |            |       |             |      |           | 2,649   | (8)     |         |   |         |        |        |   |        |        |      |   | 2,575   | (8)   

See accompanying notes to unaudited pro forma
consolidated statements of operations.



---



|    |                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

31



---



##### 





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 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

The following discussion of Alions
financial condition and results of operations should be read
together with the consolidated financial statements and the
notes to those statements included elsewhere in this annual
report. This discussion contains forward-looking statements
about our business and operations that involve risks and
uncertainties. Our actual results may differ materially from
those we currently anticipate as a result of the Risk
Factors described beginning on page 18, and elsewhere
in this annual report.

About This Managements Discussion and
Analysis

The discussion and analysis that follows is
organized to:



| |   |                                                                    
| | - | -------------------------------------------------------------------
| |  | 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

As described in the notes to the accompanying
consolidated financial statements, Alion completed the
acquisition of substantially all of the assets and certain of
the liabilities of IIT Research Institute on

32



---



##### 



December 20, 2002 (the Transaction), the
last day of the Companys first interim period for the
fiscal year ended September 30, 2003. The following
discussion and analysis of results of operations relates to the
results of operations for the fiscal year ended
September 30, 2004 and for the pro forma results of
operations for the fiscal years ended September 30, 2003
and September 30, 2002, as if the IITRI acquisition
had been consummated on October 1, 2001.


We apply our scientific and engineering expertise
to research and develop technological solutions for problems
relating to national defense, public health and safety, and
nuclear safety and analysis. We provide our research and
development and engineering services primarily to agencies of
the federal government, but also to state, local and foreign
governments as well as commercial customers both in the U.S. and
abroad. Our revenues increased 26.6%, 5.7%, and 4.4% for the
fiscal years ended September 30, 2004, 2003, and 2002,
respectively, through a combination of internal growth and
acquisitions. The following table reflects, for each fiscal year
indicated, summary results of operations and contract backlog
data:

|                  |       |                                   |       |           |       |           |       |       |       |   |       |       |       | 
|----------------- | ----- | --------------------------------- | ----- | --------- | ----- | --------- | ----- | ----- | ----- | - | ----- | ----- | ----- | 
|                  |       |                                  
|                  |       | For the Years Ended September 30,
|                  |       |                                  
|                  |       |                                   |       | Pro Forma |       | Pro Forma
|                  |       | 2004                              |       | 2003      |       | 2002     
|                  |       |                                   |       |           |       |          
|                  |       |                                  
|                  |       | (In millions)                    
|Revenue           |       | $                                 | 269.9 |           |       | $         | 213.2 |       |       | $ | 201.7 |      
|                  |       |                                   |       |           |       |           |       |       |       |   |       |      
|Net loss          |       |                                   | (15.1 | )         |       |           | (20.7 | )     |       |   | (13.8 | )    
|                  |       |                                   |       |           |       |           |       |       |       |   |       |      
|Contract Backlog: |       |                                   |       |           |       |           |       |       |       |   |       |      
|                  |       | Funded                            |       |           | 161   |           |       |       | 107   |   |       |       | 72    | 
|                  |       | Unfunded                          |       |           | 1,793 |           |       |       | 1,435 |   |       |       | 1,431 | 
|                  |       |                                   |       |           |       |           |       |       |       |   |       |      
|                  | Total |                                   | $     | 1,954     |       |           | $     | 1,542 |       |   | $     | 1,503 |      
|                  |       |                                   |       |           |       |           |       |       |       |   |       |      

We contract primarily with the federal
government. We expect most of our revenues to continue to come
from government contracts and we expect that most of these
contracts will be with the U.S. Department of Defense. The
balance of our revenue comes from a variety of commercial
customers, state and local governments, and foreign governments.
The following table reflects, for each fiscal year indicated,
the percentage of the Companys revenue derived from each
of its major types of customers:

|                                                          |       |                     |    |      |   |      |    |     |   |  |    |     |  
|--------------------------------------------------------- | ----- | ------------------- | -- | ---- | - | ---- | -- | --- | - |  | -- | --- | -
|                                                          |       |                    
|                                                          |       | For the Years Ended
|                                                          |       | September 30,      
|                                                          |       |                    
|                                                          |       | 2004                |    | 2003 |   | 2002
|                                                          |       |                     |    |      |   |     
|U.S. Department of Defense (DoD)                          |       |                     | 91 | %    |   |      | 95 | %   |   |  | 90 | %  
|Other Federal Civilian Agencies                           |       |                     | 7  |      |   |      | 3  |     |   |  | 8  |    
|Commercial/ State and Local Government/
    International |       |                     | 2  |      |   |      | 2  |     |   |  | 2  |    
|                                                          |       |                     |    |      |   |      |    |     |   |  |    |    
|                                                          | Total |                     |    | 100  | % |      |    | 100 | % |  |    | 100 | %
|                                                          |       |                     |    |      |   |      |    |     |   |  |    |    

We intend to expand our research offerings in
commercial and international markets; however, the expansion, if
any, will be incremental. Revenues from commercial/ state and
local government/ international research together amounted to
approximately 2%, of total revenues in each of fiscal years
2004, 2003, and 2002, respectively. We derive our international
revenue from spectrum management research and software tools and
our locomotive simulation and training services to foreign
governmental customers.

Most of our revenue is generated based on
services provided either by our employees or subcontractors. To
a lesser degree, the revenue we earn includes reimbursable
travel and other items to support the contractual effort. Thus,
once we win new business, the key to delivering the revenue is
through hiring new employees to meet customer requirements,
retaining our employees, and ensuring that we deploy them on
direct-billable jobs. Therefore, we closely monitor hiring
success, attrition trends, and direct labor utilization. A key
challenge in growing our business is to hire enough employees
with appropriate security clearances. Since we earn higher
profits from the labor services that our employees provide
compared with subcontracted efforts

33



---



##### 



and other reimbursable items such as hardware and
software purchases for customers, we seek to optimize our labor
content on the contracts we win.


The table below provides a summary of annual
revenues by significant contracts performed by the Company.

Summary of Annual Revenues by Customer/
Government Agency

|                                                                        |  |                                                              |  |                         |  |                |        |               |  |   |         |   |  |  |     |  
|----------------------------------------------------------------------- |  | ------------------------------------------------------------ |  | ----------------------- |  | -------------- | ------ | ------------- |  | - | ------- | - |  |  | --- | -
|                                                                        |  |                                                              |  |                         |  |                |        | Percentage of
|                                                                        |  |                                                              |  | Primary Core            |  | FY04 Annual    |        | FY04 Annual  
|Sponsor/Government Agency                                               |  | Title                                                        |  | Business Area*          |  | Revenue        |        | Revenue      
|                                                                        |  |                                                              |  |                         |  |                |        |              
|                                                                        |  |                                                              |  |                         |  |               
|                                                                        |  |                                                              |  |                         |  | (In thousands)
|Department of Defense - Joint Spectrum Center                           |  | Joint Spectrum Center Engineering Support Services           |  | Wireless Communications |  | $              | 49,477 |               |  |   | 18      | %
|General Services Administration                                         |  | Information Technology Services - U.S. Department of Defense |  | Information Technology  |  | $              | 48,588 |               |  |   | 18      | %
|Department of Defense - Defense Information
    Systems Agency          |  | Modeling and Simulation Information Analysis Center          |  | Modeling and Simulation |  | $              | 35,136 |               |  |   | 13      | %
|Department of Defense - Defense Logistics Agency                        |  | Modeling and Simulation                                      |  | Modeling and Simulation |  | $              | 18,895 |               |  |   | 7       | %
|Department of Defense - Army (subcontractor to
    Parsons Corporation) |  | Newport Chemical Agent Disposal Facility                     |  | Chemical and Biodefense |  | $              | 12,870 |               |  |   | 5       | %
|                                                                        |  |                                                              |  |                         |  |                |        |               |  |   |         |   |  |  |     |  
|Subtotal                                                                |  |                                                              |  |                         |  |                |        |               |  | $ | 164,966 |   |  |  | 61  | %
|Other Sponsors/ Agencies                                                |  |                                                              |  |                         |  |                |        |               |  | $ | 104,970 |   |  |  | 39  | %
|                                                                        |  |                                                              |  |                         |  |                |        |               |  |   |         |   |  |  |     |  
|Total Revenues                                                          |  |                                                              |  |                         |  |                |        |               |  | $ | 269,936 |   |  |  | 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.

Our revenues and our operating margins are
affected by, among other things, our mix of contract types
(e.g., cost-reimbursement, fixed-price, and time-and-material).
Significant portions of our revenues are generated by services
performed on cost-reimbursement contracts under which we are
reimbursed for approved costs, plus a fee, which reflects our
profit on the work performed. We recognize revenue on
cost-reimbursement contracts based on actual costs incurred plus
a proportionate share of the fees earned. We also have a number
of fixed-price government contracts. We use the
percentage-of-completion method to recognize revenue on
fixed-price contracts. These contracts involve higher financial
risks, and in some cases higher margins, because we must deliver
the contracted services for a predetermined price regardless of
our actual costs incurred in the project. Our failure to
anticipate technical problems, estimate costs accurately or
control costs during performance of a fixed-price contract may
reduce the overall fee on the contract or cause a loss. Under
time-and-material contracts, labor and related costs are
reimbursed at negotiated, fixed hourly rates. Revenue on
time-and-material contracts is recognized at contractually
billable rates as labor hours and

34



---



##### 



direct expenses are incurred. The following table
summarizes the percentage of revenues attributable to each
contract type for the periods indicated.


|                   |  |                                  |     |                |  |                |     |   |  |   |     |  |  |  |     |   |  |   |     |  |  |  |     |  
|------------------ |  | -------------------------------- | --- | -------------- |  | -------------- | --- | - |  | - | --- |  |  |  | --- | - |  | - | --- |  |  |  | --- | -
|                   |  |                                 
|                   |  | For the Year Ended September 30,
|                   |  |                                 
|                   |  |                                  |     |                |  |               
|Contract Type      |  | 2004                             |     | Pro Forma 2003 |  | Pro Forma 2002
|                   |  |                                  |     |                |  |               
|                   |  |                                  |     |                |  |                |     |   |  |   |     | 
|Cost-reimbursement |  | $                                | 160 |                |  |                | 59  | % |  | $ | 133 |  |  |  | 62  | % |  | $ | 121 |  |  |  | 60  | %
|Fixed-price        |  |                                  | 44  |                |  |                | 16  |   |  |   | 34  |  |  |  | 16  |   |  |   | 37  |  |  |  | 18  |  
|Time-and-material  |  |                                  | 66  |                |  |                | 25  |   |  |   | 46  |  |  |  | 22  |   |  |   | 44  |  |  |  | 22  |  
|                   |  |                                  |     |                |  |                |     |   |  |   |     |  |  |  |     |   |  |   |     |  |  |  |     |  
|Total              |  | $                                | 270 |                |  |                | 100 | % |  | $ | 213 |  |  |  | 100 | % |  | $ | 202 |  |  |  | 100 | %
|                   |  |                                  |     |                |  |                |     |   |  |   |     |  |  |  |     |   |  |   |     |  |  |  |     |  

For the three years ended September 30,
2004, 2003, and 2002, the percentage distribution among these
three types of contracts has remained relatively constant.
Nonetheless, the percentage distribution reflects, to some
extent, the increased use by governmental procuring agencies of
General Services Administration Schedules which usually involve
an increased number both of time-and-material and fixed-price
orders.

Our objective is to continue to grow by
capitalizing on our highly educated work force and our
established position in our core research fields, and by
synergistic acquisitions. From 1998 through September 30,
2004, the Company and its predecessor, IITRI, completed the
following six acquisitions:



| |   |                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In September 1998, we acquired Human Factors
    Applications, Inc. (HFA), a supplier of ordnance and explosive
    waste remediation services. HFA has core competencies in
    demilitarization, de-mining, environmental remediation,
    explosion sciences, ordnance management, and training.      
|
| |  | In May 1999, we acquired EMC Science Center, Inc.
    which has technical expertise in electromagnetic environmental
    effects research and training, and an analytical laboratory.                                                                                                                    
|
| |  | In February 2000, we completed our acquisition of
    AB Technologies, Inc. which specializes in defense operations
    research, training-related modeling and simulation, education
    and training support, complex problem analysis, and military
    policy development for the federal government.
|
| |  | In May 2002, we acquired Daedalic, Inc., which
    develops modeling and simulation software for large-scale
    vehicle and air mobility operations.                                                                                                                                                    
|
| |  | In October 2003, we completed the acquisition of
    Innovative Technology Solutions Corporation (ITSC) which
    provides nuclear safety and analysis services for the
    U.S. Department of Energy (DOE) and the commercial nuclear
    power industry.                                               
|
| |  | In February 2004, we completed the acquisition of
    Identix Public Sector, Inc. (IPS) which provides program
    management and acquisition management services, integrated
    logistics support, and foreign military support primarily to
    U.S. Navy customers.                                  

Except for HFA, which is a separately operated
wholly-owned subsidiary, we have fully integrated these acquired
entities into our research base and capabilities, enabling us to
expand our research offerings for our government and commercial
customers. Management believes that synergistic acquisitions
like these provide several potential benefits to our
organization and the public in that they:



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

35



---



##### 



Results of Operations

For fiscal years ended September 30, 2004,
2003 and 2002, the Transaction had two significant impacts on
net income: first, the value assigned to the purchased contracts
are amortized on a straight-line basis over three years
resulting in approximately a $10.5 million, non-cash
expense per year, and second, there are two additional expense
categories that appear on the operating statements:
non-recurring third party transaction expenses (e.g. outside
legal, finance, accounting and audit fees of approximately
$6.7 million for fiscal year 2003 and approximately
$6.4 million for fiscal year 2002) and the interest-related
expense associated with the debt financing which includes the
related change in warrant valuation associated with change in
share price of Alion common stock of approximately
$16.8 million, $13.9 million, and $9.6 million
for the fiscal years ended September 30, 2004, 2003, and
2002, respectively.



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

For purposes of comparability, the table below
reflects the relative financial impact of the ITSC and IPS
acquisitions as they relate to the financial performance of
Alion for the fiscal year ended September 30, 2004 compared
to the pro forma financial performance for fiscal year ended
September 30, 2003. The discussion of the results of
operations will include references to the financial information
shown in the table below in conjunction with the consolidated
financial statements of Alion provided elsewhere in this
document. The financial information provided in the table is
based on estimates from Alion management.



| |   |                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We completed the acquisition of ITSC on
    October 31, 2003. ITSC is a New Mexico corporation that had
    approximately 53 employees, the majority of whom were located in
    New Mexico. ITSC provides nuclear safety and analysis services
    to the U.S. Department of Energy (DOE) as well as to
    the commercial nuclear power industry.
|
| |  | We completed the acquisition of IPS on
    February 13, 2004. IPS is based in Fairfax, Virginia. IPS
    provides program and acquisition management, integrated
    logistics support, and foreign military support primarily to
    U.S. Navy customers.                                                                                         

36



---



##### 



|                                  |                                             |                                       |         |                |         |            |       |                |       |              |        |               |       |   |        |        |        |   |         |        |         |   |         |        |         | 
|--------------------------------- | ------------------------------------------- | ------------------------------------- | ------- | -------------- | ------- | ---------- | ----- | -------------- | ----- | ------------ | ------ | ------------- | ----- | - | ------ | ------ | ------ | - | ------- | ------ | ------- | - | ------- | ------ | ------- | 
|                                  |                                             |                                       |         | Pro Forma Year
|                                  |                                             | Year Ended September 30, 2004         |         | Ended         
|                                  |                                             |                                       |         | September 30, 
|                                  |                                             |                                       |         | Consolidated   |         | 2003      
|                                  |                                             |                                       |         | Operations of  |         |           
|                                  |                                             | Consolidated                          |         |                |         | Acquired   |       | Alion Less the |       | Consolidated
|                                  |                                             | Operations of                         |         | ITSC           |         | IPS        |       | Operations     |       | Acquired     |        | Operations of
|Financial Information             |                                             | Alion                                 |         | Operation*     |         | Operation* |       | (ITSC and IPS) |       | Operations   |        | Alion        
|                                  |                                             |                                       |         |                |         |            |       |                |       |              |        |              
|                                  |                                             |                                       |         | (In thousands)
|                                  |                                             | (In thousands)                        |         |               
|Total revenue                     |                                             | $                                     | 269,940 |                |         | $          | 9,437 |                |       | $            | 18,921 |               |       | $ | 28,359 |        |        | $ | 241,581 |        |         | $ | 213,182 |       
|                                  | Material and subcontract revenue            |                                       |         | 70,328         |         |            |       | 3,044          |       |              |        | 8,421         |       |   |        | 11,465 |        |   |         | 58,863 |         |   |         | 43,391 |        
|Total direct contract expenses    |                                             |                                       | 196,388 |                |         |            | 7,336 |                |       |              | 12,152 |               |       |   | 19,488 |        |        |   | 176,900 |        |         |   | 155,214 |       
|                                  | Major components of direct contract expense |                                       |         |                |         |            |       |                |       |              |        |               |       |   |        |        |        |   |         |        |         |   |         |        |        
|                                  |                                             | Direct labor cost                     |         |                | 119,999 |            |       |                | 4,172 |              |        |               | 3,934 |   |        |        | 8,106  |   |         |        | 111,894 |   |         |        | 105,469 | 
|                                  |                                             | Other direct cost (ODC)               |         |                | 8,109   |            |       |                | 209   |              |        |               | 43    |   |        |        | 252    |   |         |        | 7,857   |   |         |        | 7,617   | 
|                                  |                                             | Material and subcontract (M&S) cost   |         |                | 68,280  |            |       |                | 2,955 |              |        |               | 8,175 |   |        |        | 11,131 |   |         |        | 57,149  |   |         |        | 42,128  | 
|Gross profit                      |                                             |                                       | 73,552  |                |         |            | 2,101 |                |       |              | 3,195  |               |       |   | 5,296  |        |        |   | 68,256  |        |         |   | 57,968  |       
|Total operating expense           |                                             |                                       | 73,703  |                |         |            | 2,352 |                |       |              | 2,020  |               |       |   | 4,372  |        |        |   | 69,331  |        |         |   | 64,842  |       
|                                  | Major components of operating expense       |                                       |         |                |         |            |       |                |       |              |        |               |       |   |        |        |        |   |         |        |         |   |         |        |        
|                                  |                                             | Indirect personnel and facilities     |         |                | 28,637  |            |       |                | 1,532 |              |        |               | 674   |   |        |        | 2,206  |   |         |        | 26,431  |   |         |        | 20,346  | 
|                                  |                                             | Non-recurring Transaction expense     |         |                |        |            |       |                |      |              |        |               |      |   |        |        |       |   |         |        |        |   |         |        | 6,726   | 
|                                  |                                             | General and administrative            |         |                | 28,116  |            |       |                | 734   |              |        |               | 1,116 |   |        |        | 1,850  |   |         |        | 26,266  |   |         |        | 24,670  | 
|                                  |                                             | Stock-based and deferred compensation |         |                | 2,513   |            |       |                |      |              |        |               |      |   |        |        |       |   |         |        | 2,513   |   |         |        | 856     | 
|                                  |                                             | Depreciation and amortization         |         |                | 13,448  |            |       |                | 86    |              |        |               | 231   |   |        |        | 317    |   |         |        | 13,131  |   |         |        | 12,436  | 
|Income (loss) from operations     |                                             |                                       | (151    | )              |         |            | (250  | )              |       |              | 1,174  |               |       |   | 924    |        |        |   | (1,075  | )      |         |   | (6,874  | )     
|Other income and expense          |                                             |                                       | (14,943 | )              |         |            |      |                |       |              |       |               |       |   |       |        |        |   | (14,943 | )      |         |   | (13,847 | )     
|Income tax benefit/ (expense)     |                                             |                                       | (17     | )              |         |            |      |                |       |              |       |               |       |   |       |        |        |   | (17     | )      |         |   | (27     | )     
|Net income (loss) from operations |                                             | $                                     | (15,111 | )              |         | $          | (250  | )              |       | $            | 1,174  |               |       | $ | 924    |        |        | $ | (16,035 | )      |         | $ | (20,748 | )     



---



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

37



---



##### 



Contract Revenues.Revenues increased $56.7 million, or 26.6%, to
$269.9 million for the year ended September 30, 2004,
from $213.2 million for the year ended September 30,
2003. The $56.7 million increase is attributable to the
following:

|  |  |                                                                                                                            |  |   |              | 
|- |  | -------------------------------------------------------------------------------------------------------------------------- |  | - | ------------ | 
| |  | 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 | 

For the year ended September 30, 2004, our
performance of additional work under Company contracts that were
in existence during the prior year includes an increase in our
decommissioning and demilitarization support services to the
U.S. Armys Newport Chemical Agent Disposal Facility
(NECDF) under a subcontract to Parsons Infrastructure and
Technology Group, Inc. that accounted for approximately
$4.2 million of increased revenue, while our continued
support to the Department of Defense Joint Spectrum Center
(JSC) accounted for approximately $4.1 million of
increased revenue. The Modeling and Simulation Information
Analysis Center (MSIAC) contract to the Department of
Defense accounted for approximately $3.5 million of the
revenue increase.

As a component of revenue, material and
subcontract (M&S) revenue increased approximately
$26.9 million, or 62.1%, to $70.3 million for the year
ended September 30, 2004 from $43.4 million for the
year ended September 30, 2003. As a percentage of revenue,
M&S revenue was 26.0% for the fiscal year ended
September 30, 2004 as compared to 20.4% for the year ended
September 30, 2003. The increase in M&S revenue content
can be attributed to two factors: 1) the M&S revenue of
the acquired operations was approximately $11.5 million, or
40.5% of total acquired revenue, and 2) the M&S revenue
content performed under existing contracts increased to
approximately 24.4% of revenue. The revenue activity of the
acquired operations has an increased percentage level of M&S
revenue that results from the amount of subcontractor support
which is provided to the commercial utility customers of the
ITSC operation and the increased level of subcontract activity
required under our support contracts to the U.S. Navy
performed by the IPS operation.

Direct Contract
Expenses.Direct contract expenses
increased $41.2 million, or 26.5%, to $196.4 million
for the year ended September 30, 2004 from
$155.2 million for the year ended September 30, 2003.
As a percentage of revenue, direct contract expenses were 72.8%
for the years ended September 30, 2004 and 2003. The
changes in specific components of direct contract expenses are:



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

38



---



##### 



Gross Profit.Gross
profit increased $15.6 million, or 26.9%, to
$73.6 million for the year ended September 30, 2004,
from $58.0 million for the year ended September 30,
2003. The $15.6 million increase is attributable to the
following:

|  |  |                                                                                                                                 |  |   |              | 
|- |  | ------------------------------------------------------------------------------------------------------------------------------- |  | - | ------------ | 
| |  | 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 | 

As a percentage of revenue, gross profit was
27.2% for years ended September 30, 2004 and 2003. For the
year ended September 30, 2004, we experienced an increased
proportion of M&S contract revenue, which typically
generates lower profit margins; however, we were able to sustain
our overall gross profit margin due to the increase in the
proportionate amount of time-and-material and fixed price
contract work, which typically generate higher profit margins.

Operating Expenses.Operating expenses increased $8.9 million, or 13.7%, to
$73.7 million for the year ended September 30, 2004,
from $64.8 million for the year ended September 30,
2003. However, for the year ended September 30, 2003, there
was approximately $6.7 million in non-recurring,
transaction-related expense associated with Alions
purchase of the Selected Operations of IITRI. There were no
such costs incurred for the year ended September 30, 2004.
As such, the adjusted increase in operating expense was
approximately $15.6 million ($8.9 million plus
$6.7 million). The $15.6 million adjusted increase is
attributable to the following:

|  |  |                                                                                                                 |  |   |              | 
|- |  | --------------------------------------------------------------------------------------------------------------- |  | - | ------------ | 
| |  | 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 | 

As a percentage of revenue, operating expense was
27.3% for the year ended September 30, 2004 as compared to
30.4% for the year ended September 30, 2003. For the year
ended September 30, 2004, the percentage decrease in
operating expense is directly attributable to the absence of
Transaction-related expenses.

The changes in other specific components of
operating expenses are:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Operating expenses, net of depreciation,
    amortization, and non-recurring Transaction-related expense
    increased approximately $14.5 million, or 31.7%, to
    $60.2 million for the year ended September 30, 2004,
    from $45.7 million for the year ended September 30,
    2003. As a percentage of revenue, operating expense net of
    depreciation, amortization, and non-recurring
    Transaction-related expense was 22.3% for the year ended
    September 30, 2004 as compared to 21.4% for the year ended
    September 30, 2003. Approximately 0.5 percentage
    points of the 0.9 percentage point increase is attributable
    to the increase in stock-based compensation, as described below.    
|
| |  | 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                                                                                                                                                                             

39



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##### 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | For each year ended September 30, 2004 and
    2003, approximately $10.2 million of amortization expense
    was incurred associated with the intangible asset value assigned
    to purchased customer contracts of IITRI. For the year ended
    September 30, 2004, approximately $0.3 million of
    amortization expense was incurred associated with intangible
    asset value assigned to the purchased contracts of ITSC and IPS.
    Also, for each respective year ended September 30, 2004 and
    2003, approximately $0.5 million of depreciation expense
    was incurred associated with the fair value assigned to the
    purchased fixed assets of IITRI. As a percentage of
    revenue, operating expense relating to depreciation and
    amortization expense was 5.0% for the year ended
    September 30, 2004 as compared to 5.8% 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.

Income (Loss) from
Operations.For the year ended
September 30, 2004, the loss from operations was
$0.1 million compared with $6.8 million operating loss
for the year ended September 30, 2003. The
$6.7 million decrease is associated with factors discussed
above and is attributable to the following:

|  |  |                                                                               |  |   |             | 
|- |  | ----------------------------------------------------------------------------- |  | - | ----------- | 
| |  | 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.As a category, other income
and expense increased approximately $1.2 million, or 8.6%,
to $15.1 million for the year ended September 30, 2004
as compared to $13.9 million for the year ended
September 30, 2003. As a component of other income and
expense, interest expense increased approximately
$3.0 million, or 21.6%, to $16.8 million for the year
ended September 30, 2004 from

40



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##### 



approximately $13.9 million for the year
ended September 30, 2003. The $3.0 million increase in
interest expense is attributable to the following:


|                                               |       |               |     |      |  |   |     |      | 
|---------------------------------------------- | ----- | ------------- | --- | ---- |  | - | --- | ---- | 
|                                               |       |              
|                                               |       | 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(a)                                    |       |               | 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.

In September 2004, we recognized a gain of
approximately $2.1 million on the sale of our minority
interest in Matrics, Inc.

Income Tax (Expense)
Benefit.Although HFA became a
qualified subchapter S subsidiary as of December 20, 2002
and is no longer treated as a separate entity for federal income
tax purposes, some states do not recognize this tax election. In
addition, some states do not recognize Alions
S corporation status. As a result, the Company recorded
approximately $0.02 million of state income tax expense for
the year ended September 30, 2004.

Net Loss.The net
loss decreased approximately $5.7 million, or 27.4%, to
$15.1 million for the year ended September 30, 2004 as
compared to $20.8 million for the year ended
September 30, 2003. The $5.7 million decrease is
associated with factors discussed above and is attributable to
the following:

|  |  |                                                                   |  |   |              | 
|- |  | ----------------------------------------------------------------- |  | - | ------------ | 
| |  | Income generated by the activities of the
    acquired operations |  | $ | 0.9  million | 
| |  | Decrease in loss from existing operations                         |  | $ | 4.8  million | 
|  |  | Total:                                                            |  | $ | 5.7  million | 



| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | Pro Forma Year Ended September 30,
    2003 Compared to Pro Forma Year Ended September 30,
    2002

Contract Revenue.Contract revenue increased $11.5 million, or approximately
5.7%, to $213.2 million for the year ended
September 30, 2003 from $201.7 million for the year
ended September 30, 2002. The $11.4 million increase
is attributable primarily to additional work performed under
contracts that were in existence during the prior year. As a
percentage of revenue, material and subcontract cost-based
revenue represents an increase of approximately
$2.3 million for the year ended September 30, 2003
compared to the year ended September 30, 2002. In both
years, material and subcontract cost-based revenue represented
approximately 19.8% of total revenue.

41



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##### 



The following activities generated large revenue
increases during the year ended September 30, 2003:

|                                                                                                                                  |  |   |                      | 
|--------------------------------------------------------------------------------------------------------------------------------- |  | - | -------------------- | 
|Additional services under the Modeling and
    Simulation Information Analysis Center contract with the
    Department of Defense |  | $ | 9.1 million increase | 
|Demilitarization support services to the
    U.S. Armys Newport Chemical Agent Disposal Facility                                 |  | $ | 7.6 million increase | 
|Increased utilization of the Mobile Parts
    Hospital and related services for the Department of Defense                         |  | $ | 5.5 million increase | 
|Support to the Joint Spectrum Center of the
    Department of Defense                                                             |  | $ | 3.5 million increase | 

The following activities resulted in large
revenue decreases during the year ended September 30, 2003:

|                                                                                                 |  |   |                      | 
|------------------------------------------------------------------------------------------------ |  | - | -------------------- | 
|Decline in support to the Internal Revenue
    Service on various contracts and subcontracts     |  | $ | 6.4 million decrease | 
|Decrease in support on various other contracts                                                   |  | $ | 6.2 million decrease | 
|Decline in ordnance management and unexploded
    ordnance support services business area at HFA |  | $ | 1.1 million decrease | 

During the year ended September 30, 2003,
increases in revenue were partially offset by $0.6 million
in revenue reductions related to certain amounts booked on a
fixed-price contract and on a cost-reimbursement contract, which
were not recoverable under these contracts.

Direct Contract
Expenses.Direct contract expenses
increased approximately $7.8 million, or 5.3%, to
$155.2 million for the year ended September 30, 2003,
from $147.4 million for the year ended September 30,
2002. Direct contract expenses as a percentage of revenue
decreased to 72.8% for the year ended September 30, 2003,
from 73.1% for the year ended September 30, 2002. Direct
labor costs for the year ended September 30, 2003,
increased by approximately 9.5% or $9.2 million when
compared to the year ended September 30, 2002, to support
the revenue increases discussed above. Other direct costs
increased by approximately 2.0% or $0.2 million when
compared to the year ended September 30, 2002. Material and
subcontract costs decreased approximately $1.6 million, or
3.8%, to $42.4 million for the year ended
September 30, 2003, compared to $44.0 million for the
year ended September 30, 2002. Material and subcontract
costs vary with schedule requirements of the contract.

Gross Profit.Gross
profit increased approximately $3.6 million, or 6.6%, to
$58.0 million for the year ended September 30, 2003,
from $54.4 million for the year ended September 30,
2002. Gross profit margin as a percentage of revenue increased
to 27.2% for the year ended September 30, 2003, compared to
26.9% for the year ended September 30, 2002. The increase
in gross margin is primarily related to improved performance on
our firm-fixed price contracts.

Operating Expenses.Operating expenses increased approximately $6.1 million, or
approximately 10.5%, to $64.0 million for the year ended
September 30, 2003 from approximately $57.9 million
for the year ended September 30, 2002. Operating expenses,
net of depreciation and amortization expense, and non-recurring
Transaction-related expenses (described below), increased
approximately $5.5 million, or approximately 14.0%, to
$44.9 million for the year ended September 30, 2003,
from approximately $39.4 million for the year ended
September 30, 2002. Of this $5.5 million increase,
expenses for indirect personnel and occupancy costs increased
approximately $0.9 million, or approximately 2.0%, to
$20.3 million for the year ended September 30, 2003,
from $19.4 million for the year ended September 30,
2002, primarily for infrastructure to support contract
requirements. Bad debt expense decreased approximately
$0.4 million for the year ended September 30, 2003,
compared to the year end September 30, 2002. This decrease
was related to a $0.4 million release of reserves
associated with the Companys performance on a subcontract
to a prime contractor which were no longer required. General and
administrative expense increased approximately
$5.0 million, or 26.0%, to $24.2 million for the year
ended September 30, 2003, compared to $19.2 million
for the year ended September 30, 2002. As a percentage of
revenue, general and administrative expense was 11.3% and 9.5%
for the years ended September 30, 2003 and
September 30, 2002, respectively. Of the $5.0 million
increase in

42



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##### 



general and administrative expense, approximately
$4.0 million of the increase can be attributed to the
following:


|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |   |                      | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | -------------------- | 
|Expense associated with the SAR and phantom stock
    programs ($0.5 million); outside legal costs in support of
    litigation and arbitration matters ($0.5 million);
    increased expenses for ESOP benefit administration
    ($0.3 million); and resources for additional financial
    accounting staff ($0.3 million)                                                                                                                                                                                             |  | $ | 1.6 million increase | 
|Non-recurring expenses associated with the
    conversion and roll-out of the newly created employee-owned
    entity. Expenses included: conversion and upgrade of information
    technology, system applications, financial systems, and desktop
    software ($0.4 million); outside legal support on ESOP and
    SEC matters ($0.4 million); additional required financial
    audits in order to comply with government regulations
    ($0.4 million); and company communications and branding
    ($0.4 million) |  | $ | 1.6 million increase | 
|Expenses related to state business taxes
    ($0.4 million), post-retirement benefits
    ($0.1 million), and idle facility costs ($0.1 million)                                                                                                                                                                                                                                                                                                                                                                          |  | $ | 0.6 million increase | 
|Other administrative expenses for areas
    including, but not limited to, human resources, payroll,
    procurement, security and facilities management                                                                                                                                                                                                                                                                                                                                                                  |  | $ | 0.2 million increase | 

Non-recurring Transaction-Related
Expense.Non-recurring
Transaction-related expense (e.g., third party legal,
accounting, and finance) was approximately $6.7 million for
the year ended September 30, 2003. For the year ended
September 30, 2002, Transaction-related expenses were
approximately $6.4 million. The increase in expense is
associated with activities related to the closing of the
Transaction on December 20, 2002 which was the last day of
the first quarter of fiscal year 2003. Of the approximate
$6.7 million in related expense for the year ended
September 30, 2003, approximately $6.4 million was
incurred in the first quarter.

Depreciation and
Amortization.Depreciation and
amortization expense was approximately $12.4 million for
the year ended September 30, 2003 and $12.2 million
for the year ended September 30, 2002. In each year,
approximately $10.2 million of amortization expense related
to customer contracts purchased from IITRI and
approximately $0.4 million of depreciation expense was
associated with the fair value of tangible assets acquired in
the Transaction.

Loss from
Operations.For the year ended
September 30, 2003, the Company sustained a loss from
operations of approximately $6.1 million compared with
approximately a $3.6 million operating loss for the year
ended September 30, 2002. The $6.1 million operating
loss for the year ended September 30, 2003 included
approximately $6.7 million of non-recurring
Transaction-related expenses and approximately $1.6 million
in non-recurring expenses associated with the conversion and
roll-out of Alion (see above, Operating Expenses).
For the year ended September 30, 2002, the operating loss
of $3.6 million included approximately $6.4 million in
non-recurring Transaction-related expenses. The operating losses
for the respective years also included non-cash depreciation and
amortization expenses of approximately $10.5 million per
year which resulted from the Transaction.

Other Expense.Other
expenses were approximately $14.7 million for the year
ended September 30, 2003 and approximately
$9.7 million for the year ended September 30, 2002. In
each respective year, there was approximately $13.9 and
$9.6 million of interest expense related to the debt
financing associated with the purchase of assets from IITRI.

Income Tax Expense.Our wholly-owned subsidiary, Human Factors Applications, Inc.
(HFA), had operating income of approximately $1.3 million
for the year ended September 30, 2003, compared to
$1.6 million for the year ended September 30, 2002.
HFA recorded income tax provisions of approximately $0.03 and
$0.6 million, for the years ended September 30, 2003
and September 30, 2002, respectively. We filed an election
with the IRS to treat HFA as a qualified Subchapter S subsidiary
exempt from federal income tax at the operating level, which
became effective December 21, 2002.

43



---



##### 



Net Loss.The net
loss of approximately $20.8 million for the year ended
September 30, 2003, which compared to the net loss of
$13.8 million for the year ended September 30, 2002,
is due to the factors discussed above.

Liquidity and Capital Resources

The Companys primary liquidity requirements
are for debt service, working capital, capital expenditures, and
acquisitions. The principal working capital need is to fund
accounts receivable, which increases with the growth of the
business. We are funding our present operations, and we intend
to fund future operations, primarily through cash provided by
operating activities and through use of our revolving credit
facility.

Net cash provided by operating activities of
Alion was approximately $5.7 million for the year ended
September 30, 2004, as compared to cash provided by
operations of approximately $14.3 million for the year
ended September 30, 2003. Of the $8.6 million
difference, $2.5 million arises from decreased net income.
Approximately $18.7 million in reduced cash flow was
attributable to increases in accounts receivable offset by
$8.1 million in related increases in accounts payable.
Depreciation and non-cash debt-related expenses contributed
approximately $3.9 million and approximately
$3.1 million, respectively, to an increase in cash flow,
while other assets and liabilities consumed approximately
$2.5 million.

Net cash used in investing activities was
approximately $23.6 million for the year ended
September 30, 2004. The most significant component of the
Companys investing activities is the strategic
acquisitions of, or investments in, other companies. During the
year ended September 30, 2004, the Company used
approximately $21.7 million to make acquisitions and pay
earnout obligations. Alion paid approximately $4.0 million
for the ITSC acquisition, approximately $10.6 million
($8.0 million in cash at closing plus approximately
$2.6 million in subsequent payments for intercompany
payables) for the IPS acquisition and $7.1 million in earn
out obligations due for the AB Tech acquisition. We spent
approximately $3.7 million for capital expenditures and
approximately $1.0 million to make a minority investment in
Matrics Incorporated. We sold our Matrics investment for
$3.1 million in September 2004. During the year ended
September 30, 2003, Alion paid approximately
$59.9 million in cash as part of the purchase price for
substantially all of the assets of IITRI and used
approximately $1.3 million for capital expenditures.

Net cash provided by financing activities was
approximately $22.2 million for the year ended
September 30, 2004, compared to net cash provided by
financing activities of approximately $47.7 million for the
year ended September 30, 2003. The most significant
components of the Companys financing activities are:
1) net proceeds from (or repayment of) short term
borrowings and 2) net proceeds from (or repayment of) long
term debt securities. During the year ended September 30,
2004, Alion borrowed $50.0 million in proceeds under the
Term B Senior Credit Facility to repay the senior term note
payable and revolving line credit facility with LaSalle Bank of
approximately $29.3 million and $24.0 million,
respectively. During the year ended September 30, 2003, the
financing was required to complete the purchase of substantially
all of the assets of IITRI. Alion generated
$25.8 million in cash from the initial sale of the
Companys common stock to the ESOP Trust and another
approximately $0.8 million from a subsequent sale of common
stock to the ESOP Trust. Alion also obtained $33.3 million
from borrowings under the LaSalle Bank senior term note. During
the year ended September 30, 2003, Alion repaid
approximately $5.7 million of principal on the senior term
loan and approximately $6.2 million of principal on LaSalle
Banks revolving credit facility. In the year ended
September 30, 2004, the Company raised approximately
$7.0 million from sales of common stock to the ESOP Trust.



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

To fund the Transaction, the Company entered into
various debt agreements (e.g., Senior Credit Agreement,
Mezzanine Note, and Subordinated Note) on December 20,
2002. On August 2, 2004, the Company entered into a new
Term B Senior Credit Facility, that resulted in the
extinguishment of the LaSalle Bank senior term note, the LaSalle
Bank revolving credit facility and the Mezzanine Note. The
discussion below describes the new Term B Senior Credit Facility
followed by a description of the remaining debt agreements which
were used to fund the Transaction.

44



---



##### 



Term B Senior Credit
Facility.On August 2, 2004, we
entered into a new Term B senior credit facility for an amount
up to $180.0 million with a syndicate of financial
institutions for which Credit Suisse First Boston (CSFB) serves
as arranger, administrative agent and collateral agent. LaSalle
Bank serves as syndication agent under the Term B senior credit
facility. The new Term B senior credit facility consists of a
committed $100.0 million term loan, a committed
$30.0 million revolving credit facility and provides for an
additional $50.0 million (uncommitted) incremental
term loan in which funding is available subject to lender
syndication approval. The term of the facility is five years.
During the first four years of the term, principal under the
senior term loan is payable quarterly in an amount equal to
0.25 percent of the principal amount then outstanding.
During the fifth and final year of the term, we are obligated to
pay quarterly installments of principal in an amount equal to
24 percent of the principal amount then outstanding. All
principal obligations under the senior revolving credit facility
are to be repaid in full no later than August 2, 2009.

At our option, the Term B senior term loan and
the senior revolving credit facility each may bear interest at
either of two floating rates. We may elect that interest be
payable on our $100.0 million senior term loan at an annual
rate equal to the prime rate charged by CSFB plus a maximum
spread of 225 basis points or at an annual rate equal to
the Eurodollar rate plus a maximum spread of 275 basis
points. If we elect a prime rate borrowing under our senior
revolving credit facility, interest would be payable at an
annual rate equal to the prime rate charged by CSFB plus the
additional basis points reflected in the table below under the
column ABR Spread corresponding to our leverage
ratio at the time. If we elect a Eurodollar borrowing under our
senior revolving credit facility, interest would be payable at
an annual rate equal to the Eurodollar rate plus the additional
basis points reflected in the table below under the column
Eurodollar Spread corresponding to our leverage
ratio at the time.

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

If we borrow under the incremental term loan
facility and certain economic terms of the incremental term
loan, including applicable yields, maturity dates and average
life to maturity, are more favorable to the incremental term
loan lenders than the comparable economic terms under the senior
term loan or the senior revolving credit facility, then the Term
B senior credit facility provides that the applicable interest
rate spread will be adjusted upward. The upward adjustment will
take place if the yield payable under the incremental term loan
exceeds the yield under the senior term loan or senior revolving
credit facility by more than 50 basis points. The effect of
this provision is that if we borrow an incremental term loan,
that borrowing may make our borrowings under the senior term
loan and the senior revolving credit facility more expensive.

The Term B senior credit facility requires us to
enter into an interest rate hedge agreement acceptable to CSFB
which fixes or caps the actual interest we will pay on no less
than 40 percent of our long-term indebtedness. On
August 2, 2004, we elected to have the senior term loan
bear interest at the Eurodollar rate, which was approximately
1.6 percent as of August 2, 2004, plus the applicable
margin, which totaled approximately 4.35 percent (i.e.,
LIBOR 1.6 percent plus 2.75 percent Eurodollar
spread). On August 16, 2004, we entered into an interest
rate cap agreement effective September 30, 2004 with one of
our senior lenders. Under this agreement, in exchange for our
payment to the senior lender of approximately $319,000, our
maximum effective rate of interest payable with regard to a
portion of the outstanding principal balance of the Term B
senior credit facility is not to exceed 6.64 percent (i.e.,
LIBOR 3.39 percent cap plus maximum

45



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##### 



2.75 percent Eurodollar spread) for the
period September 30, 2004 through September 29, 2005
and is not to exceed 7.41 percent (i.e., LIBOR
4.66 percent plus 2.75 percent maximum Eurodollar
spread) for the period September 30, 2005 through
September 29, 2007. The maximum principal balance, by
quarter, to which this interest rate cap agreement applies, is
as follows:


|                                                 |  |                   |      | 
|------------------------------------------------ |  | ----------------- | ---- | 
|                                                 |  | Principal Balance
|Quarter                                          |  | (In millions)    
|                                                 |  |                  
|September 30, 2004 through December 31,
    2004 |  | $                 | 37.5 | 
|January 1, 2005 through March 31, 2005           |  | $                 | 37.4 | 
|April 1, 2005 through June 30, 2005              |  | $                 | 37.3 | 
|July 1, 2005 through September 30, 2005          |  | $                 | 37.2 | 
|October 1, 2005 through December 31,
    2005    |  | $                 | 37.1 | 
|January 1, 2006 through March 31, 2006           |  | $                 | 37.0 | 
|April 1, 2006 through June 30, 2006              |  | $                 | 36.9 | 
|July 1, 2006 through September 30, 2006          |  | $                 | 36.8 | 
|October 1, 2006 through December 31,
    2006    |  | $                 | 36.8 | 
|January 1, 2007 through March 31, 2007           |  | $                 | 36.7 | 
|April 1, 2007 through June 30, 2005              |  | $                 | 36.6 | 
|July 1, 2007 through September 30, 2007          |  | $                 | 34.5 | 

Each quarter, the senior lender counter party to
this interest rate cap agreement is required to calculate and
reimburse us for all interest payments under the Term B senior
credit facility in excess of the applicable cap. This cap
agreement expires September 30, 2007.

Under the terms of the senior credit facility, we
are subject to certain financial covenants with respect to our
maximum leverage ratio and our interest coverage ratio. The Term
B senior credit facility is secured by a first priority,
perfected security interest in all of our current and future
tangible and intangible property.

On August 2, 2004, the Company borrowed
$50.0 million under the new Term B senior secured loan to
retire its outstanding Senior Term Note and revolving credit
facility under the Senior Credit Agreement with LaSalle Bank.
The Company paid approximately $47.2 million in principal
(approximately $23.2 million to redeem the Senior Term Note
and approximately $24.0 million to pay the revolving credit
facility) and accrued and unpaid interest and approximately
$3.3 million in transaction fees associated with the
refinancing.

On October 1, 2004, the Company drew down
approximately $22.0 million on the Term B senior term loan
to retire its existing Mezzanine Note in the approximate
principal amount of $19.6 million, plus approximately
$1.8 million prepayment premium, and $0.6 million for
accrued and unpaid interest.

The Company is permitted to use any future
proceeds it might receive from the currently uncommitted
Incremental Term Loan Facility to finance permitted
acquisitions and to make certain put right payments required
under the Companys Mezzanine Warrant, if the put rights
are exercised, and for any other purpose permitted by
incremental term loans, as defined in the Senior Credit
Facility, if and when they are funded.

Mezzanine Note.On
December 20, 2002, the Company issued a Mezzanine Note
to IITRI with a face value of approximately
$20.3 million, as part of the consideration for
the IITRI acquisition. The Mezzanine Note is junior to the
senior credit facility, but ranks senior to the Subordinated
Note. The Company must pay the outstanding Mezzanine Note
principal in a lump sum on December 20, 2008. Prepayment
penalties apply for early redemption. Each quarter, the Company
must pay interest on the Mezzanine Note, in cash, at a rate of
12% per year, based on a 360-day year of twelve 30-day
months. As of July 1, 2004, IITRI transferred all of its
rights, title and interest in the Mezzanine Note to the Illinois
Institute of Technology. On October 1, 2004, Alion redeemed
the Mezzanine Note with proceeds from the Term B Senior Credit
Facility which included a prepayment penalty of approximately
$1.8 million.

Subordinated Note.On December 20, 2002, the Company issued the Subordinated
Note to IITRI, with a face value of $39.9 million, as
part of the consideration for the IITRI acquisition. The
Subordinated Note

46



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##### 



bears interest at a rate of 6% per year
through December 2008, payable quarterly by the issuance of
non-interest bearing notes, called paid-in-kind or
(PIK) notes, which mature at the same time as the
Subordinated Note. Issuance of the PIK notes will have the
effect of deferring the underlying cash interest expense on the
Subordinated Note. The PIK notes do not bear interest and
therefore will not compound any interest on these payment
obligations. Commencing December 2008, the Subordinated Note
will bear interest at 16% per year payable quarterly in
cash until the Subordinated Note has been repaid in full.
Principal on the Subordinated Note is payable in equal
installments of $19.95 million in December 2009 and
December 2010; the PIK notes are also due in equal installments
of $7.2 million on these same dates. As of July 1,
2004, IITRI transferred all of its rights, title and
interest in the Subordinated Note to the Illinois Institute of
Technology.


Warrants.The
Company issued detachable warrants with the Mezzanine Note and
the Subordinated Note. The outstanding warrants associated with
the Mezzanine Note represent the right to buy approximately
505,000 shares of Alion common stock at an exercise price
of $10.00 per share. These warrants are exercisable until
December 20, 2008 and contain a put right giving the holder
the right to require the Company to purchase the warrants back
at the then-current fair value of the Companys common
stock, minus the warrants exercise price. The put right
can be exercised within thirty days after a change in control,
or within thirty days prior to December 20, 2008, or within
thirty days after delivery to the current holders of an
appraisal of the per share value of the Companys common
stock as of September 30, 2008, if the ESOP still exists
and no public market price exists for the Companys common
stock. Although the Mezzanine Note was redeemed on
October 1, 2004, the detachable warrants remain outstanding.

The warrants associated with the Subordinated
Note represent the right to buy approximately
1,080,000 shares of Alion common stock at an exercise price
of $10.00 per share. These warrants are exercisable until
December 20, 2010 and also contain a put right giving the
holder the right to require the Company to purchase the warrants
back at the then-current fair value of the Companys common
stock, minus the warrants exercise price. This put right
applies to up to 50% of these warrants within thirty days prior
to December 20, 2009 (or within thirty days after delivery
to the warrantholders of an appraisal of the per share value of
the Companys common stock as of September 30, 2009,
if the ESOP still exists and no public market price exists for
its common stock), and up to 100% of these warrants within
thirty days prior to December 20, 2010 (or within thirty
days after delivery to the warrant holders of an appraisal of
the per share value of its common stock as of September 30,
2010, if the ESOP still exists and no public market value exists
for its common stock).

All put rights terminate upon one or more
underwritten public offerings of Alion common stock resulting in
aggregate gross proceeds of at least $30.0 million to the
sellers (excluding proceeds received from certain affiliates of
Alion).

As of July 1, 2004, IITRI transferred
all of its rights, title and interest in the warrants to the
Illinois Institute of Technology.

Other Notes and
Agreements.On December 20, 2002,
the Company entered into a $0.9 million Deferred
Compensation Agreement with Dr. Atefi, with payment terms
substantially equivalent to those of the Mezzanine Note
previously described and issued Dr. Atefi detachable
warrants representing the right to buy approximately
22,062 shares of Alion common stock at an exercise price of
$10.00 per share, with put rights similar to those
contained in the warrants accompanying the Mezzanine Note. On
October 29, 2004, Dr. Atefi elected to redeem the
amount due under his Deferred Compensation Agreement.,
Dr. Atefi was paid approximately $0.9 million, plus
approximately $0.2 million in accrued interest. The
warrants remain outstanding.

On March 28, 2003, an officer of the Company
purchased a portion of the Companys Mezzanine Note owned
by IITRI for $750,000, its face value, along with warrants
to purchase 19,327 shares of Alions common stock
at an exercise price of $10.00 per share. On
November 12, 2003, the Company purchased the portion of the
Mezzanine Note and warrants from the officer for an aggregate
purchase price of $1,034,020.

On February 11, 2004, the Company borrowed
$750,000 from an officer of the Company. In exchange, on
June 7, 2004, the Company issued the officer a Promissory
Note with interest at a rate of 15% per annum until

47



---



##### 



March 31, 2009. The annual interest period
was effective beginning February 11, 2004. The Agreement
essentially replaces a Note, which is described above, for the
same sum previously issued to another officer of the Company,
the termination of whose employment relationship resulted in
repurchase of the Note. On December 9, 2004, the Promissory
Note was extinguished. An amount of $750,000 plus accrued
interest of $21,635 was paid to the officer.


During fiscal year 2005 and the next five fiscal
years, at a minimum, we expect that we will have to make the
estimated interest and principal payments set forth below.

|                                          |                |                      |        |        |  |      |       |       |  |      |       |        |  |  |        |        |  |  |         |         |  |  |        |        | 
|----------------------------------------- | -------------- | -------------------- | ------ | ------ |  | ---- | ----- | ----- |  | ---- | ----- | ------ |  |  | ------ | ------ |  |  | ------- | ------- |  |  | ------ | ------ | 
|                                          |                |                     
|                                          |                | 6-Fiscal Year Period
|                                          |                |                     
|                                          |                | 2005                 |        | 2006   |  | 2007 |       | 2008  |  | 2009 |       | 2010  
|                                          |                |                      |        |        |  |      |       |       |  |      |       |       
|                                          |                |                     
|                                          |                | ($ In thousands)    
|Bank revolving credit facility            |                |                      |        |        |  |      |       |       |  |      |       |        |  |  |        |        |  |  |         |         |  |  |        |       
|                                          | - Interest(1)  |                      | $      | 521    |  |      | $     | 606   |  |      | $     | 686    |  |  | $      | 768    |  |  | $       | 854     |  |  | $      |       | 
|                                          | - Principal(2) |                      |        |       |  |      |       |      |  |      |       |       |  |  |        |       |  |  |         | 7,215   |  |  |        |       | 
|Term B senior term loan                   |                |                      |        |        |  |      |       |       |  |      |       |        |  |  |        |        |  |  |         |         |  |  |        |       
|                                          | - Interest(3)  |                      |        | 6,991  |  |      |       | 7,695 |  |      |       | 8,425  |  |  |        | 9,890  |  |  |         | 10,255  |  |  |        |       | 
|                                          | - Principal(4) |                      |        | 1,000  |  |      |       | 1,000 |  |      |       | 1,000  |  |  |        | 1,000  |  |  |         | 96,000  |  |  |        |       | 
|Mezzanine note and agreement with officer |                |                      |        |        |  |      |       |       |  |      |       |        |  |  |        |        |  |  |         |         |  |  |        |       
|                                          | - Interest(5)  |                      |        | 1,964  |  |      |       |      |  |      |       |       |  |  |        |       |  |  |         |        |  |  |        |       | 
|                                          | - Principal(5) |                      |        | 20,450 |  |      |       |      |  |      |       |       |  |  |        |       |  |  |         |        |  |  |        |       | 
|Promissory note with officer              |                |                      |        |        |  |      |       |       |  |      |       |        |  |  |        |        |  |  |         |         |  |  |        |       
|                                          | - Interest(6)  |                      |        | 21     |  |      |       |      |  |      |       |       |  |  |        |       |  |  |         |        |  |  |        |       | 
|                                          | - Principal(6) |                      |        | 750    |  |      |       |      |  |      |       |       |  |  |        |       |  |  |         |        |  |  |        |       | 
|Subordinated note                         |                |                      |        |        |  |      |       |       |  |      |       |        |  |  |        |        |  |  |         |         |  |  |        |       
|                                          | - Interest(7)  |                      |        |       |  |      |       |      |  |      |       |       |  |  |        |       |  |  |         | 6,384   |  |  |        | 3,192  | 
|                                          | - Principal(7) |                      |        |       |  |      |       |      |  |      |       |       |  |  |        |       |  |  |         | 27,132  |  |  |        | 27,132 | 
|                                          |                |                      |        |        |  |      |       |       |  |      |       |        |  |  |        |        |  |  |         |         |  |  |        |       
|Total cash  Pay interest                 |                |                      | 9,497  |        |  |      | 8,301 |       |  |      | 9,111 |        |  |  | 10,658 |        |  |  | 17,493  |         |  |  | 3,192  |       
|Total cash  Pay principal                |                |                      | 22,200 |        |  |      | 1,000 |       |  |      | 1,000 |        |  |  | 1,000  |        |  |  | 130,347 |         |  |  | 27,132 |       
|                                          |                |                      |        |        |  |      |       |       |  |      |       |        |  |  |        |        |  |  |         |         |  |  |        |       
|                                          | Total          |                      | $      | 31,697 |  |      | $     | 9,301 |  |      | $     | 10,111 |  |  | $      | 11,658 |  |  | $       | 147,840 |  |  | $      | 30,324 | 
|                                          |                |                      |        |        |  |      |       |       |  |      |       |        |  |  |        |        |  |  |         |         |  |  |        |       



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We anticipate a continuing requirement to have in
    place a $30.0 million bank revolving credit facility to
    finance our ongoing working capital needs. In 2005, we
    anticipate the average balance drawn on the revolving credit
    facility to be approximately $5.0 million, bearing an
    effective interest rate of approximately 7.9%. For fiscal years
    2006, 2007, 2008, and 2009, the average balance is estimated to
    be approximately $5.5 million, $6.0 million,
    $6.6 million and $7.2 million, respectively. For years
    2005, 2006, 2007, 2008, and 2009, the projected effective CSFB
    prime rate interest rate is estimated to be approximately 7.9%,
    8.8%, 9.4%, 9.9%, and 10.2%, respectively. The effective
    interest rate takes into account that we have entered into an
    interest rate cap agreement which caps the interest rate we will
    pay on a portion, but not all, of the outstanding principal
    balance of the Term B Senior Credit Facility. The current cap
    agreement expires in August 2007. Outstanding principal balances
    that are not under a cap agreement have been applied interest
    expense based on the alternative CSFB prime rate. The term of
    the revolving credit facility is five years.
|   
|(2) | Estimated balance drawn and repayment of the
    revolving credit facility at termination of the revolving credit
    facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(3) | The projected balance which we estimate will be
    drawn under the Term B senior term loan is as follows:
    $100.0 million, $99.0 million, $98.0 million,
    $97.0 million, and $96.0 million for fiscal years
    2005, 2006, 2007, 2008, and 2009, respectively. The effective
    annual interest rate for fiscal years 2005, 2006, 2007, 2008,
    and 2009 is estimated to be approximately 7.0%, 7.7%, 8.4%,
    9.9%, and 10.7%, respectively. The effective interest rate takes
    into account that we have entered into an interest rate cap
    agreement which                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

48



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##### 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | caps the interest rate we will pay on a portion,
    but not all, of the outstanding principal balance of the Term B
    Senior Credit Facility. The current cap agreement expires in
    August 2007. Outstanding principal balances that are not under a
    cap agreement have been applied interest expense based on the
    alternative CSFB prime rate. The term of the Term B senior term
    loan is five years. The approximate impact of a 1% increase in
    the interest rate, as applied to principal balances drawn under
    the Term B senior term loan that are not covered by the
    current interest rate cap agreement would be $0.5 million,
    $0.5 million, $0.5 million, $1.0 million, and
    $1.0 million for fiscal years September 30, 2005,
    2006, 2007, 2008, and 2009, respectively.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | 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 the Term B Senior Credit
    Facilitys term and 96 percent of the principal
    balance outstanding during the fifth and final year of the term.
    The table assumes that we will have drawn $100.0 million by
    the end of fiscal year 2005, resulting in expected annual
    principal payments of approximately $1.0 million in each of
    fiscal years 2005, 2006, 2007, and 2008. During the fifth year,
    or 2009, we expect to pay principal in the amount of
    $96.0 million. The Term B Senior Credit Facility also
    requires us to make mandatory prepayments of principal depending
    upon whether we generate certain excess cash flow in a given
    fiscal year, we issue certain equity, we issue or incur certain
    debt or we sell certain assets. As of September 30, 2004,
    no mandatory prepayments are due.                                                                                                                                      
|   
|(5) | The $2.0 million payment of interest in 2005
    includes approximately $1.8 million of accrued interest
    expense and prepayment penalties under the Mezzanine Note, and
    $0.2 million in interest under Dr. Atefis
    Deferred Compensation Agreement. The principal paid amount in
    2005 represents the redemption of the Mezzanine Note that
    occurred on October 1, 2004 and the payment of the
    principal amount previously deferred by Dr. Atefi under his
    deferred compensation agreement that occurred on
    October 29, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(6) | Principal amount of the Promissory Note is
    $0.75 million and carries an annual interest rate of 15%.
    The Note matures in 2009. On December 9, 2004, the
    Promissory Note with officer was extinguished. An amount of
    $750,000 plus accrued interest of $21,635 was paid to the
    officer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(7) | 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 during this period, thereby having
    the effect of increasing the principal value of the subordinated
    note; but because the PIK notes do not themselves bear interest,
    the interest obligations paid by issuance of the PIK notes will
    not be compounded. In other words, no interest will be paid on
    interest accrued under the subordinated note. In the years 2005
    through 2008, the PIK interest on the Subordinated Note will be
    approximately $2.4 million in each fiscal year. During the
    eight-year term of the Subordinated Note, approximately
    $14.2 million of principal accretes to the note through the
    PIK. These amounts are included in the principal payments in
    fiscal years 2009 and 2010. In years 2009 and 2010, interest
    will be 16% paid quarterly in cash. The principal, together with
    the outstanding balance of the PIK notes, will be paid in equal
    amounts at the end of fiscal years 2009 and 2010.

Other Obligations.The Company has a maximum earn out payment obligation of
$11.5 million to the former shareholders of AB Technologies
arising from IITRIs acquisition of their company. The earn
out arrangement applies to results of certain operations for
part of fiscal year 2000, all of fiscal years 2001 through 2004,
and part of fiscal year 2005. The former AB Technologies
shareholders filed a lawsuit against the Company for breach of
the AB Technologies asset purchase agreement claiming at least
$8.2 million in damages. The federal court stayed the
litigation and ordered both parties to submit the dispute to the
independent accounting firm of Grant Thornton for arbitration.
On January 20, 2004, the arbitrator issued a decision that
awarded the former AB Technologies shareholders a purchase price
adjustment of approximately $0.7 million and further
definitized the method for calculating the earn out. For the
fiscal year ended September 30, 2004, the Company
recognized approximately $8.4 million, excluding interest,
in purchase price adjustments and earn out obligations due the
former AB Technologies shareholders. To date, a total of
approximately $10.3 million in earn out obligation has been
recorded.

49



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##### 



The Companys remaining minimum lease
payment obligations under non-cancelable operating leases for
the fiscal years ending 2005, 2006, 2007, 2008 and 2009 are
$10.9 million, $10.4 million, $10.4 million,
$10.3 million and $9.9 million, respectively. The
remaining aggregate obligations on these leases thereafter are
approximately $11.2 million. Commercial facility lease
expenses are included in these amounts. These commercial
facility lease obligations are currently reimbursable costs
under the Companys government contracts.

Other contingent obligations which will impact
the Companys cash flow relate to:



| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | Repurchase obligations under the KSOP;                                                            
|
| |  | Obligations related to the holders put
    rights associated with the Mezzanine Note warrants;   
|
| |  | Obligations related to the holders put
    rights associated with the Subordinated Note warrants;
|
| |  | Obligations relating to our stock appreciation
    rights and phantom stock programs; and         
|
| |  | Obligations relating to deferred compensation
    programs for senior managers.                   

Through September 30, 2004, the Company has
spent the following amounts to repurchase shares of its common
stock from the ESOP Trust to satisfy obligations under the KSOP
to terminated employees. All repurchased shares were contributed
back to the ESOP Trust.

|              |  |                  |        |             |  |             |       |  |  |   |         | 
|------------- |  | ---------------- | ------ | ----------- |  | ----------- | ----- |  |  | - | ------- | 
|              |  | Number of Shares |        |             |  | Total Value
|Date          |  | Repurchased      |        | Share Price |  | Repurchased
|              |  |                  |        |             |  |            
|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 |  |  | $ | 1,938   | 
|June 2004     |  |                  | 727    |             |  | $           | 16.56 |  |  | $ | 12,039  | 
|June 2004     |  |                  | 743    |             |  | $           | 16.56 |  |  | $ | 12,304  | 
|July 2004     |  |                  | 48,309 |             |  | $           | 16.56 |  |  | $ | 799,997 | 

The Company believes that cash flow from
operations and cash available under its revolving credit
facility will provide it with sufficient capital to fulfill its
current business plan and to fund its working capital needs for
at least the next 36 months. Although the Company expects
to have positive cash flow from operations, it will need to
generate significant additional revenues beyond its current
revenue base and to earn net income in order to repay principal
and interest on the indebtedness it assumed under the new Term B
Senior Credit Facility and the remaining outstanding
indebtedness it incurred to fund the Transaction.

The Companys business plan calls for it to
continue to acquire companies with complementary technologies.
The Term B senior credit facility permits the Company to make
certain permitted acquisitions, and the Company intends to use a
portion of the financing available to it under the Term B Senior
Credit Facility to make permitted acquisitions.

Given the structure of the Term B senior credit
facility, the Company expects that it will need to refinance the
Term B Senior Credit Facility before the end of fiscal year
2008. The Companys cash from operations will be
insufficient to satisfy all of its obligations and it cannot be
certain that it will be able to refinance on terms that will be
favorable to the Company, if at all. Moreover, if the
Companys plans or assumptions change, if its assumptions
prove inaccurate, if it consummates additional or larger
investments in or acquisitions of other companies than are
currently planned, if it experiences unexpected costs or
competitive pressures, or if its existing cash and projected
cash flow from operations prove insufficient, it may need to
obtain greater amounts of additional financing and sooner than
expected. While it is the Companys intention only to enter
into new financing or refinancing that it considers
advantageous, it cannot be certain that such sources of
financing will be available to the Company in the future, or, if
available, that financing could be obtained on terms favorable
to the Company.

50



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##### 



Summary of Critical Accounting
Policies



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

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

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

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

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

Contracts with agencies of the federal government
are subject to periodic funding by the contracting agency
concerned. Funding for a contract may be provided in full at
inception of the contract or ratably throughout the term of the
contract as the services are provided. If funding is not
assessed as probable, revenue recognition is deferred until
realization is probable.

Contract costs on federal government contracts,
including indirect costs, are subject to audit by the federal
government and adjustment pursuant to negotiations between the
Company and government representatives. All of the
Companys federal contract indirect costs have been audited
and agreed upon through fiscal year 2001. Contract revenues on
federal government contracts have been recorded in amounts that
are expected to be realized upon final settlement.

The Company recognizes revenue on unpriced change
orders as expenses are incurred only to the extent that the
Company expects it is probable that such costs will be
recovered. The Company recognizes revenue in excess of costs on
unpriced change orders only when management can also reliably
estimate the amount of excess and experience provides a
sufficient basis for recognition. The Company recognizes revenue
on claims as expenses are incurred only to the extent that the
Company expects it is probable that such costs will be recovered
and the amount of recovery can be reliably estimated.



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

The purchase price that we pay to acquire the
stock or assets of an entity must be assigned to the net assets
acquired based on the estimated fair value of those net assets.
The purchase price in excess of the estimated fair value of the
tangible net assets and separately identified intangible assets
acquired represents goodwill. The purchase price allocation
related to acquisitions involves significant estimates and
management judgments that may be adjusted during the purchase
price allocation period.

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

As of September 30, 2004, the Company has
goodwill of approximately $83.1 million, which will be
subject to the aforementioned annual impairment review. In
addition, as of September 30, 2004, the Company has a
recorded net intangible asset balance of approximately
$13.6 million, comprised primarily of purchased contracts
which were acquired in connection with the Transaction and the
ITSC and IPS acquisitions. The

51



---



##### 



intangible assets have an estimated useful life
of one to three years and are amortized using the straight-line
method.


Contractual Obligations

The following table summarizes our contractual
and other forecasted long-term debt obligations. For contractual
obligations, we included payments that we have a legal
obligation to make.

|                         |                   |                               |   |         |         |           |   |           |        |                |   |        |        |  |   |         |         |  |   |       |       | 
|------------------------ | ----------------- | ----------------------------- | - | ------- | ------- | --------- | - | --------- | ------ | -------------- | - | ------ | ------ |  | - | ------- | ------- |  | - | ----- | ----- | 
|                         |                   |                              
|                         |                   | Payments Due by Fiscal Year  
|                         |                   |                              
|                         |                   | Total                         |   | 2005    |         | 2006-2008 |   | 2009-2010 |        | 2011 and After
|                         |                   |                               |   |         |         |           |   |           |        |               
|Contractual obligations: |                   |                               |   |         |         |           |   |           |        |                |   |        |        |  |   |         |         |  |   |      
|                         | Long-term debt(1) |                               | $ | 240,931 |         |           | $ | 31,697    |        |                | $ | 31,070 |        |  | $ | 178,164 |         |  | $ |      |      
|                         | Lease obligations |                               |   | 71,948  |         |           |   | 12,640    |        |                |   | 36,015 |        |  |   | 19,361  |         |  |   | 3,932 |      
|                         |                   |                               |   |         |         |           |   |           |        |                |   |        |        |  |   |         |         |  |   |      
|                         |                   | Total contractual obligations |   | $       | 312,879 |           |   | $         | 44,337 |                |   | $      | 67,085 |  |   | $       | 197,525 |  |   | $     | 3,932 | 
|                         |                   |                               |   |         |         |           |   |           |        |                |   |        |        |  |   |         |         |  |   |      



---



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

Off-Balance Sheet Financing
Arrangements

The Company has no off-balance sheet financing
arrangements. In addition, the Company does not have any
relationship with unconsolidated entities or any special purpose
entities and has not issued any guarantees.






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

The Companys exposure to interest rate risk
is primarily due to the debt it incurred to finance the
Transaction and the subsequent refinancing of a portion of that
debt in August 2004. The Mezzanine Note, Subordinated Note, and
the agreements with officers have fixed interest rates, and
therefore present no risk of change to interest charges as a
result of an increase in market interest rates. The balance
drawn under the $30.0 million senior revolving credit
facility and the balance on the Term B senior term loan,
however, bear interest at variable rates tied to the Eurodollar
rate. Such variable rates increase the risk that interest
charges will increase materially if market interest rates
increase. The Company has reduced, in part, the maximum total
amount of variable interest rate risk by entering into an
interest rate cap agreement on the first $37.5 million of
principal borrowed under the Term B senior credit facility.
Under this agreement, in exchange for our payment to the senior
lender of approximately $319,000, our maximum effective rate of
interest payable with regard to a portion of the outstanding
principal balance of the Term B Senior Credit Facility is not to
exceed 6.64 percent (i.e., LIBOR 3.39 percent cap plus
maximum 2.75 percent Eurodollar spread) for the period
September 30, 2004 through September 29, 2005 and is
not to exceed 7.41 percent (i.e., LIBOR 4.66 percent
plus 2.75 percent maximum Eurodollar spread) for the period
September 30, 2005 through September 29, 2007. For a
description of the arrangement, refer to Discussion of
Debt Structure in Managements Discussion and
Analysis of Financial Condition and Results of Operations.
The approximate impact of a 1% increase in the interest rate, as
applied to principal balances drawn under the Term B Senior
Credit Facility that are not covered by the current interest
rate cap agreement, would be $0.5 million,
$0.5 million, $0.5 million, $1.0 million, and
$1.0 million for fiscal years ending September 30,
2005, 2006, 2007, 2008, and 2009, respectively.

The Company does not use derivatives for trading
purposes. It invests its excess cash in short-term, investment
grade, and interest-bearing securities.

Because the Companys expenses and revenues
from its international research contracts are generally
denominated in U.S. dollars, the Company does not believe
that its operations are subject to material risks associated
with currency fluctuations.

52



---



##### 



The Companys exposure to change in the fair
market value of Alions stock as the economic basis for the
estimate of contingent obligations relate to:



| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | Repurchase obligations under the KSOP;                                                            
|
| |  | Obligations related to the holders put
    rights associated with the Mezzanine Note warrants;   
|
| |  | Obligations related to the holders put
    rights associated with the Subordinated Note warrants;
|
| |  | Obligations relating to its stock appreciation
    rights and phantom stock programs; and         
|
| |  | Obligations relating to deferred compensation
    programs for senior managers.                   

53



---



##### 








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

INDEX TO FINANCIAL STATEMENTS

|                                                                                         |                                                                                                                                                                                                       |      |    |    | 
|---------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | -- | -- | 
|                                                                                         |                                                                                                                                                                                                       | Page
|                                                                                         |                                                                                                                                                                                                       |     
|Consolidated Financial Statements of Alion
    Science and Technology Corporation        |                                                                                                                                                                                                       |      |    |   
|Report of Independent Registered Public
    Accounting Firm                              |                                                                                                                                                                                                       |      | 55 |   
|Consolidated Financial Statements:                                                       |                                                                                                                                                                                                       |      |    |   
|                                                                                         | Consolidated Balance Sheets as of
    September 30, 2004 and 2003                                                                                                                                     |      |    | 56 | 
|                                                                                         | Consolidated Statements of Operations for the
    years ended September 30, 2004 and 2003 and for the period
    from October 10, 2001 (inception) through
    September 30, 2002                     |      |    | 57 | 
|                                                                                         | Consolidated Statements of Shareholders
    Equity (Deficit) for the years ended September 30, 2004 and
    2003 and for the period from October 10, 2001
    (inception) through September 30, 2002 |      |    | 58 | 
|                                                                                         | Consolidated Statements of Cash Flows for the
    years ended September 30, 2004 and 2003 and for the period
    from October 10, 2001 (inception) through
    September 30, 2002                     |      |    | 59 | 
|                                                                                         | Notes to Consolidated Financial Statements                                                                                                                                                            |      |    | 61 | 
|Consolidated Financial Statement
    Schedule                                            |                                                                                                                                                                                                       |      |    |   
|                                                                                         | Schedule II  Valuation and
    Qualifying Accounts                                                                                                                                                   |      |    | 78 | 
|Consolidated Financial Statements of Selected
    Operations of IIT Research Corporation |                                                                                                                                                                                                       |      |    |   
|Independent Auditors Report                                                             |                                                                                                                                                                                                       |      | 79 |   
|Consolidated Financial Statements:                                                       |                                                                                                                                                                                                       |      |    |   
|                                                                                         | Consolidated Balance Sheets as of
    September 30, 2002 and 2001                                                                                                                                     |      |    | 80 | 
|                                                                                         | Consolidated Statements of Income for the years
    ended September 30, 2002, 2001, and 2000                                                                                                          |      |    | 81 | 
|                                                                                         | Consolidated Statements of Changes in
    Owners Net Investment for the years ended
    September 30, 2002, 2001, and 2000                                                                           |      |    | 82 | 
|                                                                                         | Consolidated Statements of Cash Flows for the
    years ended September 30, 2002, 2001, and 2000                                                                                                      |      |    | 83 | 
|Notes to Consolidated Financial Statements                                               |                                                                                                                                                                                                       |      | 84 |   

54



---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

The Board of Directors

Alion Science and Technology Corporation:


We have audited the consolidated financial
statements of Alion Science and Technology Corporation and
subsidiaries (the Company) as listed in the accompanying index.
In connection with our audits of the consolidated financial
statements, we also have audited the consolidated financial
statement schedule as listed in the accompanying index. These
consolidated financial statements and consolidated financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements and consolidated financial
statement schedule based on our audits.

We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Alion Science and Technology
Corporation and subsidiaries as of September 30, 2004 and
2003, and the results of their operations and their cash flows
for the years ended September 30, 2004 and 2003 and for the
period from October 10, 2001 (inception) through
September 30, 2002, in conformity with U.S. generally
accepted accounting principles. Also in our opinion, the related
consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as
a whole, present fairly, in all material respects, the
information set forth therein.



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

Chicago, Illinois

December 10, 2004


55



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION

CONSOLIDATED BALANCE SHEETS

|                                                                          |                                                                                                                                                                                                            |                                                                       |                                                       |         |         |         |        |         |         |         | 
|------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ----------------------------------------------------- | ------- | ------- | ------- | ------ | ------- | ------- | ------- | 
|                                                                          |                                                                                                                                                                                                            |                                                                      
|                                                                          |                                                                                                                                                                                                            | September 30,                                                        
|                                                                          |                                                                                                                                                                                                            |                                                                      
|                                                                          |                                                                                                                                                                                                            | 2004                                                                  |                                                       | 2003   
|                                                                          |                                                                                                                                                                                                            |                                                                       |                                                       |        
|                                                                          |                                                                                                                                                                                                            |                                                                      
|                                                                          |                                                                                                                                                                                                            | (In thousands, except                                                
|                                                                          |                                                                                                                                                                                                            | share and per share                                                  
|                                                                          |                                                                                                                                                                                                            | information)                                                         
|Current assets:                                                           |                                                                                                                                                                                                            |                                                                       |                                                       |         |         |         |        |        
|                                                                          | Cash                                                                                                                                                                                                       |                                                                       | $                                                     | 4,717   |         |         | $      | 494     |        
|                                                                          | Restricted cash                                                                                                                                                                                            |                                                                       |                                                       |        |         |         |        | 5       |        
|                                                                          | Accounts receivable, less allowance of $2,896 and
    $2,484 at September 30, 2004 and 2003, respectively                                                                                                  |                                                                       |                                                       | 68,949  |         |         |        | 42,775  |        
|                                                                          | Stock subscriptions receivable                                                                                                                                                                             |                                                                       |                                                       | 1,556   |         |         |        | 1,247   |        
|                                                                          | Prepaid expense                                                                                                                                                                                            |                                                                       |                                                       | 1,333   |         |         |        | 975     |        
|                                                                          | Other current assets                                                                                                                                                                                       |                                                                       |                                                       | 1,008   |         |         |        | 986     |        
|                                                                          |                                                                                                                                                                                                            |                                                                       |                                                       |         |         |         |        |        
|                                                                          |                                                                                                                                                                                                            |                                                                       | Total current assets                                  |         |         | 77,563  |        |         |         | 46,482  | 
|Fixed assets, net                                                         |                                                                                                                                                                                                            |                                                                       | 10,778                                                |         |         |         | 8,696  |        
|Intangible assets, net                                                    |                                                                                                                                                                                                            |                                                                       | 13,618                                                |         |         |         | 22,788 |        
|Goodwill                                                                  |                                                                                                                                                                                                            |                                                                       | 83,075                                                |         |         |         | 65,522 |        
|Other                                                                     |                                                                                                                                                                                                            |                                                                       | 1,688                                                 |         |         |         | 97     |        
|Deferred compensation assets                                              |                                                                                                                                                                                                            |                                                                       | 1,739                                                 |         |         |         | 1,169  |        
|                                                                          |                                                                                                                                                                                                            |                                                                       |                                                       |         |         |         |        |        
|                                                                          |                                                                                                                                                                                                            |                                                                       | Total assets                                          |         |         | 188,461 |        |         |         | 144,754 | 
|                                                                          |                                                                                                                                                                                                            |                                                                       |                                                       |         |         |         |        |        
|Current liabilities:                                                      |                                                                                                                                                                                                            |                                                                       |                                                       |         |         |         |        |        
|                                                                          | Current portion of senior note payable                                                                                                                                                                     |                                                                       | $                                                     |        |         |         | $      | 5,000   |        
|                                                                          | Current portion, Term B Senior Credit Facility
    note payable                                                                                                                                            |                                                                       |                                                       | 468     |         |         |        |        |        
|                                                                          | Acquisition obligations                                                                                                                                                                                    |                                                                       |                                                       | 3,059   |         |         |        | 2,928   |        
|                                                                          | Trade accounts payable and accrued liabilities                                                                                                                                                             |                                                                       |                                                       | 23,420  |         |         |        | 9,661   |        
|                                                                          | Accrued payroll and related liabilities                                                                                                                                                                    |                                                                       |                                                       | 20,689  |         |         |        | 14,221  |        
|                                                                          | Advance payments                                                                                                                                                                                           |                                                                       |                                                       |        |         |         |        | 5       |        
|                                                                          | ESOP liabilities                                                                                                                                                                                           |                                                                       |                                                       | 136     |         |         |        | 320     |        
|                                                                          | Current portion of loss on operating lease
    obligations                                                                                                                                                 |                                                                       |                                                       | 832     |         |         |        |        |        
|                                                                          | Billings in excess of costs and estimated
    earnings on uncompleted contracts                                                                                                                            |                                                                       |                                                       | 676     |         |         |        | 409     |        
|                                                                          |                                                                                                                                                                                                            |                                                                       |                                                       |         |         |         |        |        
|                                                                          |                                                                                                                                                                                                            |                                                                       | Total current liabilities                             |         |         | 49,280  |        |         |         | 32,544  | 
|Senior note payable, excluding current portion                            |                                                                                                                                                                                                            |                                                                       |                                                      |         |         |         | 22,903 |        
|Term B Senior Credit Facility note payable,
    excluding current portion |                                                                                                                                                                                                            |                                                                       | 46,367                                                |         |         |         |       |        
|Mezzanine note payable                                                    |                                                                                                                                                                                                            |                                                                       | 17,503                                                |         |         |         | 17,636 |        
|Subordinated note payable                                                 |                                                                                                                                                                                                            |                                                                       | 34,247                                                |         |         |         | 33,437 |        
|Agreements with officers                                                  |                                                                                                                                                                                                            |                                                                       | 1,514                                                 |         |         |         | 743    |        
|Deferred compensation liability                                           |                                                                                                                                                                                                            |                                                                       | 1,735                                                 |         |         |         | 1,164  |        
|Accrued postretirement benefit obligations                                |                                                                                                                                                                                                            |                                                                       | 3,398                                                 |         |         |         | 3,319  |        
|Deferred rent and loss on operating lease
    obligations                 |                                                                                                                                                                                                            |                                                                       | 3,892                                                 |         |         |         | 346    |        
|Redeemable common stock warrants                                          |                                                                                                                                                                                                            |                                                                       | 20,777                                                |         |         |         | 14,762 |        
|                                                                          |                                                                                                                                                                                                            |                                                                       |                                                       |         |         |         |        |        
|                                                                          |                                                                                                                                                                                                            |                                                                       | Total liabilities                                     |         |         | 178,713 |        |         |         | 126,854 | 
|Shareholders equity, subject to redemption:                              |                                                                                                                                                                                                            |                                                                       |                                                       |         |         |         |        |        
|                                                                          | Common stock (subject to redemption),
    $0.01 par value, 15,000,000 shares authorized,
    3,376,197 shares and 2,973,813 shares issued and
    outstanding at September 30, 2004 and 2003, respectively |                                                                       |                                                       | 34      |         |         |        | 29      |        
|                                                                          | Additional paid-in capital                                                                                                                                                                                 |                                                                       |                                                       | 37,532  |         |         |        | 30,578  |        
|                                                                          | Accumulated deficit                                                                                                                                                                                        |                                                                       |                                                       | (27,818 | )       |         |        | (12,707 | )      
|                                                                          |                                                                                                                                                                                                            |                                                                       |                                                       |         |         |         |        |        
|                                                                          |                                                                                                                                                                                                            |                                                                       | Total shareholders equity, subject to
    redemption |         |         | 9,748   |        |         |         | 17,900  | 
|                                                                          |                                                                                                                                                                                                            |                                                                       |                                                       |         |         |         |        |        
|                                                                          |                                                                                                                                                                                                            | Total liabilities and shareholders equity,
    subject to redemption |                                                       | $       | 188,461 |         |        | $       | 144,754 |        
|                                                                          |                                                                                                                                                                                                            |                                                                       |                                                       |         |         |         |        |        

See accompanying notes to consolidated financial
statements.

56



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                 |                                   |                                 |           |                     |         |                    |           |         |         |   |    |    |     |  
|---------------------------------------------------------------- | --------------------------------- | ------------------------------- | --------- | ------------------- | ------- | ------------------ | --------- | ------- | ------- | - | -- | -- | --- | -
|                                                                 |                                   |                                 |           | Period from        
|                                                                 |                                   | Year Ended September 30,        |           | October 10, 2001   
|                                                                 |                                   |                                 |           | (Inception) through
|                                                                 |                                   | 2004                            |           | 2003                |         | September 30, 2002
|                                                                 |                                   |                                 |           |                     |         |                   
|                                                                 |                                   |                                
|                                                                 |                                   | (In thousands, except share and
|                                                                 |                                   | per share information)         
|Contract revenue                                                 |                                   | $                               | 269,940   |                     |         | $                  | 165,917   |         |         | $ |   |   
|Direct contract expense                                          |                                   |                                 | 196,388   |                     |         |                    | 120,559   |         |         |   |   |   
|                                                                 |                                   |                                 |           |                     |         |                    |           |         |         |   |    |   
|                                                                 | Gross profit                      |                                 |           | 73,552              |         |                    |           | 45,358  |         |   |    |   |    
|                                                                 |                                   |                                 |           |                     |         |                    |           |         |         |   |    |   
|Operating expenses:                                              |                                   |                                 |           |                     |         |                    |           |         |         |   |    |   
|                                                                 | Indirect contract expense         |                                 |           | 17,647              |         |                    |           | 8,685   |         |   |    |   |    
|                                                                 | Research and development          |                                 |           | 399                 |         |                    |           | 177     |         |   |    |   |    
|                                                                 | General and administrative        |                                 |           | 28,117              |         |                    |           | 19,909  |         |   |    | 91 |    
|                                                                 | Non-recurring transaction expense |                                 |           |                    |         |                    |           | 726     |         |   |    |   |    
|                                                                 | Rental and occupancy expense      |                                 |           | 10,990              |         |                    |           | 6,892   |         |   |    |   |    
|                                                                 | Depreciation and amortization     |                                 |           | 13,447              |         |                    |           | 9,553   |         |   |    |   |    
|                                                                 | Stock-based compensation(1)       |                                 |           | 2,513               |         |                    |           | 856     |         |   |    |   |    
|                                                                 | Bad debt expense (recovery)       |                                 |           | 590                 |         |                    |           | (525    | )       |   |    |   |    
|                                                                 |                                   |                                 |           |                     |         |                    |           |         |         |   |    |   
|Total operating expenses                                         |                                   |                                 | 73,703    |                     |         |                    | 46,273    |         |         |   | 91 |   
|                                                                 |                                   |                                 |           |                     |         |                    |           |         |         |   |    |   
|                                                                 |                                   | Operating loss                  |           |                     | (151    | )                  |           |         | (915    | ) |    |    | (91 | )
|Other income (expense):                                          |                                   |                                 |           |                     |         |                    |           |         |         |   |    |   
|                                                                 | Interest income                   |                                 |           | 27                  |         |                    |           | 21      |         |   |    |   |    
|                                                                 | Interest expense                  |                                 |           | (16,835             | )       |                    |           | (11,724 | )       |   |    |   |    
|                                                                 | Other                             |                                 |           | 1,865               |         |                    |           | 2       |         |   |    |   |    
|                                                                 |                                   |                                 |           |                     |         |                    |           |         |         |   |    |   
|                                                                 |                                   | Loss before income taxes        |           |                     | (15,094 | )                  |           |         | (12,616 | ) |    |    | (91 | )
|                                                                 |                                   | Income tax expense              |           |                     | (17     | )                  |           |         |        |   |    |    |    |  
|                                                                 |                                   |                                 |           |                     |         |                    |           |         |         |   |    |   
|                                                                 |                                   | Net loss                        |           | $                   | (15,111 | )                  |           | $       | (12,616 | ) |    | $  | (91 | )
|                                                                 |                                   |                                 |           |                     |         |                    |           |         |         |   |    |   
|Basic and diluted loss per share                                 |                                   | $                               | (4.91     | )                   |         | $                  | (6.05     | )       |         |   |    |   
|                                                                 |                                   |                                 |           |                     |         |                    |           |         |         |   |    |   
|Basic and diluted weighted average common shares
    outstanding |                                   |                                 | 3,074,709 |                     |         |                    | 2,085,274 |         |         |   |    |   
|                                                                 |                                   |                                 |           |                     |         |                    |           |         |         |   |    |   



---



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

See accompanying notes to consolidated financial
statements.

57



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY (DEFICIT)

|                                                     |  |                                          |           |        |  |            |    |          |  |          |        |             |  |       |         |   |  |   |        |   |  |   |         |   |  |   |         |  
|---------------------------------------------------- |  | ---------------------------------------- | --------- | ------ |  | ---------- | -- | -------- |  | -------- | ------ | ----------- |  | ----- | ------- | - |  | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                                     |  |                                          |           |        |  | Additional |    |          |  |          |        |             |  |      
|                                                     |  | Common                                   |           | Common |  | Paid-In    |    | Treasury |  | Treasury |        | Accumulated |  |      
|                                                     |  | Shares                                   |           | Stock  |  | Capital    |    | Shares   |  | Stock    |        | Deficit     |  | Total
|                                                     |  |                                          |           |        |  |            |    |          |  |          |        |             |  |      
|                                                     |  |                                         
|                                                     |  | (In thousands, except share information)
|Balances at October 10, 2001 (inception)             |  |                                          |          |        |  | $          |   |          |  | $        |       |             |  |       |        |   |  | $ |       |   |  | $ |        |   |  | $ |        |  
|Issuance of common stock to KSOP Trust               |  |                                          | 100       |        |  |            |   |          |  |          | 1      |             |  |       |         |   |  |   |        |   |  |   |        |   |  |   | 1       |  
|Net loss for the period ended September 30,
    2002 |  |                                          |          |        |  |            |   |          |  |          |       |             |  |       |        |   |  |   |       |   |  |   | (91     | ) |  |   | (91     | )
|                                                     |  |                                          |           |        |  |            |    |          |  |          |        |             |  |       |         |   |  |   |        |   |  |   |         |   |  |   |         |  
|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 period 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   |  
|                                                     |  |                                          |           |        |  |            |    |          |  |          |        |             |  |       |         |   |  |   |        |   |  |   |         |   |  |   |         |  

See accompanying notes to consolidated financial
statements.

58



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                              |                                                               |                          |         |                     |   |                    |         |         |   |   |    |     |  
|--------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | ------------------------ | ------- | ------------------- | - | ------------------ | ------- | ------- | - | - | -- | --- | -
|                                                                                              |                                                               |                          |         | Period from        
|                                                                                              |                                                               | Year Ended September 30, |         | October 10, 2001   
|                                                                                              |                                                               |                          |         | (Inception) through
|                                                                                              |                                                               | 2004                     |         | 2003                |   | September 30, 2002
|                                                                                              |                                                               |                          |         |                     |   |                   
|                                                                                              |                                                               |                         
|                                                                                              |                                                               | (In thousands)          
|Cash flows from operating activities:                                                         |                                                               |                          |         |                     |   |                    |         |         |   |   |    |    
|                                                                                              | Net loss                                                      |                          | $       | (15,111             | ) |                    | $       | (12,616 | ) |   | $  | (91 | )
|Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities: |                                                               |                          |         |                     |   |                    |         |         |   |   |    |    
|                                                                                              | Depreciation and amortization                                 |                          |         | 13,447              |   |                    |         | 9,553   |   |   |    |    |  
|                                                                                              | Accretion of debt to face value                               |                          |         | 1,449               |   |                    |         | 1,024   |   |   |    |    |  
|                                                                                              | Amortization of debt issuance costs                           |                          |         | 1,462               |   |                    |         | 353     |   |   |    |    |  
|                                                                                              | Decrease in value of interest rate cap agreement              |                          |         | 204                 |   |                    |         | 148     |   |   |    |    |  
|                                                                                              | Change in fair value of redeemable common stock
    warrants  |                          |         | 6,015               |   |                    |         | 4,453   |   |   |    |    |  
|                                                                                              | Stock-based compensation                                      |                          |         | 2,513               |   |                    |         | 856     |   |   |    |     |  
|                                                                                              | Loss on disposal of assets                                    |                          |         |                    |   |                    |         | 7       |   |   |    |    |  
|                                                                                              | Gain on investments                                           |                          |         | (2,223              | ) |                    |         | (113    | ) |   |    |    |  
|Changes in assets and liabilities, net of effect
    of acquisitions:                         |                                                               |                          |         |                     |   |                    |         |         |   |   |    |    
|                                                                                              | Accounts receivable, net                                      |                          |         | (14,160             | ) |                    |         | 4,571   |   |   |    |    |  
|                                                                                              | Other assets                                                  |                          |         | (4,215              | ) |                    |         | 793     |   |   |    | 86  |  
|                                                                                              | Sale of marketable securities                                 |                          |         | 405                 |   |                    |         |        |   |   |    |    |  
|                                                                                              | Trade accounts payable and accruals                           |                          |         | 13,808              |   |                    |         | 5,664   |   |   |    |    |  
|                                                                                              | Other liabilities                                             |                          |         | 2,081               |   |                    |         | (429    | ) |   |    |    |  
|                                                                                              |                                                               |                          |         |                     |   |                    |         |         |   |   |    |    
|Net cash provided by (used in) operating
    activities                                       |                                                               |                          | 5,675   |                     |   |                    | 14,264  |         |   |   | (5 | )  
|Cash flows from investing activities:                                                         |                                                               |                          |         |                     |   |                    |         |         |   |   |    |    
|                                                                                              | Cash paid for acquisitions, net of cash acquired              |                          |         | (21,678             | ) |                    |         | (60,099 | ) |   |    |    |  
|                                                                                              | Capital expenditures                                          |                          |         | (3,678              | ) |                    |         | (1,329  | ) |   |    |    |  
|                                                                                              | Proceeds from sale of investment securities                   |                          |         | 3,064               |   |                    |         |        |   |   |    |    |  
|                                                                                              | Purchase of investment securities                             |                          |         | (1,333              | ) |                    |         |        |   |   |    |    |  
|                                                                                              |                                                               |                          |         |                     |   |                    |         |         |   |   |    |    
|Net cash used in investing activities                                                         |                                                               |                          | (23,625 | )                   |   |                    | (61,428 | )       |   |   |   |    
|Cash flows from financing activities:                                                         |                                                               |                          |         |                     |   |                    |         |         |   |   |    |    
|                                                                                              | Proceeds from Term B Senior Credit Facility note
    payable  |                          |         | 50,000              |   |                    |         |        |   |   |    |     |  
|                                                                                              | Proceeds from senior note payable                             |                          |         |                    |   |                    |         | 35,000  |   |   |    | 10  |  
|                                                                                              | Payment of debt issuance costs                                |                          |         | (3,280              | ) |                    |         | (1,700  | ) |   |    |    |  
|                                                                                              | Repayment of senior note payable                              |                          |         | (29,250             | ) |                    |         | (5,750  | ) |   |    |    |  
|                                                                                              | Repayment of mezzanine note payable                           |                          |         | (750                | ) |                    |         |        |   |   |    |     |  
|                                                                                              | Proceeds from agreement with officer                          |                          |         | 750                 |   |                    |         |        |   |   |    | 1   |  
|                                                                                              | Borrowings (repayments) under revolving
    credit facility   |                          |         | 24,000              |   |                    |         | (6,185  | ) |   |    |    |  
|                                                                                              | Repayment of LaSalle Bank 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            |                          |         | (1,562              | ) |                    |         | (88     | ) |   |    |    |  
|                                                                                              | Cash received from issuance of common stock to
    ESOP Trust |                          |         | 6,959               |   |                    |         | 26,620  |   |   |    |    |  
|                                                                                              |                                                               |                          |         |                     |   |                    |         |         |   |   |    |    
|Net cash provided by financing activities                                                     |                                                               |                          | 22,173  |                     |   |                    | 47,652  |         |   |   | 11 |    
|Net increase in cash                                                                          |                                                               |                          | 4,223   |                     |   |                    | 488     |         |   |   | 6  |    
|Cash at beginning of period                                                                   |                                                               |                          | 494     |                     |   |                    | 6       |         |   |   |   |    
|                                                                                              |                                                               |                          |         |                     |   |                    |         |         |   |   |    |    
|Cash at end of period                                                                         |                                                               | $                        | 4,717   |                     |   | $                  | 494     |         |   | $ | 6  |    
|                                                                                              |                                                               |                          |         |                     |   |                    |         |         |   |   |    |    

59



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION


CONSOLIDATED STATEMENTS OF CASH
FLOWS  (Continued)

|                                                  |                                                                                                           |                          |   |                     |   |                    |   |        |   |  |   |   | 
|------------------------------------------------- | --------------------------------------------------------------------------------------------------------- | ------------------------ | - | ------------------- | - | ------------------ | - | ------ | - |  | - | - | 
|                                                  |                                                                                                           |                          |   | Period from        
|                                                  |                                                                                                           | Year Ended September 30, |   | October 10, 2001   
|                                                  |                                                                                                           |                          |   | (Inception) through
|                                                  |                                                                                                           | 2004                     |   | 2003                |   | September 30, 2002
|                                                  |                                                                                                           |                          |   |                     |   |                   
|                                                  |                                                                                                           |                         
|                                                  |                                                                                                           | (In thousands)          
|Supplemental disclosure of cash flow information: |                                                                                                           |                          |   |                     |   |                    |   |        |   |  |   |  
|                                                  | Cash paid for interest                                                                                    |                          | $ | 7,563               |   |                    | $ | 3,774  |   |  | $ |  | 
|                                                  | Cash paid (received) for taxes                                                                            |                          |   | (29                 | ) |                    |   | (105   | ) |  |   |   | 
|Non-cash investing and financing activities:      |                                                                                                           |                          |   |                     |   |                    |   |        |   |  |   |  
|                                                  | Mezzanine note and warrants issued in connection
    with acquisition of selected operations of IITRI     |                          |   |                    |   |                    |   | 20,343 |   |  |   |  | 
|                                                  | Subordinated note and warrants issued in
    connection with acquisition of selected operations of IITRI  |                          |   |                    |   |                    |   | 39,900 |   |  |   |  | 
|                                                  | Bank debt assumed in connection with the
    acquisition of selected operations of IITRI                  |                          |   |                    |   |                    |   | 6,188  |   |  |   |  | 
|                                                  | IITRI transaction costs assumed in connection
    with the 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                  |                          |   | 4,330               |   |                    |   | 2,828  |   |  |   |  | 
|                                                  |                                                                                                           |                          |   |                     |   |                    |   |        |   |  |   |  

See accompanying notes to consolidated financial
statements.

60



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



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

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

Alion, a for-profit S Corporation, was
formed in October 2001 for the purpose of purchasing
substantially all of the assets and certain of the liabilities
of IIT Research Institute (IITRI), a not-for-profit
membership corporation affiliated with and controlled by the
Illinois Institute of Technology. Prior to the acquisition of
substantially all of the assets and liabilities of IITRI
(the Transaction), the Companys activities had been
organizational in nature. On December 20, 2002, Alion
acquired substantially all of the assets and liabilities
of IITRI (Business), excluding the assets and liabilities
of IITRIs Life Sciences Operation, for aggregate
total proceeds of $127.3 million consisting of (in
thousands):



| |   |                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $58,571 cash, consisting of $56,721 paid
    to IITRI and $1,517 paid for certain transaction expenses
    on behalf of IITRI, and $333 paid for other transaction
    expenses;                                                                                                                          
|
| |  | $39,900 in seller notes to IITRI, with
    detachable warrants representing approximately 26% of the
    outstanding common stock of Alion at the closing date (on a
    fully diluted basis). The seller notes bear interest at an
    effective interest rate of 6.71% per annum. See
    notes 8 and 9;
|
| |  | $20,343 in mezzanine notes to IITRI, with
    detachable warrants representing 12% of the outstanding common
    stock of Alion at the closing date (on a fully diluted basis).
    The mezzanine notes bear interest at 12% per annum. See
    notes 8 and 9;                                            
|
| |  | $2,300 in transaction costs less the $1,517
    referenced above;                                                                                                                                                                                                                                         
|
| |  | $6,188 in assumed IITRI debt due to its
    bank; and                                                                                                                                                                                                                                                     
|
| |  | $1,520 in additional amounts due to IITRI
    for purchase price adjustments related to the Life Sciences
    Operation.                                                                                                                                                                                  

The acquisition was accounted for using the
purchase method. The purchase price has been allocated to the
acquired assets and assumed liabilities based on their estimated
fair values at the date of acquisition. As a result of the
Transaction, the Company recorded goodwill of approximately
$63.6 million, which is subject to an annual impairment
review, as discussed below. In addition, the Company recorded
intangible assets of approximately $30.6 million, comprised
of purchased contracts. The intangible assets have an estimated
useful life of three years and is amortized using the
straight-line method.

The total purchase consideration of approximately
$127.3 million was allocated to the fair value of the net
assets acquired as follows (in thousands):

|                         |  |   |         |  
|------------------------ |  | - | ------- | -
|Cash and restricted cash |  | $ | 1,187   |  
|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 |  
|                         |  |   |         |  

61



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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



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

The consolidated financial statements are
prepared on the accrual basis of accounting and include the
accounts of Alion and its wholly-owned subsidiaries: Human
Factors Application, Inc. (HFA), acquired at the time of the
Transaction, and Innovative Technology Solutions Corporation
(ITSC) and Identix Public Sector (IPS), which were acquired
during the year ended September 30, 2004. All significant
intercompany accounts have been eliminated in consolidation.



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

The Companys fiscal year ends on
September 30. Beginning with the fiscal year ended
September 30, 2004, the Company began operating based on a
three-month quarter, four-quarter fiscal year. For the fiscal
year ended September 30, 2003, the Company operated on a
thirteen-period fiscal year that consisted of three, four-week
periods in its first interim period; three, four-week periods in
its second interim period; four, four-week periods in its third
interim period; and the balance of the fiscal year of
approximately three, four-week periods in its fourth interim
period. Accordingly, any comparisons or references made between
or with respect to interim or quarterly periods, will need to
consider the differing lengths of time.



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

The preparation of financial statements in
conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of
financial statements and the reported amounts of operating
results during the reported period. Actual results are likely to
differ from those estimates, but the Companys management
does not believe such differences will materially affect the
Companys financial position, results of operations, or
cash flows.



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

Where appropriate, certain items relating to
prior years have been reclassified to conform to the current
year presentation.



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

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

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

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

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

62



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Contracts with agencies of the federal government
are subject to periodic funding by the contracting agency
concerned. Funding for a contract may be provided in full at
inception of the contract or ratably throughout the term of the
contract as the services are provided. If funding is not
assessed as probable, revenue recognition is deferred until
realization is probable.

Contract costs on federal government contracts,
including indirect costs, are subject to audit by the federal
government and adjustment pursuant to negotiations between the
Company and government representatives. All of the
Companys federal contract indirect costs have been audited
and agreed upon through fiscal year 2001. Contract revenues on
federal government contracts have been recorded in amounts that
are expected to be realized upon final settlement.

The Company recognizes revenue on unpriced change
orders as expenses are incurred only to the extent that the
Company expects it is probable that such costs will be
recovered. The Company recognizes revenue in excess of costs on
unpriced change orders only when management can also reliably
estimate the amount of excess and experience provides a
sufficient basis for recognition. The Company recognizes revenue
on claims as expenses are incurred only to the extent that the
Company expects it is probable that such costs will be recovered
and the amount of recovery can be reliably estimated.



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

The Company is an S corporation under the
provisions of the Internal Revenue Code. For federal and certain
state income tax purposes, the Company is not subject to tax on
its income. Such income is allocated to the Companys
shareholder, Alion Science and Technology Corporations
Employee Stock Ownership Savings and Investment Plan. The
Company may be subject to state income taxes in those states
that do not recognize S corporations. Additionally, the
Company may be subject to additional types of taxes including
franchise and business taxes. As of September 30, 2004, the
Companys tax basis in its assets exceeds its book basis by
approximately $29.0 million.

The Companys operating subsidiaries, HFA
and ITSC, are qualified subchapter S entities that are not
treated as separate corporations for federal income tax purposes.



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

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



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

Accounts receivable include billed accounts
receivable, amounts currently billable and costs and estimated
earnings in excess of billings on uncompleted contracts. Costs
and estimated earnings in excess of billings on uncompleted
contracts represent accumulated project expenses and fees which
have not been billed or are not currently billable as of the
date of the consolidated balance sheet. These amounts are stated
at estimated realizable value and aggregated $14.6 million
and $8.7 million at September 30, 2004 and 2003,
respectively. Costs and estimated earnings in excess of billings
on uncompleted contracts at September 30, 2004 include
$2.0 million related to costs incurred on projects for
which the Company has been requested by the customer to begin
work under a new contract or extend work under an existing
contract, but for which formal contracts or contract
modifications have not been executed. The allowance for doubtful
accounts is the Companys best estimate of the amount of
probable losses in the Companys existing billed and
unbilled accounts receivable. The Company determines the
allowance using specific identification and historical write-off
experience based on the age of the population.

Billings in excess of costs and estimated
earnings and advance collections from customers represent
amounts received from or billed to commercial customers in
excess of project revenue recognized to date.

63



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

The Company has adopted Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets, which requires, among other
things, the discontinuance of goodwill amortization. Under
SFAS 142, goodwill is to be reviewed at least annually for
impairment or more frequently if events or changes in
circumstances indicates the asset might be impaired; the Company
has elected to perform this review annually at the end of each
fiscal year. An impairment loss would be recognized if the
carrying amount of goodwill exceeds its fair value. The Company
completed the fiscal 2004 annual goodwill impairment analysis in
the fourth quarter of fiscal 2004. Based on this analysis, the
Company concluded that no goodwill impairment exists as of
September 30, 2004.



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

Leasehold improvements, software and equipment
are recorded at cost. Expenditures for maintenance and repairs
are charged to current operations. Software and equipment are
depreciated over their estimated useful lives (2 to
15 years for the various classes of software and equipment)
generally using the straight-line method. Leasehold improvements
are amortized on the straight-line method over the shorter of
the assets estimated useful life or the life of the lease.
Upon sale or retirement of an asset, costs and related
accumulated depreciation are deducted from the accounts, and the
gain or loss is recognized in the consolidated statements of
operations.



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

The following methods and assumptions were used
to estimate the fair value of each class of financial
instruments for which it is practicable to estimate fair value.
It is impracticable for the Company to estimate the fair value
of its subordinated debt because the only market for this
financial instrument consists of principal to principal
transactions.



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

The carrying amount approximates fair value
because of the short maturity of those instruments.



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

The fair values of these investments are
estimated based on quoted or market prices for these or similar
instruments.



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

The carrying amount of the Companys senior
debt approximates fair value which is estimated on current rates
offered to the Company for debt of the same remaining maturities.



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

The fair value of the Companys financial
instruments is estimated based on current rates offered to the
Company for contracts with similar terms and maturities.



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

The Company uses an option pricing model to
estimate the fair value of its redeemable common stock warrants.

64



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

On December 19, 2001, the Company adopted
the Alion Science and Technology Corporation Employee Ownership,
Savings and Investment Plan (the Plan) and the Alion
Science and Technology Corporation Employee Ownership, Savings
and Investment Trust (the Trust). The Plan, a tax
qualified retirement plan, includes an ESOP component and a
non-ESOP component. In March 2003, the Company filed an
application for a determination letter from the Internal Revenue
Service that the Plan and Trust qualify under
Sections 401(a) and 501(a) of the Internal Revenue Code of
1986, as amended. The Company believes that the Plan and Trust
have been designed and are currently being operated in
compliance with the applicable requirements of the IRC.



|    |                                     
|--- | ------------------------------------
|(4) | Pensions and Postretirement Benefits

The Company sponsors a medical benefits plan
providing certain medical, dental, and vision coverage to
eligible employees and former employees. The Company has a
self-insured funding policy with a stop-loss limit under an
insurance agreement.

The Company also provides postretirement medical
benefits for employees who meet certain age and service
requirements. Retiring employees may become eligible for those
benefits at age 55 if they have 20 years of service,
or at age 60 with 10 years of service. The plan
provides benefits until age 65 and requires employees to
pay one-quarter of their health care premiums. A small, closed
group of employees is eligible for coverage after age 65.
These retirees contribute a fixed portion of the health care
premium. The estimated contribution to premiums from retirees is
an aggregate of $125,000.

There were no plan assets as of
September 30, 2004 and 2003. The Company uses an
October 1 measurement date.

Following is a reconciliation of the plans
accumulated postretirement benefit obligation (in thousands):

|                                                                      |  |      |       |      |  |   |       |  
|--------------------------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|                                                                      |  | 2004 |       | 2003
|                                                                      |  |      |       |     
|Accumulated postretirement benefit obligation as
    of September 30: |  |      |       |      |  |   |       |  
|Retirees                                                              |  | $    | 1,118 |      |  | $ | 849   |  
|Fully eligible active plan participants                               |  |      | 812   |      |  |   | 717   |  
|Other active plan participants                                        |  |      | 1,672 |      |  |   | 1,372 |  
|                                                                      |  |      |       |      |  |   |       |  
|                                                                      |  | $    | 3,602 |      |  | $ | 2,938 |  
|                                                                      |  |      |       |      |  |   |       |  
|Reconciliation of beginning and ending benefit
    obligation:        |  |      |       |      |  |   |       |  
|Benefit obligation at beginning of period                             |  | $    | 2,938 |      |  | $ | 3,113 |  
|Service cost                                                          |  |      | 119   |      |  |   | 74    |  
|Interest cost                                                         |  |      | 178   |      |  |   | 156   |  
|Actuarial (gain) loss                                                 |  |      | 579   |      |  |   | (381  | )
|Benefits paid                                                         |  |      | (212  | )    |  |   | (24   | )
|                                                                      |  |      |       |      |  |   |       |  
|Benefit obligation at September 30                                    |  | $    | 3,602 |      |  | $ | 2,938 |  
|                                                                      |  |      |       |      |  |   |       |  

Following is a reconciliation of the funded
status of the plan (in thousands):

|                                                                               |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------ |  | - | ------ | - |  | - | ------ | -
|Funded status of the plan:                                                     |  |   |        |   |  |   |        |  
|Obligation at September 30                                                     |  | $ | (3,602 | ) |  | $ | (2,938 | )
|Unrecognized net loss (gain)                                                   |  |   | 204    |   |  |   | (381   | )
|                                                                               |  |   |        |   |  |   |        |  
|Accrued postretirement benefits included in the
    consolidated balance sheet |  | $ | (3,398 | ) |  | $ | (3,319 | )
|                                                                               |  |   |        |   |  |   |        |  

65



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The components of net periodic postretirement
benefit cost for the years ended September 30, 2004 and
2003 are as follows (in thousands):

|                                         |  |      |     |      |  |   |     | 
|---------------------------------------- |  | ---- | --- | ---- |  | - | --- | 
|                                         |  | 2004 |     | 2003
|                                         |  |      |     |     
|Service cost                             |  | $    | 119 |      |  | $ | 74  | 
|Interest cost                            |  |      | 178 |      |  |   | 156 | 
|Amortization of net (gain) loss          |  |      | (6  | )    |  |   |    | 
|                                         |  |      |     |      |  |   |     | 
|Net periodic postretirement benefit cost |  | $    | 291 |      |  | $ | 230 | 
|                                         |  |      |     |      |  |   |     | 

The weighted-average assumptions in the following
table represent the rates used to develop the actuarial present
value of the projected benefit obligation for the year listed
and also the net periodic benefit costs.

|                                                                                    |  |      |      |      |  |  |      |  
|----------------------------------------------------------------------------------- |  | ---- | ---- | ---- |  |  | ---- | -
|                                                                                    |  | 2004 |      | 2003
|                                                                                    |  |      |      |     
|Accumulated post retirement benefit obligation at
    October 1                     |  |      | 6.00 | %    |  |  | 6.25 | %
|Service and interest cost portions of net
    periodic postretirement benefit costs |  |      | 6.25 | %    |  |  | 6.75 | %

The following table displays the assumed health
care trends used to determine the accumulated postretirement
benefit obligation:

|                                                                                   |  |      |      |      |  |  |      |  
|---------------------------------------------------------------------------------- |  | ---- | ---- | ---- |  |  | ---- | -
|                                                                                   |  | 2004 |      | 2003
|                                                                                   |  |      |      |     
|Health care cost trend rate assumed for next year                                  |  |      | 10.5 | %    |  |  | 11.0 | %
|Rate to which the cost trend rate is assumed to
    decline (ultimate trend rates) |  |      | 5.5  | %    |  |  | 5.5  | %
|Year the rate reaches the ultimate trend rate                                      |  |      | 2014 |      |  |  | 2014 |  

A one-percentage-point change in assumed health
care cost trend rates would have the following effect (in
thousands):

|                                              |  |                 |     |                 |  |   |      |  
|--------------------------------------------- |  | --------------- | --- | --------------- |  | - | ---- | -
|                                              |  | One-Percentage- |     | One-Percentage-
|                                              |  | Point Increase  |     | Point Decrease 
|                                              |  |                 |     |                
|Total interest and service cost               |  | $               | 37  |                 |  | $ | (34  | )
|Accumulated postretirement benefit obligation |  |                 | 270 |                 |  |   | (245 | )

Estimated future benefit payments -fiscal years
ending September 30:

|            |  |   |       | 
|----------- |  | - | ----- | 
|2005        |  | $ | 232   | 
|2006        |  | $ | 232   | 
|2007        |  | $ | 228   | 
|2008        |  | $ | 245   | 
|2009        |  | $ | 277   | 
|2010 - 2014 |  | $ | 1,705 | 

In December 2003, the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act) was signed
into law. The Act introduced a prescription drug benefit under
Medicare Part D and a federal subsidy to sponsors of retirement
health care plans that provide a benefit that is at least
actuarially equivalent to Medicare Part D. The Company has
elected to defer the recognition of the effect, if any, of the
Act until such time when the authoritative guidance is issued.
Any measures of the accumulated postretirement benefit
obligation or net periodic postretirement benefit cost in the
Companys financial statements do not reflect the effect of
the Act. The Company has a small, closed group of retirees
covered for medical after age 65, thus the effect of the
Act is not expected to be material.

66



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

Basic and diluted loss per share is computed by
dividing net loss by the weighted average number of common
shares outstanding. Prior to the sale of shares of common stock
to the ESOP, the Companys capital structure consisted of
100 shares of common stock issued and outstanding.
Accordingly, historical earnings per share information for
periods prior to the Transaction have not been presented as it
is not indicative of the Companys ongoing capital
structure.

Loss per share excludes the impact of warrants
and stock appreciation rights described herein as this impact
would be anti-dilutive for all periods presented.



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

The Companys common stock is owned by the
Alion Science and Technology Corporation Employee Ownership,
Savings and Investment Trust (the Trust). The Company provides a
put option to any participant or beneficiary who receives a
distribution of common stock which permits the participant or
beneficiary to sell such common stock to the Company during
certain periods, at the estimated fair value price per share,
which was at $19.94 per share as of September 30,
2004. Accordingly, all of the Companys equity is
classified as subject to redemption in the accompanying
consolidated balance sheets. The estimated fair value price per
share is determined based upon a valuation performed by an
independent, third-party firm. The Company may allow the Trust
to purchase shares of common stock tendered to the Company under
the put option.

Certain participants have the right to sell their
shares distributed from the participants account that were
acquired on the closing date of the Transaction at a value per
share equal to the greater of the original purchase price and
the estimated fair value price per share of the common stock.



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

As of September 30, 2004, the Company has
recorded goodwill of approximately $83.0 million, which is
subject to an annual impairment review. During the fiscal year
ended September 30, 2004, goodwill increased by
approximately $17.5 million primarily as a result of
recording additional obligations of $7.7 million related to
earn out arrangements for historical acquisitions and
approximately $9.6 million for the acquisitions described
in Note 15. For the acquisitions described in Note 15,
the Companys allocation of purchase price is preliminary
and subject to adjustment.

As of September 30, 2004, the Company has
recorded intangible assets of approximately $13.7 million
comprised primarily of contracts purchased from IITRI of
approximately $12.4 million. For the acquisitions described
in Note 15, as of September 30, 2004, the Company
recorded intangible assets of approximately $1.2 million
for purchased contracts. The intangible assets have an estimated
useful life of one to three years and are being amortized using
the straight-line method.

Amortization expense was approximately
$10.6 million for the fiscal year ended September 30,
2004. Amortization expense is estimated to be approximately
$10.7 million, $2.7 million and $0.2 million for
the fiscal years ended September 30, 2005, 2006, and 2007,
respectively.



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

To fund the Transaction described in Note 1,
the Company entered into various debt agreements (i.e., Senior
Credit Agreement, Mezzanine Note, and Subordinated Note) on
December 20, 2002. On August 2, 2004, the Company
entered into a new Term B Senior Credit Facility with Credit
Suisse First Boston (CSFB)(Term B Senior Credit Facility), and
used the proceeds to extinguish the LaSalle Bank senior term
note, the LaSalle Bank revolving credit facility and, subsequent
to September 30, 2004, the Mezzanine Note.

67



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The discussion below describes the Term B Senior
Credit Facility and the initial debt agreements used to finance
the Transaction.



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

On August 2, 2004, the Company entered into
the Term B Senior Credit Facility administered by CSFB
consisting of a $30.0 million revolving credit facility, a
Senior Secured Term B Loan for $100.0 million, and a
$50.0 million uncommitted Incremental Term Loan
accordion facility. The total principal amount that
may be borrowed under the Senior Credit Facility is
$180.0 million.

During the first four years of the term,
principal under the Senior Secured Term B Loan is payable
quarterly in an amount equal to 0.25 percent of the
principal amount then outstanding. During the fifth and final
year of the term, the Company is obligated to pay quarterly
installments of principal in an amount equal to 24 percent
of the principal amount then outstanding. All principal
obligations under the senior revolving credit facility are to be
repaid in full no later than August 2, 2009.

The Senior Secured Term B Loan and the revolving
credit facility each may bear interest at either of two floating
rates. The Company may elect that interest be payable on our
$100.0 million Senior Secured Term B Loan at an annual rate
equal to the prime rate charged by CSFB plus a maximum spread of
225 basis points or at an annual rate equal to the
Eurodollar rate plus a maximum spread of 275 basis points.
As of September 30, 2004, the applicable interest rate was
4.34%.

The Term B Senior Credit Facility requires the
Company to enter into an interest rate hedge agreement
acceptable to CSFB which fixes or caps the actual interest the
Company will pay on no less than 40 percent of our
long-term indebtedness. On August 2, 2004, the Company
elected to have the Senior Secured Term B Loan bear interest at
the Eurodollar rate, which was approximately 1.6 percent as
of August 2, 2004, plus the applicable margin, which
totaled approximately 4.35 percent (i.e., LIBOR
1.6 percent plus 2.75 percent Eurodollar spread). On
August 16, 2004, the Company entered into an interest rate
cap agreement effective September 30, 2004 with one of the
Companys senior lenders. Under this agreement, in exchange
for the Companys payment to the senior lender of
approximately $319,000, the Companys maximum effective
rate of interest payable with regard to a portion of the
outstanding principal balance of the Term B Senior Credit
Facility is not to exceed 6.64 percent (i.e., LIBOR
3.39 percent cap plus maximum 2.75 percent Eurodollar
spread) for the period September 30, 2004 through
September 29, 2005 and is not to exceed 7.41 percent
(i.e., LIBOR 4.66 percent plus 2.75 percent maximum
Eurodollar spread) for the period September 30, 2005
through September 29, 2007.

The terms of borrowings under the Incremental
Term Loan Facility will be established at the time the
borrowings, if any, are made. If the Company borrows under the
Incremental Term Loan facility and certain economic terms of the
Incremental Term Loan, including applicable yields, maturity
dates and average life to maturity, are more favorable to the
incremental term loan lenders than the comparable economic terms
under the Senior Secured Term B Loan or the revolving credit
facility, then the Term B Senior Credit Facility provides that
the applicable interest rate spread will be adjusted upward. The
upward adjustment will take place if the yield payable under the
incremental term loan exceeds the yield under the Senior Secured
Term B Loan or revolving credit facility by more than
50 basis points. The effect of this provision is that if
the Company borrows under the Incremental Term
Loan Facility, that borrowing may increase the cost of
borrowings under the Senior Secured Term B Loan and the
revolving credit facility. Under the terms of the Senior Secured
Term B Loan, the Company is subject to certain financial
covenants with respect to the Companys maximum leverage
ratio and our interest coverage ratio.

On August 2, 2004, the Company borrowed
$50.0 million under the Senior Secured Term B Loan to
retire its outstanding Senior Term Note and revolving credit
facility under the Senior Credit Agreement with LaSalle Bank.
The Company paid approximately $47.2 million in principal
(approximately $23.2 million to

68



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

redeem the senior term note and
$24.0 million on the revolving credit facility) and accrued
and unpaid interest and approximately $3.3 million in
transaction fees associated with the refinancing.

On October 1, 2004, the Company drew down
approximately $22.0 million on the Senior Secured Term B
Loan to retire its existing Mezzanine Note in the approximate
principal amount of $19.6 million, plus approximately
$1.8 million prepayment premium, and $0.6 million for
accrued and unpaid interest.

The Company is permitted to use any future
proceeds it might receive from the currently uncommitted
Incremental Term Loan Facility to finance permitted
acquisitions and to make certain put right payments required
under the Companys Mezzanine Warrant, if the put rights
are exercised, and for any other purpose permitted by
Incremental Term Loans, as defined in the Term B Senior Credit
Facility, if and when they are funded.



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

On December 20, 2002, the Company executed a
Senior Credit Agreement among LaSalle Bank National Association,
US Bank, National Cooperative Bank, Orix Financial Services,
Inc. and BB&T Bank to refinance and
replace IITRIs prior credit arrangements and to
finance, in part, the Transaction. The Senior Credit Agreement
consists of a $35.0 million Senior Term Note and a
$25.0 million revolving credit facility. All principal
obligations under the Senior Credit Agreement are to be repaid
in full no later than December 20, 2007. The Senior Credit
Agreement is secured by a first priority, perfected security
interest in all of the Companys current and future
tangible and intangible property. On December 20, 2002, the
Company paid $1.7 million to obtain this facility which was
recorded as debt discount. The Company is using the effective
interest method to accrete the value of long-term debt to its
face value. For the fiscal year ended September 30, 2004,
the Company recognized approximately $1.3 million of
interest expense related to accretion of this discount.

Under the Senior Credit Agreement, balances drawn
on the revolving credit facility bore interest at the LaSalle
Bank prime rate plus 200 basis points. As a result of the
aforementioned refinancing, which occurred on August 2,
2004, the revolving credit facility and senior term loan were
extinguished. As of August 2, 2004, the Company had
approximately $24.0 million borrowed under the revolving
credit facility at an interest rate equal to approximately 6.25%
(LaSalle Bank prime rate plus 200 basis points).

Prior to the aforementioned refinancing, which
occurred on August 2, 2004, the Company had approximately
$47.2 million in borrowings under the Senior Credit
Agreement, which bore interest at either of two floating rates:
a per year rate equal to the Eurodollar rate plus 350 basis
points, or LaSalles prime rate (base rate) plus
200 basis points.

Effective February 14, 2003, the Company
exercised its right and elected that the Senior Term Note bear
interest at a Eurodollar rate. This election did not affect the
interest rate applicable to amounts borrowed under the revolving
line of credit. Interest under the Senior Term Note was payable
at LaSalles prime rate (base rate) plus 200 basis
points until February 14, 2003. Thereafter, the Senior Term
Note bore interest at the Eurodollar rate plus 350 basis
points.

The Company entered into an interest rate cap
agreement effective as of February 3, 2003 with one of its
senior lenders. Under this agreement, the Companys maximum
effective rate of interest payable on the first $25 million
of principal under its term note is not to exceed 6%. Any
interest the Company pays on the first $25 million of
principal in excess of 6% will be reimbursed to the Company
semiannually by the senior lender pursuant to the cap agreement.
This cap agreement expires February 3, 2007. As a result of
the aforementioned refinancing, which occurred on August 2,
2004, the current cap agreement fair value of approximately
$0.047 million was reduced to zero and $0.047 million
was recognized as additional interest expense in the fourth
quarter of fiscal year 2004.

69



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

On December 20, 2002, the Company issued
to IITRI a Mezzanine Note securities purchase agreement
(Mezzanine Note) with a face value of approximately
$20.3 million. The Mezzanine Note served as part of the
consideration for the Transaction. On July 1, 2004, the
Illinois Institute of Technology (IIT) acquired all
of IITRIs rights and interests in the Mezzanine Note
and the related Warrant Agreement. The Company is required to
pay interest on the Mezzanine Note at a rate of 12% per
year, based on a 360-day year of twelve 30-day months. Interest
is payable quarterly in cash. The Company is required to pay the
outstanding principal amount of the Mezzanine Note in a lump sum
on December 20, 2008. The Mezzanine Note is subordinate to
the Senior Term Note, but ranks senior to the Subordinated Note.

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

On March 28, 2003, an officer of the Company
purchased a portion of the Companys Mezzanine Note owned
by IITRI for $750,000, its face value (as described below
in Other Notes and Agreements).

As a result of the aforementioned refinancing,
which occurred on August 2, 2004, the Mezzanine Note in the
approximate principal amount of $19.6 million was
extinguished on October 1, 2004 as described in
Note 19.



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

On December 20, 2002, the Company issued a
seller note to IITRI under a seller note securities
purchase agreement (Subordinated Note) with a face value of
$39.9 million. The Subordinated Note served as part of the
consideration for the Transaction. On July 1, 2004, the
Illinois Institute of Technology (IIT) acquired all
of IITRIs rights and interests in the Subordinated
Note and the related Warrant Agreement. The Subordinated Note
bears interest at a rate of 6% per year through December
2008 payable quarterly by the issuance of non-interest bearing
notes (paid-in-kind notes or PIK notes) maturing at the same
time as the Subordinated Note. The issuance of the PIK notes
will have the effect of deferring the underlying cash interest
expense on the Subordinated Note, but because the PIK notes will
not themselves bear interest, they will not have the effect of
compounding any interest on these interest payment obligations.
Commencing December 2008, the Subordinated Note will bear
interest at 16% per year payable quarterly in cash through
the time of repayment in full of the Subordinated Note.
Principal on the Subordinated Note will be payable in equal
installments of $19.95 million in December 2009 and
December 2010; the PIK notes are also due in equal installments
of $7.2 million on these same dates.



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

On December 20, 2002, the Company entered
into a $0.9 million deferred compensation agreement with
Dr. Bahman Atefi, its President, CEO and Chairman, as a
condition to completing the Transaction, with payment terms
substantially equivalent to those of the Mezzanine Note, and
issued Dr. Atefi detachable warrants representing the right
to buy approximately 22,062 shares of Alion common stock at
an exercise price of $10.00 per share, with put rights
similar to those contained in the warrants accompanying the
Mezzanine Note.. On October 29, 2004, Dr. Atefi
elected to redeem the amount due under his deferred compensation
agreement with Alion. Dr. Atefi was paid approximately
$0.9 million, plus $0.2 million in accrued interest.
The warrants relating to the deferred compensation agreement
remain outstanding.

On March 28, 2003, an officer of the Company
purchased a portion of the Companys Mezzanine Note owned
by IITRI for $750,000, its face value, along with warrants
to purchase 19,327 shares of Alions common

70



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

stock at an exercise price of $10.00 per
share. On November 12, 2003, the Company purchased the
portion of the Mezzanine Note and warrants from the officer for
an aggregate purchase price of $1,034,020.

On February 11, 2004, the Company borrowed
$750,000 from an officer of the Company. In exchange, on
June 7, 2004, the Company issued a promissory note in the
principal amount of $750,000 to the officer. The promissory note
bears interest at a rate of 15% per year, payable
quarterly. The annual interest period was effective beginning
February 11, 2004. The Company is required to pay the
outstanding principal amount of the Promissory Note in a lump
sum on March 31, 2009. On December 9, 2004, the
Promissory Note was extinguished. An amount of $750,000 plus
accrued interest of $21,635 was paid to the officer.

As of September 30, 2004, for the
aforementioned debt agreements, the remaining fiscal year
principal repayments (at face amount before debt discount) are
as follows:

|                                  |  |                      |       |      |  |      |      |                 |  |      |      |      |  |       |      |  |  |   |       |  |  |   |       |  |  |   |        | 
|--------------------------------- |  | -------------------- | ----- | ---- |  | ---- | ---- | --------------- |  | ---- | ---- | ---- |  | ----- | ---- |  |  | - | ----- |  |  | - | ----- |  |  | - | ------ | 
|                                  |  |                     
|                                  |  | 6-Fiscal Year Period
|                                  |  |                     
|                                  |  | 2005                 |       | 2006 |  | 2007 |      | 2008            |  | 2009 |      | 2010 |  | Total
|                                  |  |                      |       |      |  |      |      |                 |  |      |      |      |  |      
|                                  |  |                      |       |      |  |      |      |                 |  |      |      |     
|                                  |  |                      |       |      |  |      |      | ($ In millions) |  |      |      |     
|Senior Secured Term B Loan(1)     |  | $                    | 0.50  |      |  | $    | 0.50 |                 |  | $    | 0.50 |      |  | $     | 0.50 |  |  | $ | 48.0  |  |  |   |      |  |  | $ | 50.0   | 
|Mezzanine Note(2)                 |  |                      | 19.59 |      |  |      |     |                 |  |      |     |      |  |       |     |  |  |   |      |  |  |   |      |  |  |   | 19.59  | 
|Subordinated Seller Note(3)       |  |                      |      |      |  |      |     |                 |  |      |     |      |  |       |     |  |  |   | 19.95 |  |  |   | 19.95 |  |  |   | 39.90  | 
|Subordinated Paid in Kind Note(4) |  |                      |      |      |  |      |     |                 |  |      |     |      |  |       |     |  |  |   | 7.20  |  |  |   | 7.20  |  |  |   | 14.40  | 
|Agreements with officers(5)       |  |                      | 1.61  |      |  |      |     |                 |  |      |     |      |  |       |     |  |  |   |      |  |  |   |       |  |  |   | 1.61   | 
|                                  |  |                      |       |      |  |      |      |                 |  |      |      |      |  |       |      |  |  |   |       |  |  |   |       |  |  |   |        | 
|Total principal payments          |  | $                    | 21.70 |      |  | $    | 0.50 |                 |  | $    | 0.50 |      |  | $     | 0.50 |  |  | $ | 75.15 |  |  | $ | 27.15 |  |  | $ | 125.50 | 
|                                  |  |                      |       |      |  |      |      |                 |  |      |      |      |  |       |      |  |  |   |       |  |  |   |       |  |  |   |        | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 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 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 $50.0 million includes, as of
    September 30, 2004, approximately $3.2 million of the
    remaining unamortized debt discount. Approximately
    $3.3 million of debt issuance costs were originally
    recorded as debt discount.
|   
|(2) | Repayment of $19.6 million for the face
    value of Mezzanine Note. The approximate $19.6 million
    includes, as of September 30, 2004, approximately
    $2.1 million of the remaining unamortized debt discount,
    assigned to the fair value of the detachable warrants. At date
    of issuance, December 20, 2002, approximately
    $3.1 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. The $19.6 million repayment
    is to be financed by the Senior Secured Term B Loan and is
    disclosed as a long-term liability on the consolidated balance
    sheet as of September 30, 2004.                                                                                                                                                                                                                          
|   
|(3) | Repayment of $39.9 million for the face
    value of the Subordinated Seller Note in two equal payments of
    $19.95 million in years 2009 and 2010. The
    $39.9 million includes, as of September 30, 2004,
    approximately $5.7 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.                                                                                                                                                                                                                                                                                                                                                           

71



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | During the eight-year term of the Subordinated
    Note, approximately $14.4 million of principal accretes to
    the note through the PIK. These amounts are included in the
    principal payments in fiscal years 2009 and 2010. In fiscal
    years 2009 and 2010, interest will be 16% paid quarterly in
    cash. The principal, together with the outstanding balance of
    the PIK notes will be paid in equal amounts at the end of fiscal
    years 2009 and 2010.
|   
|(5) | Repayment of $0.86 million agreement with
    officer. Repayment of $0.75 million promissory with officer.                                                                                                                                                                                                                                                                                                                                                                   



|    |                                 
|--- | --------------------------------
|(9) | Redeemable Common Stock Warrants

In connection with the issuance of the Mezzanine
Note, Subordinated Note, and the Deferred Compensation Agreement
described in Note 8, the Company issued 524,229, 1,080,437,
and 22,062, respectively, detachable redeemable common stock
warrants (the Warrants) to the holders of those instruments. As
of July 1, 2004, IITRI transferred all of its rights,
title and interest in the warrants to the Illinois Institute of
Technology. The Warrants have an exercise price of $10 per
share and are exercisable until December 20, 2008 for the
warrants associated with the Mezzanine Note and the Deferred
Compensation Agreement and until December 20, 2010 for the
warrants associated with the Subordinated Note. In addition, the
Warrants enable the holders to sell the warrants back to the
Company, at predetermined times, at the then current fair value
of the common stock less the exercise price. Accordingly, the
Warrants are classified as debt instruments in accordance with
Emerging Issues Task Force Issue No. 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own
Stock. The estimated fair value of the Warrants of
approximately $10.3 million on the date of issuance was
recorded as a discount to the face value of the notes issued and
as a liability in the accompanying consolidated balance sheet.
The estimated fair value of the Warrants was $20.8 million
as of September 30, 2004. Changes in the estimated fair
value of the Warrants are recorded as interest expense in the
accompanying consolidated statements of operations.



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

Future minimum lease payments under
non-cancelable operating leases for buildings, equipment and
automobiles at September 30, 2004 are set out below. Under
these operating leases, the Company subleased some excess
capacity to subtenants under non-cancelable operating leases.

In connection with the IPS acquisition, the
Company assumed two operating leases at above-market rates and
recorded a loss accrual of $4.4 million based on the
estimated fair value of the lease liabilities assumed which is
being amortized over the lease terms. The loss accrued was
$3.8 million at September 30, 2004. In connection with
the IPS acquisition, the Company also acquired a related
sub-lease at above-market rates. Based on the estimated fair
value of the sublease, the Company recognized an asset of
$0.6 million which is being amortized over the lease term.
The remaining asset value was $0.5 million at
September 30, 2004.

|                     |                                         |                |        |       | 
|-------------------- | --------------------------------------- | -------------- | ------ | ----- | 
|Fiscal Years Ending: |                                         | (In Thousands)
|                     |                                         |               
|2005                 |                                         | $              | 12,640 |      
|2006                 |                                         |                | 12,259 |      
|2007                 |                                         |                | 12,128 |      
|2008                 |                                         |                | 11,628 |      
|2009                 |                                         |                | 11,286 |      
|and thereafter       |                                         |                | 12,007 |      
|                     |                                         |                |        |      
|Gross lease payments |                                         |                | 71,448 |      
|                     | Less: non-cancelable subtenant receipts |                |        | 8,778 | 
|                     |                                         |                |        |      
|Net lease payments   |                                         | $              | 62,670 |      
|                     |                                         |                |        |      

72



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Rent expense under operating leases was
$10.5 million and $8.2 million for the years ended
September 30, 2004 and 2003, respectively. Sublease rental
income under operating leases was $0.8 million for the year
ended September 30, 2004.



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

Fixed assets at September 30 consisted of
the following:

|                                               |                  |                |        |        |  |   |       |        | 
|---------------------------------------------- | ---------------- | -------------- | ------ | ------ |  | - | ----- | ------ | 
|                                               |                  | 2004           |        | 2003  
|                                               |                  |                |        |       
|                                               |                  |               
|                                               |                  | (In thousands)
|Leasehold improvements                         |                  | $              | 1,992  |        |  | $ | 626   |       
|Equipment and software                         |                  |                | 13,358 |        |  |   | 9,784 |       
|                                               |                  |                |        |        |  |   |       |       
|                                               | Total cost       |                |        | 15,350 |  |   |       | 10,410 | 
|                                               |                  |                |        |        |  |   |       |       
|Less accumulated depreciation and amortization |                  |                | 4,572  |        |  |   | 1,714 |       
|                                               |                  |                |        |        |  |   |       |       
|                                               | Net fixed assets |                | $      | 10,778 |  |   | $     | 8,696  | 
|                                               |                  |                |        |        |  |   |       |       

Depreciation and leasehold amortization expense
for fixed assets was approximately $2.8 million and
$1.7 million for fiscal years ended September 30, 2004
and 2003, respectively.



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

Alions board of directors adopted a Stock
Appreciation Rights (SAR) Plan in November 2002. The SAR
plan has a term of ten years. Awards may be granted under the
plan to directors, officers, and employees. Outstanding SAR
awards cannot exceed the equivalent of 10% of the Companys
outstanding shares of common stock on a fully diluted basis. A
grantee has the right to receive payment upon exercise equal to
the difference between the appraised value of a share of Alion
common stock as of the grant date and the appraised value of a
share of Alion common stock as of the exercise date based on the
most recent valuation of the shares of common stock held by the
ESOP. Awards vest at 20% per year for employees. Awards to
members of the Companys board of directors, other than
Dr. Atefi, vest ratably over each members
then-current term of office. SARs may be exercised at any time
after grant to the extent they have vested. As of
September 30, 2004, the Company had granted 242,350
outstanding SARs which may be summarized as follows:

|                        |  |            |         |                |  |                 |        |             |  |              |         |  |  |   |             |  |  |  |         | 
|----------------------- |  | ---------- | ------- | -------------- |  | --------------- | ------ | ----------- |  | ------------ | ------- |  |  | - | ----------- |  |  |  | ------- | 
|                        |  | 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       |  |            | 68,550  |                |  |                 | 29,400 |             |  |              | 97,950  |  |  | $ | 10.00/share |  |  |  | 97,950  | 
|May 15, 2003            |  |            | 300     |                |  |                 |        |             |  |              | 300     |  |  | $ | 11.13/share |  |  |  | 98,250  | 
|June 5, 2003            |  |            | 300     |                |  |                 |        |             |  |              | 300     |  |  | $ | 11.13/share |  |  |  | 98,550  | 
|December 21, 2003       |  |            | 131,200 |                |  |                 | 12,600 |             |  |              | 143,800 |  |  | $ | 14.71/share |  |  |  | 242,350 | 

As of September 30, 2004, 12,600 SARs have
been exercised and 8,850 SARs have been forfeited.

The Company recognized approximately
$0.7 million and $0.2 million in compensation expense
associated with this plan for the years ended September 30,
2004 and 2003, respectively.



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

In February 2003, the compensation committee of
Alions board of directors approved the Companys
phantom stock plan which was subsequently adopted by the full
board of directors. Phantom stock refers to hypothetical shares
of Alion common stock. Upon vesting, recipients are entitled to
receive an amount of

73



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

money equal to the product of the number of
hypothetical shares vested and the then-current value of Alion
common stock, based on the most recent valuation of the shares
of common stock held by the ESOP.

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

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

As of September 30, 2004, the Company had
223,685 shares of phantom stock outstanding which may be
summarized as follows:

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

The Company recognized approximately
$1.5 million and $0.4 million in compensation expense
associated with this plan for the years ended September 30,
2004 and 2003, respectively.



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

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

Contract receivables from agencies of the federal
government represented approximately $68.6 million, or 96%,
of accounts receivable at September 30, 2004 and
$42.1 million, or 98%, of accounts receivable at
September 30, 2003. Contract revenues from agencies of the
federal government represented approximately 98% and 99% of
total contract revenues during the years ended
September 30, 2004 and 2003, respectively.



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



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

On December 20, 2002, Alion acquired
substantially all of the assets and certain of the liabilities
of IITRI, excluding the assets and liabilities of
IITRIs Life Sciences Operation, for approximately
$127.3 million as described in Note 1. In connection
with the acquisition, the Company formed the KSOP, which has an
ESOP component. The ESOP trustee, State Street Bank and Trust
Company, used the proceeds from the ESOP aggregating
approximately $25.8 million to acquire approximately
2.58 million shares or 100%

74



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of the Companys outstanding common stock.
The Company used the funds from the sale of common stock to the
ESOP and proceeds from the debt instruments described in
Note 8, to fund the Transaction. The acquisition was
accounted for using the purchase method. The acquisition
occurred on the last day of the Companys first interim
period in fiscal year 2003, and accordingly, the accompanying
consolidated statements of operations exclude the results of
operations of the acquired business prior to the acquisition.
The purchase price has been allocated to the acquired assets and
assumed liabilities based on their estimated fair values at the
date of acquisition. Prior to the Transaction, the
Companys activities had been organizational in nature.



| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | Acquisition of Innovative Technologies
    Solutions Corporation and Identix Public Sector,
    Inc.

On October 31, 2003, Alion acquired 100% of
the outstanding stock of Innovative Technologies Solutions
Corporation (ITSC) for $4.0 million. The transaction
is subject to an earn out provision not-to-exceed
$2.5 million. ITSC is a New Mexico corporation with
approximately 53 employees, the majority of whom are located in
New Mexico. ITSC provided nuclear safety and analysis services
to the U.S. Department of Energy (DOE) as well as to
the commercial nuclear power industry. As of September 30,
2004, the Company has recorded approximately $3.5 million
of goodwill relating to this acquisition. ITSCs results of
operations are included in Alions operations from the date
of acquisition. The pro forma impact of this acquisition was not
significant.

On February 13, 2004, Alion acquired 100% of
the outstanding stock of Identix Public Sector, Inc.
(IPS) for $8.0 million in cash. Founded in 1980, IPS
is based in Fairfax, Virginia and provides program and
acquisition management, integrated logistics support, and
foreign military support primarily to U.S. Navy customers.
IPS, formerly ANADAC, was a wholly-owned subsidiary of Identix
Incorporated.

At closing, the Company reimbursed IPSs
parent company $0.9 million for intercompany payables.
Subsequent payments totaling approximately $1.7 million for
intercompany payables were made in the three successive months
following the closing. Per the agreement, a contingent payment
of $0.5 million was placed in escrow and may be due from
the Company in the future. The payment is contingent on the
Company having the opportunity to compete or bid for services on
certain government solicitations. The initial purchase price
allocation is as follows:

|                                    |       |                |         |       | 
|----------------------------------- | ----- | -------------- | ------- | ----- | 
|                                    |       | (In Thousands)
|                                    |       |               
|Cash                                |       | $              | 1       |      
|Accounts receivable (net)           |       |                | 8,633   |      
|Other current assets                |       |                | 1,370   |      
|Acquired contracts                  |       |                | 1,387   |      
|Property, plant and equipment (net) |       |                | 1,237   |      
|Goodwill                            |       |                | 6,088   |      
|Liabilities assumed                 |       |                | (10,216 | )    
|                                    |       |                |         |      
|                                    | Total |                | $       | 8,500 | 
|                                    |       |                |         |      

The allocation of purchase price is preliminary
as the Company completes its valuation of the fair value of
assets acquired and liabilities assumed. As of
September 30, 2004, the Company has recorded approximately
$6.1 million of goodwill relating to this acquisition and
approximately $1.1 million of intangible assets related to
acquired contracts to be amortized over three years.

The results of operations for IPS are included in
Alions operations from the date of acquisition.

The table below sets out the unaudited pro forma
effects of the IPS acquisition on the Companys revenue,
net income and earnings per share as though the IPS acquisition
had taken place on first day of each fiscal year presented. This
pro forma adjustment is in addition to the unaudited pro forma
effects of the Alion

75



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

acquisition of Selected Operations of IITRI
included in the year-to-date numbers below for the 2003 fiscal
year.

For the fiscal year ended September 30,
2003, the pro forma information includes pro forma adjustments
to reverse historical amortization expense related to
pre-Transaction goodwill, to record the amortization of
identifiable intangible assets, to record interest expense on
debt issued to finance the Transaction, to record the
amortization of debt issuance costs, and to record the accretion
of debt to face value to reflect the discount for the estimated
fair value of warrants issued.

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

|                                    |  |                                      |           |                                      |  |           |           |           |  |           |           |           |  |   |           |   |  |   |           |  |  |   |           |  
|----------------------------------- |  | ------------------------------------ | --------- | ------------------------------------ |  | --------- | --------- | --------- |  | --------- | --------- | --------- |  | - | --------- | - |  | - | --------- |  |  | - | --------- | -
|                                    |  |                                      |           |                                     
|                                    |  | Fiscal Year Ended September 30, 2004 |           | Fiscal Year Ended September 30, 2003
|                                    |  |                                      |           |                                     
|                                    |  |                                      |           | IPS                                  |  | Alion     |           | Alion     |  | IPS       |           | Alion    
|                                    |  | Alion                                |           | Pro Forma(1)                         |  | Pro Forma |           | Pro Forma |  | Pro Forma |           | Pro Forma
|                                    |  |                                      |           |                                      |  |           |           |           |  |           |           |          
|Revenue                             |  | $                                    | 269,940   |                                      |  | $         | 11,213    |           |  | $         | 281,153   |           |  | $ | 213,182   |   |  | $ | 38,216    |  |  | $ | 251,398   |  
|Net income (loss)                   |  | $                                    | (15,111   | )                                    |  | $         | (3,911    | )         |  | $         | (19,022   | )         |  | $ | (20,748   | ) |  | $ | 183       |  |  | $ | (20,565   | )
|Weighted average shares outstanding |  |                                      | 3,074,709 |                                      |  |           | 3,074,709 |           |  |           | 3,074,709 |           |  |   | 2,649,747 |   |  |   | 2,649,747 |  |  |   | 2,649,747 |  
|Earnings (loss) per share           |  | $                                    | (4.91     | )                                    |  | $         | (1.27     | )         |  | $         | (6.19     | )         |  | $ | (7.83     | ) |  | $ | 0.07      |  |  | $ | (7.76     | )
|                                    |  |                                      |           |                                      |  |           |           |           |  |           |           |           |  |   |           |   |  |   |           |  |  |   |           |  



---



|    |                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The unaudited IPS pro forma loss for the year
    ended September 30, 2004 included a loss on the sublease of
    a facility of $4.1 million.



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

On March 28, 2003, an officer of the Company
purchased a portion of the Companys Mezzanine Note owned
by IITRI for $750,000, its face value, along with warrants
to purchase 19,327 shares of Alions common stock
at an exercise price of $10.00 per share. On
November 12, 2003, the Company purchased the Mezzanine Note
and warrants from the officer for an aggregate purchase price of
$1,034,020.

On February 11, 2004, the Company borrowed
$750,000 from an officer of the Company and, in exchange, the
Company issued a Promissory Note in the principal amount of
$750,000 with interest at a rate of 15% per annum, to be
paid quarterly, until March 31, 2009 when the principal
amount becomes due. The annual interest period was effective
beginning February 11, 2004. On December 9, 2004, the
Promissory Note with officer was extinguished. An amount of
$750,000 plus accrued interest of $21,635 was paid to the
officer.



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



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

The Company has earn out commitments related to
the following acquisitions:

AB Technologies (AB Tech)  Earn out is
based on an agreed-upon formula applied to net income of the
business units that formerly comprised AB Tech. The earn out
obligation continues through February 7, 2005, the fifth
anniversary of the original acquisition date.

ITSC  Earn out is based on a portion
of the gross revenue of the business units that formerly
comprised ITSC. The obligation continues through
September 30, 2005.

In the opinion of management, the realization of
the amounts due under these arrangements will not have a
material adverse effect upon the financial position, results of
operations, or the liquidity of the Company.

76



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

The Company is involved in various claims and
legal actions arising in the ordinary course of business. In the
opinion of management, the ultimate disposition of these matters
will not have a material adverse effect upon the financial
position, results of operations, or liquidity of the Company.



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

The amount of government contract revenue and
expense reflected in the consolidated financial statements
attributable to cost reimbursement contracts is subject to audit
and possible adjustment by the Defense Contract Audit Agency
(DCAA). The government considers the Company to be a major
contractor and DCAA maintains an office on site to perform its
various audits throughout the year. DCAA has concluded its
audits of the Companys indirect exp ense rates and cost
accounting practices through fiscal year 2001. There were no
significant cost disallowances for the fiscal years ended
September 30, 2000 and 2001. The results of the audits for
2002, 2003, and 2004 are not expected to have a material effect
on the results of future operations.



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

See Note 2 for a description of the
Companys fiscal year 2004 quarters and fiscal year 2003
interim periods.

|               |  |               |        |     |  |     |        |     |  |   |        |   |  |   |        |  
|-------------- |  | ------------- | ------ | --- |  | --- | ------ | --- |  | - | ------ | - |  | - | ------ | -
|               |  |              
|               |  | 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  | )

|               |  |                      |     |     |  |     |        |     |  |   |        |   |  |   |        |  
|-------------- |  | -------------------- | --- | --- |  | --- | ------ | --- |  | - | ------ | - |  | - | ------ | -
|               |  |                     
|               |  | 2003 Interim Periods
|               |  |                     
|               |  | 1st                  |     | 2nd |  | 3rd |        | 4th
|               |  |                      |     |     |  |     |        |    
|Revenue        |  | $                    |    |     |  | $   | 49,005 |     |  | $ | 65,134 |   |  | $ | 51,778 |  
|Net loss       |  | $                    | (41 | )   |  | $   | (3,075 | )   |  | $ | (2,693 | ) |  | $ | (6,807 | )
|Loss per share |  | $                    | N/A | (a) |  | $   | (1.19  | )   |  | $ | (1.00  | ) |  | $ | (3.26  | )



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Prior to the sale of shares of common stock to
    the ESOP Trust on December 20, 2002, the Companys
    activities were organizational in nature and the Companys
    capital structure consisted of 100 shares of common stock
    issued and outstanding. Accordingly, earnings per share
    information has not been presented as it is not indicative of
    the Companys prospective capital structure.



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

On October 1, 2004, the Company borrowed
$22.0 million under the Senior Secured Term B Loan. The
Company used the proceeds of the October 1, 2004, borrowing
to redeem the Mezzanine Note for approximately
$19.6 million, to pay a prepayment penalty of approximately
$1.8 million and to pay approximately $0.6 million in
accrued interest. The Company recognized an expense of
approximately $3.9 million on extinguishment of the
Mezzanine Note, including approximately $2.1 million for
amortization of original issue discount in addition to the
$1.8 million prepayment penalty.

On October 28, 2004, Alion purchased
substantially all of the assets of Countermeasures, Inc., makers
of the Buddy SystemTM Vulnerability
Assessment and Management Software, for approximately
$2.4 million. The purchase gives Alion ownership of this
technology for identifying, quantifying and managing physical,
infrastructure, program and electronic security risks. The
technology can also recommend countermeasures

77



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and advice that may significantly reduce the
exposure to threats. Countermeasures, Inc. has two employees and
is located in Hollywood, Maryland.

On October 29, 2004, Dr. Atefi elected
to redeem the amount due under his Deferred Compensation
Agreement with Alion. Dr. Atefi was paid approximately
$0.9 million, plus $0.2 million in accrued interest.
The warrants remain outstanding.

On December 9, 2004, the Promissory Note
with the officer was extinguished. An amount of $750,000 plus
accrued interest of $21,635 was paid to the officer.

Consolidated Financial Statement
Schedule

Schedule II  Valuation and
Qualifying Accounts (in thousands)

|                                |  |              |       |               |  |            |      |                |  |                 |     |             |  |   |      |   |  |   |     |  |  |   |       | 
|------------------------------- |  | ------------ | ----- | ------------- |  | ---------- | ---- | -------------- |  | --------------- | --- | ----------- |  | - | ---- | - |  | - | --- |  |  | - | ----- | 
|                                |  |              |       | Charged       |  |            |      |                |  |                 |     |            
|                                |  | Balance at   |       | (credited) to |  | Charged to |      |                |  |                 |     |            
|Allowance for Doubtful Accounts |  | Beginning of |       | Costs and     |  | Contract   |      |                |  |                 |     | Balance at 
|Receivable                      |  | Year         |       | Expenses      |  | Revenue    |      | Deductions (2) |  | Acquisitions(3) |     | End of Year
|                                |  |              |       |               |  |            |      |                |  |                 |     |            
|Fiscal year ended 2002          |  | $            |      |               |  | $          |     |                |  | $               |    |             |  | $ |     |   |  | $ |    |  |  | $ |      | 
|Fiscal year ended 2003(1)       |  | $            | 3,414 |               |  | $          | (525 | )              |  | $               | (18 | )           |  | $ | (387 | ) |  | $ |    |  |  | $ | 2,484 | 
|Fiscal year ended 2004          |  | $            | 2,484 |               |  | $          | 659  |                |  | $               |    |             |  | $ | (791 | ) |  | $ | 544 |  |  | $ | 2,896 | 



---



|    |                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                  

78



---



##### 



INDEPENDENT AUDITORS REPORT

The Board of Governors


IIT Research Institute:


We have audited the accompanying consolidated
balance sheets of Selected Operations of IIT Research
Institute as of September 30, 2001 and 2002, and the
related consolidated statements of income, changes in
owners net investment, and cash flows for each of the
years in the three-year period ended September 30, 2002.
These consolidated financial statements are the responsibility
of Selected Operations of IIT Research Institutes
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Selected Operations
of IIT Research Institute as of September 30, 2001 and
2002, and the results of their operations and their cash flows
for each of the years in the three-year period ended
September 30, 2002, in conformity with accounting
principles generally accepted in the United States of America.



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



Chicago, Illinois


December 6, 2002 except as to note 13,


which is as of December 20, 2002


79



---



##### 



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 | 
|                                           |                                                                                                                   |                                              |        |        |        |  |        |       

See accompanying notes to consolidated financial
statements.

80



---



##### 



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  | 
|                         |                               |                                                              |         |        |        |      |         |        |        |   |         |       

See accompanying notes to consolidated financial
statements.

81



---



##### 



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 |  
|                                                                         |  |                |        |  

82



---



##### 



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 Daedelic                                                                               |                                                                                               |                                                | (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 borrowings (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  |       
|                                                             |                                                                                                      |                                                                                               |                                                |                                                         |       |        |        |         |       |        |         |       

See accompanying notes to consolidated financial
statements.

83



---



##### 



SELECTED OPERATIONS OF IIT RESEARCH
INSTITUTE

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



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

IIT Research Institute (IITRI) is a
not-for-profit membership corporation working for the
advancement of knowledge and the beneficial application of
science and engineering to meet the needs of
society. IITRIs articles of incorporation provide
that in addition to its primary purpose, it will support and
assist the Illinois Institute of Technology and, in the event of
dissolution, IITRIs assets are to be distributed to
the Illinois Institute of Technology. In addition to its Chicago
facilities, IITRI maintains offices in, amongst other
places, McLean and Alexandria, Virginia; Lanham, Annapolis, and
Waldorf, Maryland; Rome, New York; West Conshohocken,
Pennsylvania; and Huntsville, Alabama.

In October 2001, Alion Science and Technology
Corporation, (formerly known as Beagle Holdings, Inc.) (Alion),
a for-profit S Corporation, was incorporated in the state
of Delaware for the purpose of purchasing substantially all of
the assets and liabilities of IITRI (Selected Operations
of IIT Research Institute or the Business). The Business
includes substantially all of the assets and liabilities
of IITRI with the exception of those assets and liabilities
associated with IITRIs Life Sciences Operation.

As described in Note 13, on
December 20, 2002 Alion purchased the Business.



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

The consolidated financial statements of the
Business have been carved out from the consolidated financial
statements of IITRI using the historical results of
operations and bases of the assets and liabilities of the
transferred operations and give effect to certain allocations of
expenses from IITRI to Life Sciences Operation. Such expenses
represent costs related to general and administrative services
that IITRI has provided to Life Sciences Operation
including interest, accounting, tax, legal, human resources,
information technology, and other corporate and infrastructure
services. The costs of these services have been allocated to
Life Sciences Operation using relative percentages of revenues,
operating expenses and headcount, and other reasonable methods,
and have been excluded in preparing the Business financial
statements. Allocations of expenses are estimates based on
managements best assessment of actual expenses incurred by
Life Sciences Operation. It is managements opinion that
the expenses charged to Life Sciences Operation and the
underlying assumptions used to determine the expenses are
reasonable. These allocations and estimates are not necessarily
indicative of the costs and expenses that would have resulted
had the Business been operated as a separate entity in the past,
or of the costs the Business may incur in the future.

The consolidated financial statements are
prepared on the accrual basis of accounting and include the
accounts of the Business and its wholly owned subsidiary Human
Factors Applications, Inc. (HFA). All significant intercompany
accounts have been eliminated in consolidation.

The consolidated financial statements may not be
indicative of the Business financial position, operating
results, or cash flows in the future or what the Business
financial position, operating results, and cash flows would have
been had the Business been a separate, stand-alone entity during
the periods presented. The consolidated financial statements do
not reflect any changes that will occur in the Business
funding or operations as a result of the Business becoming a
stand-alone entity.



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



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

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities
at the date of financial statements and the reported amounts of
revenue and expenses during the reporting period.

84



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##### 



SELECTED OPERATIONS OF IIT RESEARCH
INSTITUTE


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Actual results are likely to differ from those
estimates, but the Business management does not believe
such differences will materially affect the Business
financial position, results of operations, or cash flows.



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

The Business fiscal years end on
September 30 and consist of 52 weeks. Interim periods
were determined based upon the Business thirteen internal
period closings, each of which ends on a Friday. During the
fiscal year ended September 30, 2000, the interim periods
ended on December 24, 1999, and March 17, July 7,
and September 30, 2000. During the fiscal year ended
September 30, 2001, the interim periods ended on
December 22, 2000, and March 16, July 6, and
September 30, 2001. During the fiscal year ended
September 30, 2002, the interim periods ended on
December 21, 2001, March 15, July 5, and
September 30, 2002. For the fiscal year ending
September 30, 2003, the first interim period ended on
December 20, 2002. While the actual number of days within
each interim period will vary from fiscal year to year, the
first, second, and fourth interim periods will include
approximately 12 weeks while the third interim period will
include approximately 16 weeks. Accordingly, comparisons
between interim periods will need to consider the differing
length of the third interim period.



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

The interim period information included in the
consolidated financial statements and Note 12 has been
prepared by the Business and are unaudited. In the opinion of
management, this financial information has been prepared in
conformity with accounting principles generally accepted in the
United States of America and reflects all adjustments necessary
for a fair statement of the Business results of
operations. All such adjustments are of a normal recurring
nature.



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

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

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

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

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

Contracts with agencies of the federal government
are subject to periodic funding by the contracting agency
concerned. Funding for a contract may be provided in full at
inception of the contract or ratably throughout the term of the
contract as the services are provided. If funding is not
assessed as probable, revenue recognition is deferred until
realization is probable.

Contract costs on U.S. Government contracts,
including indirect costs, are subject to audit by the federal
government and adjustment pursuant to negotiations between the
Business and government representatives.

85



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##### 



SELECTED OPERATIONS OF IIT RESEARCH
INSTITUTE


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

All of the Business federal contract
indirect costs have been audited and agreed upon through fiscal
year 2000. Contract revenue on U.S. Government contracts
have been recorded in amounts that are expected to be realized
upon final settlement.

The Business recognizes revenue on unpriced
change orders as expenses are incurred only to the extent that
the Business expects it is probable that such costs will be
recovered. The Business recognizes revenue in excess of costs on
unpriced change orders only when management can also reliably
estimate the amount of excess and experience provides a
sufficient basis for recognition. The Business recognizes
revenue on claims as expenses are incurred only to the extent
that the Business expects it is probable that such costs will be
recovered and the amount of recovery can be reliably estimated.



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

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



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

Costs and estimated earnings in excess of
billings on uncompleted contracts represent accumulated project
expenses and fees which have not been invoiced to customers as
of the date of the consolidated balance sheet. These amounts,
which are included in accounts receivable, are stated at
estimated realizable value and aggregated $24.2 million and
$12.5 million at September 30, 2001 and 2002,
respectively. Billings in excess of costs and estimated earnings
and advance collections from customers represent amounts
received from or billed to commercial customers in excess of
project revenue recognized to date. Costs and estimated earnings
in excess of billings on uncompleted contracts at
September 30, 2001 and 2002 include $0.6 million and
$2.9 million, respectively, related to costs incurred on
projects for which the Business has been requested by the
customer to begin work under a new contract or extend work under
an existing contract, but for which formal contracts or contract
modifications have not been executed. In addition, billed
receivables at September 30, 2001 and 2002 include
$0.6 million of final bills that are not expected to be
collected within one year.



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

Goodwill, which represents the excess of purchase
price over fair value of net assets acquired, is amortized on a
straight-line basis over the expected periods to be benefited,
generally 7 years. The Business assesses the recoverability
of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired
operation. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash
flows using a discount rate commensurate with the risks
involved. The assessment of the recoverability of goodwill will
be impacted if estimated future operating cash flows are not
achieved.



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

Buildings, leasehold improvements, and equipment
are recorded at cost. Expenditures for maintenance and repairs
are charged to current operations. Buildings and equipment are
depreciated over their estimated useful lives (40 years for
buildings and 3 to 15 years for the various classes of
equipment) generally using the straight-line method. Leasehold
improvements are amortized on the straight-line method over the
shorter of the assets estimated useful life or the life of
the lease. Upon sale or retirement of an asset, costs and
related accumulated depreciation are deducted from the accounts,
and the gain or loss is recognized in the consolidated income
statement.

86



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##### 



SELECTED OPERATIONS OF IIT RESEARCH
INSTITUTE


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

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

IITRI has received a determination letter from
the Internal Revenue Service which indicates it is exempt from
income taxes under Section 501(c)(3) of the Internal
Revenue Code except for taxes pertaining to unrelated business
income. Accordingly, the accompanying consolidated financial
statements do not include provisions for income taxes except as
described below.

HFA, the Business for-profit subsidiary,
accounts for income taxes under the asset and liability method.
HFA recognizes deferred tax assets and liabilities based on the
differences between financial statement carrying amounts and the
tax bases of assets and liabilities. HFA uses the enacted tax
rates expected to apply to taxable income in the years in which
these temporary differences are expected to be recovered or
settled. The effect of a change in tax rates on deferred tax
assets and liabilities is recognized in income in the period
that includes the enactment date.



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

The Business historical structure is not
indicative of its prospective capital structure and,
accordingly, historical earnings per share information has not
been presented.



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

During 2000, the Business entered into forward
contracts as a hedge against certain foreign currency
commitments on a contract in the United Kingdom. The total
amount of the contracts was approximately $0.4 million with
the final contract maturing on May 7, 2002. No contracts
were outstanding at September 30, 2002. The contracts were
marked to market, with gains and losses recognized in the
consolidated statements of income. The Business does not use
derivatives for trading purposes.



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

The FASB issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information, in February 1998. SFAS No. 131
establishes standards for the way that public business
enterprises report information about operating segments in
annual financial statements. This statement also requires
companies that have a single reportable segment to disclose
information about products and services, geographic areas, and
major customers. This statement requires the use of the
management approach to determine the information to be reported.
The management approach is based on the way management organizes
the enterprise to assess performance and make operating
decisions regarding the allocation of resources. It is
managements opinion that, at this time, the Business has
one reportable segment.

The Business provides technical services and
products through contractual arrangements as either prime
contractor or subcontractor to other contractors, primarily for
departments and agencies of the U.S. Government.
U.S. Government contracts are subject to specific
regulatory accounting and contracting guidelines including the
Cost Accounting Standards and Federal Acquisition Regulations.
The Business also provides technical services and products to
foreign, state, and local governments, as well as customers in
commercial markets. During the years ended September 30,
2000, 2001, and 2002, revenues from foreign countries were not
significant.

Revenues from services provided to various
agencies of the U.S. Government represented
$137.5 million or 88%, $180.7 million or 94% and
$198.8 million or 98% of revenues for the years ended
September 30, 2000, 2001 and 2002, respectively. Contract
receivables from agencies of the U.S. Government represented

87



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##### 



SELECTED OPERATIONS OF IIT RESEARCH
INSTITUTE


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

$54.3 million or 94% and $48.7 million
or 94% of accounts receivable at September 30, 2001 and
2002, respectively.



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

In June 2001, the Financial Accounting Standards
Board issued SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS 141 requires the purchase method of accounting to be
used for all business combinations initiated after June 30,
2001. SFAS 141 also specifies criteria that intangible
assets acquired in a business combination must meet to be
recognized and reported apart from goodwill. As the Business is
a not-for-profit, SFAS No. 141 is not applicable.

SFAS 142 is effective for fiscal years
beginning after December 15, 2001. SFAS 142 will not
be applied to previously recognized goodwill and intangible
assets arising from the acquisition of a for-profit business
enterprise by a not-for-profit organization until interpretive
guidance related to the application of the purchase method to
those transactions is issued. SFAS 142 will be required to
be adopted by Alion in connection with the proposed acquisition
of the Business discussed in Note 13.
SFAS No. 142 changes the accounting for goodwill from
an amortization method to an impairment-only approach. Goodwill
and other intangible assets that have an indefinite life will
not be amortized, but rather will be tested for impairment
annually or whenever an event occurs indicating that the asset
may be impaired.

In June 2001, the FASB issued
SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS 143 addresses financial accounting and
reporting for obligations associated with the retirement of
tangible long-lived assets and for the associated asset
retirement costs. SFAS 143 must be applied starting with
fiscal years beginning after June 15, 2002. Management is
currently evaluating the impact that the adoption of
SFAS 143 will have on the consolidated financial statements.

In August 2001, the FASB issued
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 addresses
financial accounting and reporting for the impairment or
disposal of long-lived assets. While SFAS No. 144
supersedes SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, it retains many of the fundamental provisions of that
Statement. SFAS No. 144 also supersedes the accounting
and reporting provisions of APB Opinion No. 30, Reporting
the Results of Operations  Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual,
and Infrequently Occurring Events and Transactions, for the
disposal of a segment of a business. It retains, however, the
requirement in APB Opinion No. 30 to report separately
discontinued operations, and extends that reporting to a
component of an entity that either has been disposed of (by
sale, abandonment, or in a distribution to owners) or is
classified as held for sale. SFAS No. 144 is effective
for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. Management does not
believe that the adoption of SFAS 144 will have a
significant impact on its consolidated financial statements.

During June 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. Such standard requires costs
associated with exit or disposal activities (including
restructurings) to be recognized when the costs are incurred,
rather than at a date of commitment to an exit or disposal plan.
SFAS No. 146 nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a
Restructuring). Under SFAS No. 146, a liability
related to an exit or disposal activity is not recognized until
such liability has actually been incurred whereas under EITF
Issue No. 94-3 a liability was recognized at the time of a
commitment to an exit or disposal plan. The provisions of this
standard are effective for disposal activities initiated after
December 31, 2002.

88



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##### 



SELECTED OPERATIONS OF IIT RESEARCH
INSTITUTE


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

Certain amounts in the prior years financial
statements have been reclassified to conform to the current
years presentation.



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

Effective September 30, 1998, the Business
completed the acquisition of Human Factors Applications, Inc.
(HFA) for $3.0 million. HFA is a U.S. supplier of
ordnance and explosive waste remediation with core competencies
in the areas of demilitarization, demining, environmental
remediation, explosion sciences, sensor and software
integration, and training. The Business purchased all the
outstanding shares of HFAs common stock. The Business
allocated a portion of the purchase price to the assets acquired
and liabilities assumed at the date of acquisition based upon
their estimated fair values and recorded the balance of
$1.5 million as goodwill. The results of HFAs
operations are included in the Business consolidated
financial statements beginning on October 1, 1998.

Effective May 31, 1999, the Business
acquired EMC Science Center, Inc. (EMC) for
$3.0 million. EMC has technical expertise in
electromagnetic environmental effects testing, standards and
training, and operates a certified test laboratory. The Business
acquired all the assets and assumed all the liabilities of EMC.
The Business allocated a portion of the purchase price to the
assets acquired and liabilities assumed at the date of
acquisition based upon their estimated fair values and recorded
the balance of $2.3 million as goodwill. The results of
operations of EMC are included in the Business
consolidated financial statements beginning on June 1, 1999.

On June 12, 1999, the Business acquired 25%
of the outstanding common stock of AB Technologies, Inc.
(AB) for $6.0 million. AB Technologies specializes in
modeling and simulation related to training exercises, education
and training support, complex problem analysis and systems, and
military policy development for the U.S. Government and
other customers. A portion of the purchase price was allocated
to the estimated fair value of the net assets acquired while the
balance of $4.2 million was recorded as goodwill. The
Business used the equity method to account for its initial
common stock purchase. At September 30, 1999, the
Business investment in AB Technologies reflected its
proportionate share of net losses from June 13, 1999. At
September 30, 1999, the Business owed the previous owners
of AB Technologies $2.0 million under notes payable. AB
Technologies reported revenue of approximately
$28.5 million for the nine months ended September 30,
1999.

Effective February 7, 2000, the Business
acquired the remaining assets and liabilities from the other
shareholders of AB Technologies for approximately
$5.4 million. The acquisition was accounted for as a step
acquisition. The Business allocated a portion of the purchase to
the assets acquired and liabilities assumed at the date of
acquisition based upon their estimated fair values. The Business
recorded the remaining balance of $4.3 million as goodwill.
The purchase agreement contains an earnout provision under which
the Business could be required to make additional payments to
the other former shareholders of AB Technologies. These payments
cannot exceed $11.5 million and are based on the future net
income of AB Technologies operations through
February 7, 2005. For the years ended September 30,
2001 and 2002, the Business accrued contingent consideration
obligations of $0.6 million and $0.6 million,
respectively, under this purchase agreement. Such amounts are
included in long-term debt in the accompanying consolidated
balance sheets.

From June 12, 1999 through February 7,
2000, the Business provided management and accounting services
to AB Technologies under an administrative agreement. The
Business recovered expenses under this agreement of
$1.5 million for the period ended September 30, 1999
and an additional $2.8 million through February 7,
2000.

The following unaudited pro forma summary
information presents the results of operations as if the AB
Technologies acquisition had been completed at the beginning of
the period presented and is not necessarily

89



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##### 



SELECTED OPERATIONS OF IIT RESEARCH
INSTITUTE


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

indicative of the results of operations of the
Business that might have occurred had the acquisition been
completed at the beginning of the period specified, nor is it
necessarily indicative of future operating results:

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

In May 2002, the Business acquired the assets of
Daedalic, Inc. for $0.8 million in a business combination
to be accounted for as a purchase. The Business allocated the
purchase price to the assets acquired and recorded the balance
of $0.4 million as goodwill. The pro forma impact of this
acquisition was not significant.

Aggregate goodwill amortization expense related
to the aforementioned business combinations was
$1.5 million, $1.8 million, and $2.0 million
during the years ended September 30, 2000, 2001, and 2002,
respectively.



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

Property, plant, and equipment at
September 30 consisted of the following:

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

Depreciation and leasehold improvement
amortization expense for property, plant and equipment was
$2.3 million, $1.7 million, and $1.5 million in
the fiscal years ended September 30, 2000, 2001, and 2002,
respectively.

In May 2000, the Business sold land in Annapolis,
Maryland for $2.3 million, and recognized a gain of
$1.3 million during fiscal year 2000.

In December 2000, the Business sold its Chicago
research tower, engineering buildings, and related assets for
$12.5 million to the Illinois Institute of Technology. The
Business leased back six of the 19 floors in the tower under a
10-year operating lease agreement. The Business applied
sale/leaseback accounting and deferred recognition of the
$4.9 million gain arising from this transaction. The
Business recognized $0.4 million and $0.5 million of
the gain in fiscal years 2001 and 2002, respectively, and the
deferred balance at September 30, 2002 was
$4.0 million. The deferred gain is being recognized over
the remaining life of the lease. See Note 9 for further
discussion regarding lease commitments.

In fiscal year 2002, the Business completed the
implementation of PeopleSofts human resource software. The
Business capitalized $1.9 million of costs associated with
the implementation including software license and consultant
expenses. The Business accounted for the costs of the
implementation in accordance with AICPA Statement of Position
98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use.

90



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##### 



SELECTED OPERATIONS OF IIT RESEARCH
INSTITUTE


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

The Business maintains a revolving bank credit
agreement with First Union Bank that is secured by qualifying
billed and unbilled accounts receivable and allows borrowings of
up to $25.0 million. The maximum amount available is
calculated monthly using a borrowing base formula based on
percentages of eligible billed and unbilled accounts receivable.
Advances under the agreement bear interest, at the
Business election, at either the prime rate (4.75% at
September 30, 2002) or the London Interbank Offering Rate
(LIBOR) plus a fee. Historically, the Business has elected
the prime rate. The agreement extends through December 22,
2002. The Business also had $0.5 million in standby letters
of credit outstanding at September 30, 2002 with First
Union Bank.

Long-term debt at September 30 consisted of
the following:

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

The Business is subject to certain debt covenants
relating to the revolving bank credit agreement with First Union
Bank. As of September 30, 2002, all debt covenants had been
met.

IITRI incurred interest expense of
$1.8 million, $1.6 million, and $0.9 million and
the Business was allocated interest expense of
$1.4 million, $0.9 million, and $0.6 million for
the years ended September 30, 2000, 2001, and 2002,
respectively.



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

For fiscal year 2000, the Business recorded an
income tax provision of $0.2 million for unrelated business
income arising from the AB Technologies acquisition.

For the years ended September 30, 2000, 2001
and 2002, HFA had an operating income of $0.5 million,
$1.0 million and $1.6 million, respectively. The
Business recorded an income tax provision of $0.4 million,
$0.3 million, and $0.6 million for the years ended
September 30, 2000, 2001 and 2002, respectively, related to
HFA. Deferred taxes were not significant at September 30,
2001 and 2002.



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

The Business sponsors two defined contribution
retirement plans that cover substantially all full-time
employees. The plans are funded by contributions from the
Business and its employees. The employers contributions
under the plans were $1.5 million, $3.5 million, and
$4.2 million for the years ended September 30, 2000,
2001 and 2002, respectively.

The Business also sponsors a medical benefits
plan providing certain medical, dental, and vision coverage to
eligible employees and former employees. The Business has a
self-insured funding policy with a stop-loss limit under an
insurance agreement. Certain funds are set aside in a trust fund
from which the medical benefit claims are paid. At
September 30, 2001 and 2002, the trust fund balance was
$0.9 million and $0.04 million, respectively.

The Business also provides post retirement
medical benefits for employees who meet certain age and service
requirements. Retiring employees may become eligible for those
benefits at age 55 if they have

91



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##### 



SELECTED OPERATIONS OF IIT RESEARCH
INSTITUTE


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

20 years of service, or at age 60 with
10 years of service. The plan provides benefits until
age 65 and requires employees to pay one-quarter of their
health care premiums. A small, closed group of employees is
eligible for coverage after age 65. These retirees
contribute a fixed portion of the health care premium.

Following is a reconciliation of the plans
funded status with the accrued benefit cost shown on the
consolidated balance sheets at September 30:

|                                                                                  |  |                |        |      |  |   |        |  
|--------------------------------------------------------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | -
|                                                                                  |  | 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 | )
|                                                                                  |  |                |        |      |  |   |        |  

The components of net periodic postretirement
benefit cost for the years ended September 30 are as
follows:

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

The health care cost trend rates used to
determine the accumulated postretirement benefit obligation are
11.5% in fiscal year 2002, decreasing each year to an ultimate
of 5.5% per year in fiscal 2014. Based on the number of
employees currently participating in these plans, it is
estimated that a 1% increase each year in the health care cost
trend rates would result in increases of $0.014 million in
the service and interest cost

92



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##### 



SELECTED OPERATIONS OF IIT RESEARCH
INSTITUTE


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

components of the net periodic postretirement
benefit cost and $0.24 million in the accumulated
postretirement benefit obligation. Similarly, a 1% decrease each
year in the health care cost trend rates would result in
decreases of $0.013 million in the service and interest
cost components of the net periodic postretirement benefit cost
and $0.2 million in the accumulated postretirement benefit
obligation. The discount rate used to measure the accumulated
postretirement benefit obligation at September 30, 2001 and
2002 was 7.5% and 7.0%, respectively.

The Business provides other deferred compensation
and participation in a flexible option plan for certain key
executives. Aggregate amounts granted under the flexible option
plan were $0.3 million and $2.0 million as of
September 30, 2001 and 2002, respectively. These amounts
vest over a five-year period from the original date of grant and
vesting accelerates upon a change in control. No amounts have
vested as of September 30, 2002. Funds granted under the
plan are invested in a limited variety of mutual funds selected
by the grantee. These assets are owned by the Business and
subject to the claims of general creditors of the Business. The
deferred compensation liability to the participants is recorded
over the service period as compensation expense.



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

Future minimum lease payments under
non-cancelable operating leases for buildings, equipment, and
automobiles at September 30, 2002, are as follows:

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

Rent expense under operating leases was
$2.5 million, $6.3 million, and $8.3 million for
the years ended September 30, 2000, 2001, and 2002,
respectively.

The Business periodically enters into other lease
obligations which are directly chargeable to current contracts.
These obligations are covered by current available contract
funds or are cancelable upon termination of the related
contracts.



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

Except as noted in the following paragraph, the
Business recognizes as operating expense amounts assessed by the
Illinois Institute of Technology primarily for lease payments
and utility costs related to shared facilities, including steam
and electricity charges, and for shared grounds maintenance and
security costs. For the fiscal years ended September 30,
2000, 2001, and 2002, such amounts totaled $1.8 million,
$3.2 million, and $3.6 million, respectively.

Distributions from the Business to the Illinois
Institute of Technology are determined by and made on a
voluntary basis and at the direction of IITRIs Board
of Governors. For fiscal years 2000, 2001, 2002, distributions
amounted to $1.3 million, $1.6 million, and
$0.9 million, respectively.

The accompanying consolidated statements of
changes in owners net investment include adjustments that
represent changes in net assets of Life Sciences Operation which
included the periods net loss and capital

93



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##### 



SELECTED OPERATIONS OF IIT RESEARCH
INSTITUTE


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

funding requirements. Such amounts will not be
reimbursed to or refunded by the Business subsequent to the
acquisition by Alion described in Note 13.

See Note 5 for a discussion of the
Business sale of assets to the Illinois Institute of
Technology.



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



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

The Business is involved in various claims and
legal actions arising in the ordinary course of business. In the
opinion of management, the ultimate disposition of these matters
will not have a material adverse effect upon the financial
position, results of operations, or liquidity of the Business.



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

On September 12, 2002, the former owners of
AB Technologies (Former Owners) filed a lawsuit (AB Tech
Lawsuit) against IITRI in Circuit Court for Fairfax County,
Virginia. The complaint alleges breach of the AB Technologies
asset purchase agreement (Asset Purchase Agreement), and claims
damages of $8.2 million. The Former Owners asked the court
to order an accounting of their earn out. IITRI has filed a
Notice of Removal, asking the United States District Court for
the Eastern District of Virginia to remove the AB Tech Lawsuit
from the state court and assume jurisdiction over it in federal
court.

On September 16, 2002, IITRI filed a
lawsuit against the Former Owners which asks the court to compel
the Former Owners to submit disputed issues to an independent
accounting firm in accordance with the requirements of the Asset
Purchase Agreement, make a declaratory judgment concluding
that IITRI is entitled to an approximately
$1.1 million downward adjustment of the purchase price paid
under the Asset Purchase Agreement, and conclude that IITRI
properly computed the earnout in accordance with the earnout
formula in the Asset Purchase Agreement.

Upon the closing of the proposed acquisition of
the Business by Alion, Alion assumed responsibility for and
acquired all claims under these lawsuits.

IITRI has accrued its estimate of the earnout
liability based on the earnout formula in the Asset Purchase
Agreement.



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

The amount of U.S. Government contract
revenue and expense reflected in the consolidated financial
statements attributable to cost reimbursement contracts is
subject to audit and possible adjustment by the Defense Contract
Audit Agency (DCAA). The government considers the Business a
major contractor and DCAA maintains an office on site to perform
its various audits throughout the year. DCAA has concluded its
audits of the Business indirect expense rates and cost
accounting practices through fiscal year 2000. There were no
significant cost disallowances for the fiscal years ended
September 30, 1999 and 2000.

IITRI, as a not-for-profit organization receiving
federal funds, is required to have an annual compliance audit in
accordance with the provisions of OMB Circular A-133, Audits of
States, Local Governments, and Non-profit Organizations.
Accordingly, for purposes of these financial statements, the
Business is subject to similar audit requirements. Although DCAA
has completed its incurred cost audit for the Business
year ended September 30, 2000, the Business A-133
audit for the year ended September 30, 2001, has not been
completed. It is the opinion of management that unallowable
costs, if any, associated with this audit will be insignificant.

94



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##### 



SELECTED OPERATIONS OF IIT RESEARCH
INSTITUTE


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

See Note 1 for a description of the
Business interim periods.

|                  |  |      |        |      |  |     |        |     |  |     |        |     |  |     |        |     |  |  |        |  |  |  |        |  |  |  |        |  |  |  |        | 
|----------------- |  | ---- | ------ | ---- |  | --- | ------ | --- |  | --- | ------ | --- |  | --- | ------ | --- |  |  | ------ |  |  |  | ------ |  |  |  | ------ |  |  |  | ------ | 
|                  |  |      |        |     
|                  |  | 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)

On December 20, 2002, Alion purchased the
Business from IITRI for total aggregate proceeds of
$127,879 consisting of:



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

95



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##### 








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

There are no changes in or disagreements with our
accountants.






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

Disclosure Controls and
Procedures.The Companys
management, with the participation of the Companys Chief
Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Companys disclosure controls and
procedures (as such term is defined in Rule 15d 
15(e) under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) as of the end of the period covered
by this report. Based on such evaluation, the Companys
Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, the Companys
disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis,
information required to be disclosed by us in the reports that
the Company is required to file or submit under the Exchange Act.

Internal Control Over Financial
Reporting.There have not been any
changes in the Companys internal control over financial
reporting (as such term is defined in Rule 15d 
15(f) under the Exchange Act) during the fiscal fourth quarter
ended September 30, 2004 that have materially affected, or
are reasonably likely to materially affect, the Companys
internal control over financial reporting.






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

Sales of Unregistered Securities

In September 2004, the Company raised
approximately $1.5 million in cash through a private
placement of its common stock. The Company sold
87,971 shares to the ESOP Trust at $16.56 per share
and 4,957 shares at $19.94 per share. The Company
issued an additional 108,395 shares to the ESOP Trust, at
$19.94 per share as a contribution to the KSOP Plan. The
shares of stock were offered pursuant to an exemption from
registration under Section 4(2) of the Securities Act of
1933.

The Company has reported all other information
required to be disclosed in a report on Form 8-K during the
quarter ended September 30, 2004.

96



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##### 






PART III






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

Information Regarding the Directors of the
Registrant

The names, ages and positions of our directors,
as of September 30, 2004, are set forth below:

|                                         |  |     |    |          |  |                                                 |  |          |      |  |  |  |      | 
|---------------------------------------- |  | --- | -- | -------- |  | ----------------------------------------------- |  | -------- | ---- |  |  |  | ---- | 
|                                         |  |     |    |          |  | Term                                            |  | Director
|Name                                     |  | Age |    | Position |  | Expires                                         |  | Since   
|                                         |  |     |    |          |  |                                                 |  |         
|Bahman Atefi                             |  |     | 51 |          |  | President, Chief Executive Officer and Chairman |  |          | 2005 |  |  |  | 2001 | 
|Edward C. Pete Aldridge                |  |     | 66 |          |  | Director                                        |  |          | 2006 |  |  |  | 2003 | 
|Leslie Armitage                          |  |     | 36 |          |  | Director                                        |  |          | 2007 |  |  |  | 2002 | 
|Lewis Collens                            |  |     | 66 |          |  | Director                                        |  |          | 2007 |  |  |  | 2002 | 
|Admiral (Ret.) Harold W.
    Gehman, Jr. |  |     | 61 |          |  | Director                                        |  |          | 2007 |  |  |  | 2002 | 
|Donald E. Goss                           |  |     | 73 |          |  | Director                                        |  |          | 2006 |  |  |  | 2002 | 
|Robert L. Growney                        |  |     | 61 |          |  | Director                                        |  |          | 2006 |  |  |  | 2002 | 
|General (Ret.) George A. Joulwan         |  |     | 64 |          |  | Director                                        |  |          | 2005 |  |  |  | 2002 | 
|General (Ret.) Michael E. Ryan           |  |     | 62 |          |  | Director                                        |  |          | 2005 |  |  |  | 2002 | 

Our directors are divided into three classes. The
first class of directors consists of three directors 
Donald E. Goss, Edward C. Aldridge, and Robert L. Growney. Their
term expires on the date of the annual meeting of Alions
shareholder(s) in 2006. The second class of directors consists
of three directors  Leslie Armitage, Lewis Collens
and Admiral Harold W. Gehman, Jr. Their term expires on the
date of the annual meeting of Alions shareholder(s) in
2007. The third class of directors consists of three
directors  Bahman Atefi, General George A. Joulwan
and General Michael E. Ryan. The term of the third class of
directors expires on the date of the annual meeting of
Alions shareholder(s) in 2005. Under the terms of the
mezzanine and subordinated notes and warrants, subject to
certain requirements, IITRI may nominate three directors
for election to Alions board. Messrs. Collens, Goss,
and Growney are IITRIs board appointees.

The following sets forth the business experience,
principal occupations and employment of each of the directors.

Bahman Atefiwas
appointed chief executive officer of Alion in December 2001. He
is also chairman of Alions board of directors.
Dr. Atefi also serves as chairman of the ESOP committee.
Dr. Atefi served as president of IITRI from August
1997, and as its chief executive officer from October 2000 until
December 20, 2002, the closing date of the Transaction.
Dr. Atefi has also been chairman of the board of directors
of Human Factors Applications, Inc. since February 1999. From
June 1994 to August 1997, Dr. Atefi served as manager of
the energy and environmental group at Science Applications
International Corporation. In this capacity, he was responsible
for operation of a 600-person business unit, with annual
revenues in 1997 of approximately $80 million, which
provided scientific and engineering support to the
U.S. Department of Energy, Nuclear Regulatory Commission,
Environmental Protection Agency, U.S. Department of
Defense, as well as commercial and international customers.
Dr. Atefi is a member of the board of trustees of the
Illinois Institute of Technology. Dr. Atefi received a BS
in Electrical Engineering from Cornell University, a
masters degree in nuclear engineering and a doctor of
science in nuclear engineering from the Massachusetts Institute
of Technology.

Edward C.Pete Aldridgehas served as a director of Alion
since November 2003. Mr. Aldridge retired from government
service in May 2003 as the Under Secretary of Defense for
Acquisition, Technology, and Logistics, a position he held since
May 2001. In this position, Mr. Aldridge was responsible
for all matters relating to U.S. Department of Defense
(DoD) acquisition, research and development, advanced
technology, international programs, and the industrial base.
From March 1991 to May 2001, Mr. Aldridge served as

97



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##### 



president and CEO of the Aerospace Corporation,
president of McDonnell Douglas Electronic Systems, Secretary of
the Air Force, and numerous other positions within the
U.S. Department of Defense.


Leslie Armitagehas
served as a director of Alion since May 2002. Since January
1999, Ms. Armitage has served as a Partner of The Carlyle
Group. In June 1997, Ms. Armitage became a founding member
of Carlyle Europe. Ms. Armitage currently serves on the
board of directors of Vought Aircraft Industries, Inc., Honsel
International Technologies, and United Component, Inc.

Lewis Collenshas
served as a director of Alion since May 2002. Since 1990,
Mr. Collens has served as president of the Illinois
Institute of Technology. Mr. Collens has also served as
chief executive officer of IITRI from 1990 to October 2000.
Mr. Collens also serves as chairman of the board for IITRI
and as a director for Dean Foods Company, Taylor Capital, Amsted
Industries and Colson Group. Mr. Collens is one of the
three members of the board of directors designated by the
holders of the mezzanine notes, the subordinated note and the
warrants.

Admiral (Ret.) Harold W.
Gehman, Jr.has served as a
director of Alion since September 2002. Admiral Gehman retired
from over 35 years of active duty in the U.S. Navy in
October 2000. While in the U.S. Navy, Admiral Gehman served
as NATOs Supreme Allied Commander, Atlantic and as the
Commander in Chief of the U.S. Joint Forces Command from
September 1997 to September 2000. Since his retirement in
November 2000, Admiral Gehman has served as an independent
consultant to the U.S. Government from October 2000 to
present and Science Applications International Corporation from
January 2002 to present. Admiral Gehman currently serves on the
board of directors of Maersk Lines, Ltd., Transystems Corp., and
Burdeshaw Associates, Ltd. He also currently serves as a member
of the board of advisors for Anser Institute for Homeland
Security, Old Dominion University Research Foundation, and Old
Dominion University College of Engineering. In addition, Admiral
Gehman is a senior fellow at the National Defense University and
is chairman of the Government of Virginias Advisory
Commission for Veterans Affairs. Most recently, Admiral Gehman
agreed to chair the Space Shuttle Mishap Interagency
Investigation Board, which will provide an independent review of
the events and activities that led up to the loss of seven
astronauts on February 1, 2003 on board the Space Shuttle
Columbia.

Donald E. Gosshas
served as a director of Alion since May 2002. Mr. Goss has
served as trustee and chairman of the audit committee for the
Illinois Institute of Technology since 1982, as well as the
chairman of the audit committee and a member of the board of
governors for IITRI since 1985. Mr. Goss has also
served on the Finance Council and as chair of the audit
committee for the Catholic Archdiocese of Chicago, Illinois
since 1985. Mr. Goss has also served as a member of the
board of governors for the Chicago Zoological Society at
Brookfield Zoo since 1998. Mr. Goss retired from
Ernst & Young as partner, after 37 years of
service, in March 1990, and he has remained retired since that
date. Mr. Goss is one of the three members of the board of
directors designated by the holders of the mezzanine notes, the
subordinated note and the warrants.

Robert L. Growneyhas served as a director of Alion
since May 2002. Up until his retirement from Motorola in April
2002, Mr. Growney had served as a member of the board of
directors for Motorola since January 1997 and as vice chairman
of Motorolas board of directors since January 2002. From
January 1997 to January 2002, Mr. Growney served as
president and chief operating officer for Motorola.
Mr. Growney currently serves as a trustee for the Illinois
Institute of Technology as well as serves as a member of its
executive committee. Since May 2002, Mr. Growney has been a
venture partner with Edgewater Funds. Mr. Growney is one of
the three members of the board of directors designated by the
holders of the mezzanine notes, the subordinated note and the
warrants.

General (Ret.) George A. Joulwanhas served as a director of Alion
since May 2002. General Joulwan retired from 36 years of
service in the military in September 1997. While in the
military, General Joulwan served as commander in chief for the
U.S. Army, for U.S. Southern Command in Panama from
1990-1993 and served as commander in chief of the
U.S. European Command and NATO Supreme Allied Command from
1993-1997. From 1998 to 2000, General Joulwan served as an Olin
Professor at the U.S. Military Academy at West Point.
General Joulwan has also served as an adjunct professor at the
National Defense University from 2001 to 2002. Since 1998,
General Joulwan has served as president of One Team, Inc., a

98



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##### 



strategic consulting company. General Joulwan
also currently serves as a director for General Dynamics
Corporation.


General (Ret.) Michael E. Ryanhas served as a director of Alion
since May 2002. General Ryan retired from the military in 2001
after 36 years of service. General Ryan served his last
four years as the 16th Chief of Staff of the Air Force,
responsible for organizing, training and equipping over 700,000
active duty, reserve and civilian members. He is on the board of
directors of the Air Force Association.

Compensation of Directors

Our non-employee directors receive an annual
retainer of $25,000, payable in quarterly installments, for
their services as members of the board of directors. These
services include preparation for and attendance in person at
four board meetings per year and all committee meetings that
take place on the same day as a full board meeting. In addition,
each director receives a fee of $1,000 for in-person attendance
at each additional board meeting, and $250 for telephone
attendance at each additional board meeting. Each chairman of a
board committee receives $2,500 per year for each year he
or she serves in such capacity. All board committee members
receive $1,000 per committee meeting if the committee
meeting occurs on a day other than the day of a full Alion board
meeting. Alion reimburses directors for reasonable travel
expenses in connection with attendance at board of directors and
board committee meetings.

Each director is eligible for a one-time award
under our stock appreciation rights, or SAR, plan at the
beginning of each board term that he or she serves. For more
information about our SAR plan, please read Executive
Compensation  Stock Appreciation Rights Plan. A
directors SAR awards will vest on a schedule coincident
with his or her term on our board. With the exception of
Dr. Atefi, each of our initial directors, irrespective of
their terms, was awarded 4,200 SARs in December 2002. Each
future class of directors will be elected for a three-year term
and will receive 4,200 SAR awards upon the commencement of each
three-year term. Our directors also have the option to
participate in a deferred compensation plan for tax deferral of
their annual compensation and/or payments to be made upon
exercise of their SAR awards.

Our employee directors will not receive any
additional compensation for their services as members of the
board.

Establishment of Committees

The Board of Directors has established three
committees. The following is a list of the current members of
each committee:

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

The Board of Directors has determined that
Mr. Donald E. Goss qualifies as audit committee
financial expert as defined in Item 401(h) of
Regulation S-K, and that he is independent as
the term is used in Item 7(d)(3)(iv) of Schedule 14A
under the Securities Exchange Act.



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

In October 2003, the Board of Directors
established a Compensation Committee. As indicated above, the
members of the Committee are Lewis Collens (Chairman), Leslie
Armitage, Harold Gehman, and Pete Aldridge. Dr. Atefi is a
member of the board of trustees of the Illinois Institute of
Technology where Mr. Collens is the President.

99



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##### 



Information Regarding the Executive Officers
of the Registrant

The names, ages and positions of our executive
officers as of September 30, 2004, and the dates from which
these positions have been held are set forth below.

|                    |  |     |    |        |  |                                                                         |  |  |               | 
|------------------- |  | --- | -- | ------ |  | ----------------------------------------------------------------------- |  |  | ------------- | 
|Name                |  | Age |    | Office |  | Position Since                                                         
|                    |  |     |    |        |  |                                                                        
|Bahman Atefi        |  |     | 51 |        |  | Chief Executive Officer (1)                                             |  |  | December 2001 | 
|Randy Crawford      |  |     | 53 |        |  | Sector Senior Vice President and
    Manager  Spectrum Engineering (1) |  |  | May 2002      | 
|Barry Watson        |  |     | 50 |        |  | Sector Senior Vice President and
    Manager  Systems Technology (1)   |  |  | May 2002      | 
|Rob Goff            |  |     | 58 |        |  | Sector Senior Vice President and
    Manager  Defense Operations       |  |  | February 2004 | 
|John (Jack ) Hughes |  |     | 52 |        |  | Senior Vice President, Chief Financial Officer
    and Treasurer        |  |  | October 2002  | 
|Stacy Mendler       |  |     | 41 |        |  | Senior Vice President and Chief Administrative
    Officer(1)           |  |  | May 2002      | 
|James Fontana       |  |     | 46 |        |  | Senior Vice President, General Counsel and
    Corporate Secretary      |  |  | January 2003  | 



---



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

The following sets forth the business experience,
principal occupations and employment of each of the current
executive officers who do not serve on the board. Please read
Information Regarding the Directors of the
Registrant above for the information with respect to
Dr. Atefi:

Randy Crawfordhas
served as Sector Senior Vice President and Sector Manager for
Alions spectrum engineering sector since May 2002. He is
also a member of Alions ESOP committee. Mr. Crawford
has been a member of the board of directors of Human Factors
Applications, Inc. since September 2000. Mr. Crawford
served IITRI as spectrum engineering sector senior vice
president and manager from October 2000 through
December 20, 2002, the date of completion of the
Transaction. From January 1997 to October 2000,
Mr. Crawford served as group manager of IITRIs
spectrum engineering group. Mr. Crawford received a BSEE
from Virginia Tech and an MSE from The George Washington
University.

Barry Watsonhas
served as Sector Senior Vice President and Sector Manager for
Alions systems technology sector since May 2002.
Mr. Watson is also a member of Alions ESOP committee.
Mr. Watson served IITRI as systems technology sector
senior vice president and manager from May 1999 until
December 20, 2002, the closing date of the Transaction.
From May 1997 to April 1999, Mr. Watson was senior vice
president and group manager of IITRIs advanced
technology group. Mr. Watson received a BA in Mathematics
from Western Maryland College and a MS in Numerical Science from
Johns Hopkins University.

Rob Goffhas served
as Sector Senior Vice President and and Sector Manager for
Alions defense operations sector since February 2004.
Mr. Goff served as Vice President and Operations Manager
for IITRI from July 1999 until September 2001. From
December 20, 2002 (the closing date of the Transaction)
until February 2004, Mr. Goff was Senior Vice President and
Group Manager for Alion; he held this same position
for IITRI from September 2001 until December 20, 2002.
Prior to working for IITRI, Mr. Goff served on active
duty for 30 years, retiring at the rank of Major General
from the United States Army. Mr. Goff received a BS from
the U.S. Army Military Academy at West Point, followed by a
Masters degree in Spanish Language and Literature from
Middlebury College, and a MBA from Long Island University.

100



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##### 



John Hugheshas
served as Senior Vice President, Chief Financial Officer and
Treasurer of Alion since October 2002. From July 1998 to
September 2002, Mr. Hughes served as co-founder and
principal of Phoenix Financial & Advisory Services LLC,
responsible for providing strategic planning, operations,
financing, merger/acquisition, marketing/communications and
business development support to small and mid-sized companies in
the technology, media and entertainment industries.
Mr. Hughes has also served as principal consultant of
HKSBS, LLC from July 2002 to September 2002 and currently serves
on the HKSBS advisory board. In his position as a principal
consultant, Mr. Hughes functioned as the team leader for
the financial advisory services division. From November 1992 to
May 1998, Mr. Hughes served as senior vice president and
chief financial officer of BTG Inc., responsible for business
and operations management, strategic planning, mergers and
acquisitions, and arranging financing for a $600 million
business with 1,650 employees. Mr. Hughes received a BS in
Economics and Business from Frostburg State University and has
performed graduate coursework in contract formation, government
procurement and financial management.

Stacy Mendlerhas
served as Senior Vice President and Chief Administrative Officer
of Alion since May 2002. She is also a member of Alions
ESOP committee. Ms. Mendler served IITRI as senior
vice president and director of administration from October 1997
until December 20, 2002, the closing date of the
Transaction. As of May 2002, Ms. Mendler
was IITRIs chief administrative officer, as well as
senior vice president. She also served as IITRIs
assistant corporate secretary from November 1998 through
completion of the Transaction and has been a member of the board
of directors of Human Factors Applications, Inc. since February
1999. From February 1995 to October 1997, Ms. Mendler was
vice president and group contracts manager for the energy and
environment group at Science Applications International
Corporation where she managed strategy, proposals, contracts,
procurements, subcontracts and accounts receivable.
Ms. Mendler received a BBA in Marketing from James Madison
University and a MS in Contracts and Acquisition Management from
Florida Institute of Technology.

James Fontanajoined
Alion in January 2004 as Senior Vice President, General Counsel
and Secretary. He has 20 years of experience as an attorney
specializing in government contracts and technology law, and
possesses a wide range of legal subject matter expertise. From
February 2003 to January 2004, Mr. Fontana was in private
practice as the principal of the Law Offices of James C.
Fontana, and from April 1997 to January 2003 he served as
General Counsel of Getronics Government Solutions, LLC (formerly
Wang Federal) and Vinnell Corporation, and was Senior Corporate
Counsel to BDM International, Inc., Vinnells parent
company. Mr. Fontana is a graduate of Temple University
School of Law. He received his undergraduate degree from The
American University, where he majored in economics.

Code of Ethics

The Company adopted a Code of Ethics, Conduct,
and Responsibility (the Code) on December 21,
2001 that applies to all employees, executive officers and
directors of the Company. The Code also serves as a code of
ethics for the Companys chief executive officer, chief
financial officer, director of finance, controller, or any
person performing similar functions. Alion provides access to a
telephone hotline so that employees can report suspected
instances of improper business practices such as fraud, waste,
and violations of the Alion Code of Ethics, Conduct and
Responsibility.

The Company recently completed an examination of
the Code to determine whether it fully meets the definitional
requirements of a code of ethics as set forth in the rules and
regulations of the Securities and Exchange Commission. On
September 15, 2004, the Company adopted a revised Code
applicable to all Alion employees, including Alions CEO
and CFO, and meeting such definitional requirements set forth in
the rules and regulations of the Securities and Exchange
Commission. A copy of the Code is posted for all employees on
the Companys external website at www.alionscience.com The
Company intends to post on its website any amendments to, or
waiver of, its Code.

101



---



##### 








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

The following table sets forth all compensation
with respect to our chief executive officer and our other most
highly paid executive officers (the Named Executive
Officers), whose total salary and bonus exceeded $100,000
for the fiscal years ended September 30, 2004, 2003, and
2002. The acquired Selected Operations of IITRI paid all
compensation for the Named Executive Officers earned or paid
prior to December 20, 2002.

Summary Compensation Table

|                            |                              |                     |      |              |  |       |         |                 |           |                 |         |              |      |  |   |   |  |  |   |      |     |  |         |          |     
|--------------------------- | ---------------------------- | ------------------- | ---- | ------------ |  | ----- | ------- | --------------- | --------- | --------------- | ------- | ------------ | ---- |  | - | - |  |  | - | ---- | --- |  | ------- | -------- | ----
|                            |                              |                     |      | Long-Term    |  |      
|                            |                              | Annual Compensation |      | Compensation |  |      
|                            |                              |                     |      |              |  |      
|Name and Principal          |                              |                     |      | Other Annual |  |       |         | All Other      
|Position                    |                              | Year                |      | Salary       |  | Bonus |         | Compensation(1) |           | LTIP Payouts(2) |         | Compensation
|                            |                              |                     |      |              |  |       |         |                 |           |                 |         |             
|                            |                              |                     |      |              |  |       |         |                 |           |                 |         |              |      |  |   |   |  |  |   |      |     |  |         |         
|Bahman Atefi                |                              |                     | 2004 |              |  |       | 406,156 |                 |           |                 | 410,000 | (4)          |      |  |  |   |  |  |  |      |     |  | 16,445  | (5)     
|Chief Executive Officer     |                              |                     | 2003 |              |  |       | 387,115 |                 |           |                 | 365,000 |              |      |  |  |   |  |  |  | (3)  |     |  | 873,078 | (5),(16)
|                            |                              |                     |      | 2002         |  |       |         | 370,195         |           |                 |         | 350,000      |      |  |   |  |  |  |   |     | (3) |  |         | 21,868   | (5) 
|Barry Watson                |                              |                     | 2004 |              |  |       | 268,160 |                 |           |                 | 90,000  | (4)          |      |  |  |   |  |  |  |      |     |  | 13,852  | (7)     
|Systems Technology Sector   |                              |                     | 2003 |              |  |       | 255,860 |                 |           |                 | 110,000 |              |      |  |  |   |  |  |  | (6)  |     |  | 310,276 | (7),(16)
|                            | Senior VP and Sector Manager |                     |      | 2002         |  |       |         | 228,196         |           |                 |         | 100,000      |      |  |   |  |  |  |   |     | (6) |  |         | 17,278   | (7) 
|Randy Crawford              |                              |                     | 2004 |              |  |       | 257,752 |                 |           |                 | 90,000  | (4)          |      |  |  |   |  |  |  |      |     |  | 13,825  | (9)     
|Spectrum Engineering Sector |                              |                     | 2003 |              |  |       | 245,475 |                 |           |                 | 90,000  |              |      |  |  |   |  |  |  | (8)  |     |  | 285,441 | (9),(16)
|                            | Senior VP and Sector Manager |                     |      | 2002         |  |       |         | 218,144         |           |                 |         | 80,000       |      |  |   |  |  |  |   |     | (8) |  |         | 23,697   | (9) 
|Rob Goff                    |                              |                     | 2004 |              |  |       | 243,271 | (10)            |           |                 | 200,000 | (4)          |      |  |  |   |  |  |  |      |     |  | 14,261  | (17)    
|Defense Operational         |                              |                     | 2003 |              |  |       | 221,349 |                 |           |                 | 60,000  |              |      |  |  |   |  |  |  | (18) |     |  | 15,999  | (17)    
|                            | Information Sector Senior VP |                     |      | 2002         |  |       |         | 195,002         |           |                 |         | 50,000       |      |  |   |  |  |  |   |     |     |  |         | 14,865   | (17)
|                            | and Sector Manager           |                     |      |              |  |       |         |                 |           |                 |         |              |      |  |   |   |  |  |   |      |     |  |         |          |     
|Jack Hughes                 |                              |                     | 2004 |              |  |       | 245,195 |                 |           |                 | 135,000 | (4)          |      |  |  |   |  |  |  |      |     |  | 14,957  | (15)    
|Senior VP, Chief Financial  |                              |                     | 2003 |              |  |       | 220,677 |                 |           |                 | 65,000  |              |      |  |  |   |  |  |  | (12) |     |  | 11,675  | (15)    
|                            | Officer and Treasurer        |                     |      | 2002         |  |       |         | 4,335           | (11),(13) |                 |         | 35,000       | (14) |  |   |  |  |  |   |     |     |  |         |         |     



---



| |     |                                                                                                                                                                                                                                                                                                                                                   
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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 2003, Dr. Atefi was awarded
    65,500 shares of performance-based phantom stock. In
    November 2003, Dr. Atefi was awarded 18,695 shares of
    performance-based phantom stock as described more fully below.                                                                                                                     
|
| | (4) | Bonus amounts for fiscal year 2004 were paid in
    December 2004.                                                                                                                                                                                                                                                                                
|
| | (5) | 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.

2002 includes Company matching contributions of
$6,000 and $9,453 under IITRIs 403(b) and 401(a) plans,
respectively. Includes $700 in term life insurance premiums paid
by IITRI. Includes $5,215 in club membership dues. Includes
$500 for preparation of employees taxes.

102



---



##### 





| |     |                                                                                                                                                                                                                               
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (6) | In February 2003, Mr. Watson was awarded
    34,000 shares of performance-based phantom stock. In
    November 2003, Mr. Watson was awarded 6,798 shares of
    performance-based phantom stock as described more fully below.
|
| | (7) | 2004 includes Company matching contributions of
    $13,292 under Alions KSOP plan. Includes $560 in term life
    insurance premiums paid by Alion.                                                                         

2003 includes Company matching contributions of
$955 and $1,910 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 $11,878
under Alions KSOP. Includes $295,000 vested under a
Retention Incentive Agreement. Includes $533 in term life
insurance premiums paid by Alion.

2002 includes Company matching contributions of
$6,580 and $8,093 under IITRIs 403(b) and 401(a) plans,
respectively. Includes $482 in term life insurance premiums paid
by IITRI. Includes $2,123 in club membership dues.



| |     |                                                                                                                                                                                                                                   
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (8) | In February 2003, Mr. Crawford was awarded
    33,000 shares of performance-based phantom stock. In
    November 2003, Mr. Crawford was awarded 6,798 shares
    of performance-based phantom stock as described more fully below.
|
| | (9) | 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.

2002 includes $8,465 in cash payout for unused
vacation time. Includes Company matching contributions of $6,675
and $8,095 under IITRIs 403(b) and 401(a) plans,
respectively. Includes $462 in term life insurance premiums paid
by IITRI.



|     |                                                                                                                                                                                                                               
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | In February 2004, Mr. Goff was promoted to
    Sector Senior Vice President and Sector Manager.                                                                                                                               
|    
|(11) | Jack Hughes was appointed senior vice president,
    chief financial officer and treasurer of Alion as of
    October 1, 2002.                                                                                                
|    
|(12) | In February 2003, Mr. Hughes was awarded
    10,000 shares of performance-based phantom stock. In
    November 2003, Mr. Hughes was awarded 6,798 shares of
    performance-based phantom stock as described more fully below.
|    
|(13) | Jack Hughes entered into an employment agreement
    with IITRI in September 2002, pursuant to which he received
    an initial base annual salary of $225,000.                                                               
|    
|(14) | Represents a signing bonus paid to
    Mr. Hughes upon his execution of his employment agreement
    with IITRI.                                                                                                              
|    
|(15) | 2004 includes Company matching contributions of
    $14,423 under Alions KSOP and $534 in term life insurance
    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.



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(16) | Retention Incentive Agreements. In September
    2001, IITRI entered into and funded retention incentive
    agreements with Bahman Atefi, Randy Crawford and Barry Watson
    for $550,000, $270,000 and $215,000, respectively, via a
    non-qualified deferred compensation agreement. Alions
    acquisition if IITRIS assets constituted a change in
    control of IITRI and these retention incentive awards vested
    fully upon closing of the Transaction.
|    
|(17) | 2004 includes Company matching contributions of
    $13,753 under Alions KSOP and $508 in term life insurance
    paid by Alion.                                                                                                                                                                                                                                                                                                                                       

103



---



##### 



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.

2002 includes Company matching contributions of
$5,890 and $8,657 under IITRIs 403(b) and 401(a) plans,
respectively. Includes $408 in term life insurance premiums paid
by IITRI.



|     |                                                       
|---- | ------------------------------------------------------
|(18) | In 2004, Mr. Goff received an award of 2,500
    SARs.

Stock Appreciation Rights Plans

In November 2002, our board of directors has
adopted a Stock Appreciation Rights (SAR) Plan. The purpose of
the SAR plan is to attract, retain, reward and motivate
employees responsible for our continued growth and development
and the Companys future financial success.

The SAR plan has a 10-year term and provides that
the Company can award stock appreciation rights to Alion
directors, officers, employees and/or consultants. Awards under
the plan may not exceed 10% of the shares of Alion common stock
on a fully diluted basis, assuming the exercise of all
outstanding warrants, options, rights and convertible
securities. Under the plan, the chief executive officer, with
the approval of the board of directors or its compensation
committee, has the authority to grant awards as he deems
appropriate.

A SAR award provides a grantee with the right to
receive payment for the increase in appraised value of a share
of Alion common stock from the grant date to the exercise date.
The SAR plan contains a provision to prevent an award to a
person who is or would become (if the award were made) a
disqualified person. For this purpose,
disqualified person means any individual who
directly or beneficially holds at least 10% of Alion equity,
including outstanding common stock and synthetic
equity, such as SARs or phantom stock. Any award that
violates this provision is void.

Under the SAR plan, awards to employees vest over
five years at 20% per year. Awards to directors under the
plan vest ratably over each directors term of service.

The SAR plan contains a provision for accelerated
vesting. Under the SAR plan, upon a grantees death,
one-third of any unvested award vests automatically and is
considered to have been immediately exercised. Under the SAR
plan, a grantee may request payment for any vested SARs at any
time and can continue to hold unexercised SARs for up to
60 days after the date at which a grant becomes completely
vested. The SAR plan permits the plan administrator to defer
requested exercise payments for up to five years based on the
current and anticipated cash needs of the Company, and provides
for interest to accrue under certain circumstances. If a grantee
dies or becomes disabled, the payment of vested SARs will be
made 60 days after the date of death or disability. The
payments are determined by the number of SARs vested multiplied
by the difference between the share price at date of grant and
the share price at date of payment. Awards to directors are paid
out 60 days after the expiration of their term of service.

As of September 30, 2004, the Company had
issued 242,350 SARs of which 209,390 were still outstanding.

Our board of directors is the fiduciary for
both SAR plans and may amend or terminate either SAR plan at any
time.

104



---



##### 



The following table sets forth information
regarding grants of SARs to the Named Executive Officers
pursuant to the SAR plan in fiscal year 2004. This table does
not include warrants purchased from the Company described
elsewhere in this Annual Report. The only Named Executive
Officer who held warrants to purchase Alion common stock at
September 30, 2004 was Dr. Atefi (22,062 shares).

AR Grants in Last Fiscal Year

|                  |  |                  |       |                 |  |          |    |                 |  |            |       |  |  |  |               |  |  |   |        | 
|----------------- |  | ---------------- | ----- | --------------- |  | -------- | -- | --------------- |  | ---------- | ----- |  |  |  | ------------- |  |  | - | ------ | 
|                  |  |                 
|                  |  | Individual Grant
|                  |  |                 
|                  |  |                  |       | Percent of      |  |         
|                  |  |                  |       | SARs Granted    |  | Exercise |    |                 |  | Grant Date
|                  |  | No. of SARs      |       | to Employees in |  | of Base  |    |                 |  | Present   
|Name              |  | Granted          |       | FY              |  | Price    |    | Expiration Date |  | Value(1)  
|                  |  |                  |       |                 |  |          |    |                 |  |           
|                  |  |                 
|                  |  | (In dollars)*   
|Bahman Atefi(2)   |  |                  |       |                 |  |          |    |                 |  |            |       |  |  |  |               |  |  |   |        | 
|Barry Watson(2)   |  |                  |       |                 |  |          |    |                 |  |            |       |  |  |  |               |  |  |   |        | 
|Randy Crawford(2) |  |                  |       |                 |  |          |    |                 |  |            |       |  |  |  |               |  |  |   |        | 
|Jack Hughes(2)    |  |                  |       |                 |  |          |    |                 |  |            |       |  |  |  |               |  |  |   |        | 
|Rob Goff          |  |                  | 2,500 |                 |  |          | ** |                 |  | $          | 14.71 |  |  |  | November 2009 |  |  | $ | 25,181 | 



---



| |   |                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | Refers to the Alion Science and Technology
    Corporation 2002 Stock Appreciation Rights (SAR) Plan
    (see above, Stock Appreciation Rights Plan for more
    information regarding the SAR Plan).



|   |                                                            
|-- | -----------------------------------------------------------
|** | Percent of SARs granted in FY04 is less than
    1 percent.



|    |                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The present value of the grant at the date of
    grant has been calculated using the Black-Scholes method. The
    Black-Scholes method takes into account assumptions about future
    interest rates, stock volatility, and expected SAR life. The
    actual value, if any, that may be realized by each individual
    will depend upon the value of Alions common stock on the
    date of exercise.
|   
|(2) | No SAR awards as of September 30, 2004.                                                                                                                                                                                                                                                                                                                                                                    

The following table sets forth information
regarding the exercise of SARs during fiscal year 2004 by the
named executive Officers and SARs held by them at
September 30, 2004.

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)   |     |               |  |          |  |                              |  |                              |  |  |          |          |  |   |               |           
|Barry Watson(1)   |     |               |  |          |  |                              |  |                              |  |  |          |          |  |   |               |           
|Randy Crawford(1) |     |               |  |          |  |                              |  |                              |  |  |          |          |  |   |               |           
|Jack Hughes(1)    |     |               |  |          |  |                              |  |                              |  |  |          |          |  |   |               |           
|Rob Goff(2)       |     |               |  |          |  |                              |  |                              |  |  | 240/ 960 |          |  | $ | 2,386/ $9,542 |           
|                  | (3) |               |  |          |  |                              |  |                              |  |  |          | 0/ 2,500 |  |   | $             | 0/ $13,075 | 



---



|    |                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Refers to the Alion Science and Technology
    Corporation 2002 Stock Appreciation Rights (SAR) Plan
    (see above, Stock Appreciation Rights Plan for more
    information regarding the SAR Plan).
|   
|(1) | No SAR awards as of September 30, 2004.                                                                                                                                                                  
|   
|(2) | In 2003, Mr. Goff was awarded 1,200 SARs at
    the exercise price of $10.00 per share. As of
    September 30, 2004, the value of Alion common stock is
    $19.94 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, 2004, the value of Alion common stock is
    $19.94 per share.                           

105



---



##### 





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | The number of exercisable and unexercisable SARs
    is dependent on the plan vesting schedule. For example, as of
    September 30, 2004, for Mr. Goff, only 20% of the
    1,200 SARs awarded in 2003 have vested, resulting in 240
    exercisable SARs. As of September 30, 2004, the remaining
    SARs are unexercisable.                                                                                                                                                                                                                                               
|   
|(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, 2004, for
    Mr. Goff, the exercise price is $10 per share and the
    current value per share of Alion common stock is $19.94. The
    value of the exercisable SARs is $2,386 (240 shares
    multiplied by the difference between the current fair value per
    share of Alion stock, $19.94, and the exercise price per share,
    $10.00).

Phantom Stock Plan

Prior to the close of the Transaction, State
Street, the ESOP trustee, engaged Ernst & Young to
perform an analysis of the compensation of each member of
Alions senior management team. The ESOP trustee requested
this analysis to determine how Alions executive officers
should be compensated so as to incentivize and retain these
officers to serve Alion over the long term and thereby benefit
participants in the ESOP. As a result of this analysis, it was
determined that additional compensation would be provided to
Alions senior management, and that this additional
compensation would take the form of awards of phantom stock that
provides senior management with a simulated proprietary interest
in our Company.

The terms of the phantom stock plan were approved
by the compensation committee of Alions board of
directors. Although not required by the provisions of
Alions bylaws, the compensation committee then submitted
the plan to the full Alion board of directors for its approval
and adoption. In February 2003 the phantom stock plan was
adopted by the full board

Phantom stock refers to hypothetical shares of
Alion common stock. Each recipient of a phantom stock award
receives a grant for a specified number of shares. Recipients,
upon vesting, are entitled to receive an amount of money equal
to the product of the number of hypothetical shares vested and
the then current value of our common stock, based on the most
recent valuation of the shares of common stock held by the ESOP.
Alion will make cash payments pursuant to vested phantom stock
awards generally within a certain specified period after
vesting. Phantom stock may increase, or decrease, in value over
time, resulting in cash payments under the phantom stock awards
that may be greater, or less than, the value of the phantom
stock at the date of grant.

The phantom stock plan has a term of ten years
and provides that key management employees may be granted awards
of phantom stock by the compensation committee of our board of
directors. The board of directors may also grant awards of
phantom stock. An employee who has received a grant of phantom
stock has no right to receive payment for any share of phantom
stock until it is vested.

The phantom stock plan contains a provision to
prevent an award to a person who is or would become (if the
award were made) a disqualified person for as long
as we maintain the ESOP. For this purpose, disqualified
person means any individual who directly or beneficially
(such as under the Alion ESOP) holds at least 10% of Alion
equity, including outstanding common stock and synthetic
equity, such as SARs or phantom stock. Any award that
violates this provision is void.

Under the plan, the compensation committee, or
our full board, may:



| |   |                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Select which employees are to be awarded phantom
    stock and determine when it will be awarded;                                                                                  
|
| |  | Determine the number of shares of common stock to
    be covered by or used for reference purposes for a grant of
    phantom stock;                                               
|
| |  | Adjust the number and price of shares as a result
    of special circumstances or certain business actions, including
    but not limited to mergers, reorganizations and the like;

106



---



##### 





| |   |                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Determine, modify, and waive from time to time
    the terms and conditions, including without limitation vesting
    and other restrictions, of any grant of phantom stock;                                                                                                           
|
| |  | Accelerate or otherwise change the time in which
    a grant of phantom stock may be exercised;                                                                                                                                                                                        
|
| |  | Impose limitations on grants of phantom stock,
    including limitations on transfer provisions;                                                                                                                                                                                       
|
| |  | Modify, extend, or renew outstanding awards of
    phantom stock, or accept the surrender of outstanding awards of
    phantom stock and substitute new awards of phantom stock;                                                                                                       
|
| |  | Administer and interpret the provisions of the
    plan;                                                                                                                                                                                                                               
|
| |  | Terminate the plan;                                                                                                                                                                                                                                                                    
|
| |  | Decide all questions of fact arising in the
    application of the plan; and                                                                                                                                                                                                           
|
| |  | Prescribe, amend, and rescind rules and
    regulations relating to the plan, including (under the first
    phantom stock plan only) rules and regulations relating to
    sub-plans established for the purpose of qualifying for
    preferred tax treatment under foreign tax laws.

Under the plan, members of our compensation
committee who are eligible to receive phantom stock or who have
been granted phantom stock may vote on any matters affecting the
administration of the plan or the grant of phantom stock, except
that a member cannot act upon the granting of phantom stock to
himself or herself. These voting provisions also apply to
members of our board of directors when the board resolves to act
under the plan.

When granted, phantom stock provides the employee
with the right to receive payment upon exercise of the phantom
stock. The terms of each phantom stock grant are evidenced in a
phantom stock agreement which determines the:



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

The plan also provides that phantom stock awarded
at different times need not contain similar provisions.

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

Terminated employees will usually forfeit their
rights to all unvested phantom stock. In certain instances,
however, an employee may receive a pro rata portion of his or
her unvested phantom stock upon termination. For example, when
an employee voluntarily terminates for good reason or when he or
she is involuntarily terminated for any reason other than cause
or just cause, as defined in his or her employment agreement
with us, then that employee will receive a pro rata portion of
his or her unvested phantom stock based on a ratio:



| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the numerator of which is the number of months
    from the date of grant of the phantom stock through the end of
    the month of such termination; and
|
| |  | the denominator of which is 60.                                                                                                                         

Under the plan, the payment we will make upon the
vesting of phantom stock is intended to be made in one lump sum
within 60 days of the date of vesting unless a later date
is set forth in an individual award agreement. The compensation
committee, or our board of directors if it resolves to do so,
may delay payment for five years. If the payment is delayed, it
will include interest accrued at the prime rate as of the date
of vesting until the payment date. In general, we expect that
the compensation committee, or the board if it resolves to do
so, will examine our available cash and anticipated cash needs
in determining whether to delay payment. Under limited
circumstances, payments from the exercise of phantom stock may
be rolled over into any non-qualified deferred compensation plan
available to the employee.

107



---



##### 



As of June 25, 2004, the phantom stock plan
was amended to allow an employee who has elected as the exercise
date for phantom stock the fifth (5th) anniversary of the date
of grant of such phantom stock, and who is also a participant in
the Alion Science and Technology Corporation Executive Deferred
Compensation Plan (the Deferred Compensation Plan),
to elect, at least 180 days prior to such exercise date, to
defer receipt of all or a portion of the plan benefit through a
contribution to the Deferred Compensation Plan equal to the
amount that would otherwise have been payable.

No voting or other rights associated with
ownership of our common stock is given to phantom stockholders.
References to shares of common stock under the plan are for
accounting and valuation purposes only. As a result, an employee
who receives phantom stock does not have any of the rights of a
stockholder as a result of a grant of phantom stock.

As provided by the compensation committee, or our
full board, the phantom stock awards, as currently granted, vest
according to the following schedules:

|                            |  |          |    |          |  |  |    |  
|--------------------------- |  | -------- | -- | -------- |  |  | -- | -
|                            |  | November |    | February
|Anniversary from Grant Date |  | 2003(1)  |    | 2003(1) 
|                            |  |          |    |         
|1st                         |  |          | 20 | %        |  |  |   |  
|2nd                         |  |          | 20 | %        |  |  |   |  
|3rd                         |  |          | 20 | %        |  |  | 50 | %
|4th                         |  |          | 20 | %        |  |  | 25 | %
|5th                         |  |          | 20 | %        |  |  | 25 | %

The number of shares of our common stock used for
reference purposes with respect to grants of phantom stock under
the plan is as follows:

|                  |  |               |         |                          |  |                    |         |  |  |  |         |    
|----------------- |  | ------------- | ------- | ------------------------ |  | ------------------ | ------- |  |  |  | ------- | ---
|                  |  |               |         |                          |  | Cumulative Shares 
|Date of Issuance  |  | Shares Issued |         | Cumulative Shares Issued |  | Authorized by Plan
|                  |  |               |         |                          |  |                   
|February 14, 2003 |  |               | 171,000 |                          |  |                    | 171,000 |  |  |  | 173,000 | (1)
|November 11, 2003 |  |               | 52,685  |                          |  |                    | 223,685 |  |  |  | 225,000 | (1)



---



|    |                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Number of shares authorized under the phantom
    stock plan as periodically amended and approved by the
    compensation committee of Alions board of directors.

The following table sets forth information
regarding phantom stock granted to the named executive officers
pursuant to the phantom stock plan.

|               |  |                |              |              |  |              |                            |  |  |  |                            | 
|-------------- |  | -------------- | ------------ | ------------ |  | ------------ | -------------------------- |  |  |  | -------------------------- | 
|               |  | Number of      |              |              |  |             
|               |  | Shares, Units, |              | Full Vesting |  | Period Until
|Name           |  | or Rights(1)   |              | Period(2)    |  | Payout(3)   
|               |  |                |              |              |  |             
|Bahman Atefi   |  |                | 65,50018,695 |              |  |              | February 2008November 2008 |  |  |  | February 2008November 2008 | 
|Barry Watson   |  |                | 34,0006,798  |              |  |              | February 2008November 2008 |  |  |  | February 2008November 2008 | 
|Randy Crawford |  |                | 33,0006,798  |              |  |              | February 2008November 2008 |  |  |  | February 2008November 2008 | 
|Jack Hughes    |  |                | 10,0006,798  |              |  |              | February 2008November 2008 |  |  |  | February 2008November 2008 | 
|Robert Goff    |  |                | 3,399        |              |  |              | November 2008              |  |  |  | November 2008              | 



---



|    |                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The awards made in November 2003 were made to
    executive and senior management of Alion. The initial set of
    awards made in February 2003 were made solely to Alions
    executive management team.
|   
|(2) | Pursuant to the 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 phantom stock plan or applicable
    award agreement, recipients will be paid commencing on the fifth
    year from the date of grant.                                                    

108



---



##### 



Employment Agreements

Alion has entered into employment agreements with
Bahman Atefi, Barry Watson, Randy Crawford, John Hughes and
Robert Goff, the terms of which are set forth below.

Under his employment agreement, Dr. Atefi
will serve as President and Chief Executive Officer of Alion for
a term of 60 months, commencing on December 20, 2002
and ending on December 20, 2007. He will receive a base
annual salary of $425,200 for fiscal year 2005 and will be
eligible for a performance-based annual incentive bonus.
Dr. Atefi is also eligible to participate in Alions
Deferred Compensation Plan, Stock Appreciation Rights Plan, and
Phantom Stock Plan. Under the terms of his employment agreement,
Dr. Atefi will be given an allowance for a company car. In
addition, his initiation fee and membership dues for a country
club for business entertainment purposes are provided for under
Dr. Atefis employment agreement. Dr. Atefi may
terminate his employment agreement with 30 days advance
written notice. If he does so, however, he will forfeit any
incentive payments which might otherwise have been due him.
Alion may terminate Dr. Atefis employment agreement
for just cause, which includes, amongst others, theft or
embezzlement of our material property, gross negligence, willful
misconduct or neglect by Dr. Atefi of his duties. Alion may
also terminate Dr. Atefis employment agreement
without cause, although if Alion does so, it will have to make a
lump sum severance payment to Dr. Atefi equal to the
greater of



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

Under his employment agreement, Dr. Atefi is
entitled to terminate his employment and receive the same lump
sum severance payment described above, if he terminates his
employment for any of the following reasons within
24 months following a 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.

For a minimum of one year after termination of
Dr. Atefis employment, he is not permitted, in any
way, to compete with Alion or solicit our employees.

Under his employment agreement, Mr. Watson
will serve as Senior Vice President and Sector Manager of the
systems technology sector for Alion for a term of
60 months, commencing on December 20, 2002 and ending
on December 20, 2007. He will receive a base annual salary
of $280,100 for the fiscal year 2005 and will be eligible for a
performance-based annual incentive bonus. Mr. Watson is
also eligible to participate in Alions Deferred
Compensation Plan, Stock Appreciation Rights Plan, and Phantom
Stock Plan. Under the terms of his employment agreement,
Mr. Watson will be given an allowance for a company car.
Mr. Watson may terminate his employment agreement with
30 days notice. If he does so, however, he will forfeit any
incentive payments which might otherwise have been due him.
Alion may terminate Mr. Watsons employment agreement
for cause, which includes, amongst others, commission of a crime
involving fraud, theft or embezzlement, reckless, willful or
criminal misconduct, or gross negligence in
Mr. Watsons performance of his duties. Alion may also
terminate Mr. Watsons employment without cause,
although if Alion does so, it will have to make a lump sum
severance payment to Mr. Watson equal to the greater of
Mr. Watson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. Watsons base salary.

109



---



##### 



Under his employment agreement, Mr. Watson
is entitled to terminate his employment and receive the same
lump sum severance payment described above, if he terminates his
employment for any of the following reasons within
24 months following a 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.

For a minimum of one year after termination of
Mr. Watsons employment, he is not permitted, in any
way, to compete with Alion or solicit our employees.

Under his employment agreement, Mr. Crawford
will serve as Senior Vice President and Sector Manager of the
spectrum engineering sector for Alion for a term of
60 months, commencing on December 20, 2002 and ending
on December 20, 2007. He will receive a base annual salary
of $270,100 for fiscal year 2005 and will be eligible for a
performance-based annual incentive bonus. Mr. Crawford is
eligible to participate in Alions Deferred Compensation
Plan, Stock Appreciation Rights Plan, and Phantom Stock Plan.
Under the terms of his employment agreement, Mr. Crawford
will be given an allowance for a company car. Mr. Crawford
may terminate his employment agreement with 30 days notice.
If he does so, however, he will forfeit any incentive payments
which might otherwise have been due him. Alion may terminate
Mr. Crawfords employment agreement for cause, which
includes, amongst others, commission of a crime involving fraud,
theft or embezzlement, reckless, willful or criminal misconduct,
or gross negligence in Mr. Crawfords performance of
his duties. Alion may also terminate Mr. Crawfords
employment without cause, although if Alion does so, it will
have to make a lump sum severance payment to Mr. Crawford
equal to the greater of



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

Under his employment agreement, Mr. Crawford
is entitled to terminate his employment and receive the same
lump sum severance payment described above, if he terminates his
employment for any of the following reasons within
24 months following a 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.

For a minimum of one year after termination of
Mr. Crawfords employment he is not permitted, in any
way, to compete with Alion or solicit our employees.

Under his employment agreement, Mr. Hughes
will serve as Senior Vice President and Chief Financial Officer
of Alion for a term of 60 months, commencing on
December 20, 2002 and ending on December 20, 2007. He
will receive a base annual salary of $275,000 for fiscal year
2005 and will be eligible for a performance-based annual
incentive bonus. Mr. Hughes is also eligible to participate
in Alions Deferred Compensation Plan, Stock Appreciation
Rights Plan, and Phantom Stock Plan. Under the terms of his
employment agreement, Mr. Hughes will be given an allowance
for a company car. Mr. Hughes may terminate his employment
agreement with 30 days notice. If he does so, however, he
will forfeit any incentive

110



---



##### 



payments which might otherwise have been due him.
Alion may terminate Mr. Hughes employment agreement
for cause, which includes, amongst others, fraud, theft or
embezzlement, reckless, willful or criminal misconduct, or gross
negligence in Mr. Hughes performance of his duties.
Alion may also terminate Mr. Hughes employment
without cause, although if Alion does so, it will have to make a
lump sum severance payment to Mr. Hughes equal to the
greater of




| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Mr. Hughes 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. Hughes base salary.                                                                                                           

Under his employment agreement, Mr. Hughes
is entitled to terminate his employment and receive the same
lump sum severance payment described above, if he terminates his
employment for any of the following reasons within
24 months following a 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.

For a minimum of one year after termination of
Mr. Hughes employment he is not permitted, in any way, to
compete with Alion or solicit our employees.

Under his employment agreement, Mr. Goff
will serve Senior Vice President and Sector Manager of the
defense operations integration sector for Alion, effective
February 14, 2004. He will receive a base annual salary of
$270,200 for the fiscal year 2005. Mr. Goff is also
eligible to participate in Alions Deferred Compensation
Plan, Stock Appreciation Rights Plan, and Phantom Stock Plan.
Mr. Goff will be given an allowance for the lease of a
company car. Mr. Goff may terminate his employment
agreement with 30 days notice. If he does so, however, he
will forfeit any incentive payments which might otherwise have
been due him. Alion may terminate Mr. Goffs
employment agreement for cause, which includes, amongst others,
commission of a crime involving fraud, theft or embezzlement,
reckless, willful or criminal misconduct, or gross negligence in
Mr. Goffs performance of his duties. Within two years
from the effective date, Alion may also terminate
Mr. Goffs employment without cause, although if Alion
does so, it will have to make a lump sum severance payment to
Mr. Goff equal to one year of annual base salary as of the
date of termination.

Under his employment agreement, Mr. Goff is
entitled to terminate his employment and receive the same lump
sum severance payment described above, if he terminates his
employment for any of the following reasons within
24 months following a 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

Dr. Atefi entered into a Deferred
Compensation Agreement with Alion as a condition to completing
the acquisition, pursuant to which he has forgone an aggregate
of approximately $1.0 million in deferred compensation
under his retention incentive agreement with IITRI and
under an Executive Deferred Compensation Plan entered into
between IITRI and Dr. Atefi in 1997. Alion used this
amount to decrease the principal amount of the Mezzanine Note
and warrants issued to IITRI at closing. On
December 20, 2002,

111



---



##### 



Alion entered into an agreement with
Dr. Atefi, the payment terms of which resemble those of the
Mezzanine Note, which entitle Dr. Atefi to payment by Alion
of approximately $857,000 in principal amount on
December 20, 2008, plus 12% cash interest per year. Under
this Agreement, Dr. Atefi was also granted warrants which
entitle him to purchase approximately 22,062 shares of
Alions common stock at an exercise price of $10 per
share. On October 29, 2004, Dr. Atefi elected to
redeem the amount due under his Deferred Compensation Agreement.
Dr. Atefi was paid $857,000 plus $193,682 in accrued
interest. Dr. Atefis warrants remain outstanding.


Deferred Compensation Plans

We maintain two Deferred Compensation Plans. One
plan, the Executive Deferred Compensation Plan, covers members
of management and other highly compensated officers of the
Company. The other plan, the Directors Deferred Compensation
Plan, covers members of our board of directors.

Each plan permits an individual to make a
qualifying election to forego current payment and defer a
portion of his or her compensation. Officers may defer up to 50%
of their annual base salary and up to 100% of their bonus, SAR
and/or phantom stock payments. Directors may defer up to 100% of
their fees and up to 100% of their SAR payments.

Each Plan permits an individual to defer payment
to a specified future date and to specify whether deferrals are
to be paid in a lump sum or installments. Under certain limited
circumstances, deferrals may be paid out early or further
deferred. In general, individuals may make only one qualifying
deferral election per year.






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

The following table sets forth certain
information as of September 30, 2004, regarding the
beneficial ownership of the Companys common stock by
certain beneficial owners and all directors and Named Executive
Officers, both individually and as a group. The Company knows of
no other person not disclosed herein beneficially owning more
than 5% of the Companys Common Stock. The address of the
beneficial owner (as required) and the dates applicable to the
beneficial ownership indicated are set forth in the footnotes
below.

|                                                      |  |                |              |                   |  |             |           |      |  |  |      | 
|----------------------------------------------------- |  | -------------- | ------------ | ----------------- |  | ----------- | --------- | ---- |  |  | ---- | 
|                                                      |  |                |              | Amount and Nature |  |            
|                                                      |  |                |              | Beneficial of     |  | 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)  |  |  | 32.0 | 
|Directors(4) and Executive
    Officers:              |  |                |              |                   |  |             |           |      |  |  |      | 
|Bahman Atefi                                          |  |                | Common stock |                   |  |             | 87,316    | (5)  |  |  | 2.6  | 
|Jack Hughes                                           |  |                | Common stock |                   |  |             | 5,262     | (6)  |  |  | *    | 
|Barry Watson                                          |  |                | Common stock |                   |  |             | 51,112    | (7)  |  |  | 1.5  | 
|Randy Crawford                                        |  |                | Common stock |                   |  |             | 47,343    | (8)  |  |  | 1.4  | 
|Rob Goff                                              |  |                | Common stock |                   |  |             | 8,105     | (9)  |  |  | *    | 
|All Directors and Officers as a Group (5
    Persons) |  |                | Common stock |                   |  |             | 199,138   | (10) |  |  | 5.9  | 



---



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



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Applicable percentages based on
    3,376,197 shares outstanding on September 30, 2004,
    and also includes shares of Common Stock subject to warrants
    that may be exercised within 60 days of September 30,
    2004. 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

112



---



##### 



|    |                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | 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 65,254 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 5,262 shares of Alions common stock
    pursuant to the KSOP.                                                                                                                                                                                                                                                                
|   
|(7) | Includes interests to
    purchase 51,112 shares of Alions common stock
    pursuant to the KSOP.                                                                                                                                                                                                                                                               
|   
|(8) | Includes interests to
    purchase 47,343 shares of Alions common stock
    pursuant to the KSOP.                                                                                                                                                                                                                                                               
|   
|(9) | Includes interests to
    purchase 8,105 shares of Alions common stock
    pursuant to the KSOP                                                                                                                                                                                                                                                                 



|     |                                                                                                                                                                                                             
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Includes 119,138 shares of KSOP interests
    beneficially owned by the Named Executive Officers as of
    September 30, 2004, warrants to
    purchase 22,062 shares of common stock held by
    Dr. Atefi.



| |                   
| | ------------------
| | Changes in Control

We do not know of any agreements, the operation
of which may at a subsequent date result in a change in control
of the Company.






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

On March 28, 2003, IITRI sold and Jon
Emery, the then General Counsel of Alion, purchased Mezzanine
Notes in the principal amount of $750,000 and accompanying
Mezzanine Warrants to purchase 19,327 shares of Alion
common stock at an exercise price of $10 per share, for an
aggregate purchase price of $750,000. On November 12, 2003,
Alion purchased the Mezzanine Note and all accompanying warrants
from Mr. Emery for an aggregate purchase price of
$1,034,020, which amount consisted of $795,000 for the purchase
of the Notes, $193,270 for the purchase of the warrants, and
$35,000 for reimbursement for legal and other professional fees
and $10,750 for interest earned on the Mezzanine Note. The
determination to purchase the notes and warrants for this amount
was made by the Chief Executive Officer. The purchase price for
the Mezzanine Notes represents a premium of 6% above the
aggregate principal amount of the notes, which is derived from
repurchase terms contained in the notes. The $10 per share
purchase price for the warrants represents a negotiated amount
with Mr. Emery in conjunction with his resignation.

On February 11, 2004, the Company borrowed
$750,000 from an officer of the Company. In exchange, on
June 7, 2004, the Company issued the officer a promissory
note with interest at a rate of 15% per annum until
March 31, 2009. The annual interest period was effective
beginning February 11, 2004. The agreement essentially
replaces a note, which is described above, for the same sum
previously issued to another officer of the Company, the
termination of whose employment relationship resulted in
repurchase of the note. The agreement with the officer is
subordinate to the Term B Senior Credit Facility. On
December 8, 2004, the Promissory Note with the officer was
extinguished. An amount of $750,000 plus accrued interest of
$21,635 was paid to the officer.

Except as described above, since the beginning of
our last fiscal year, including any currently proposed
transactions, no directors, executive officers or immediate
family members of such individuals were engaged in transactions
with us or any subsidiary involving more than $60,000, other
than the arrangements described in the section Executive
Compensation.

113



---



##### 








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

Consistent with the charter of Audit and Finance
Committee, the Committee is responsible for engaging the
Companys independent auditors. Beginning with the year
ended September 30, 2003, all audit and permitted non-audit
services require pre-approval by the Audit and Finance
Committee. The full Committee approves proposed services and fee
estimates for these services. During fiscal years 2003 and 2004
all services performed by the auditors were pre-approved.

The following table summarizes the fees of KPMG
LLP, our independent auditors, billed to the Company for each of
the last two fiscal years for audit services and billed to the
Company in each of the last two fiscal years for other services:

|                      |  |      |         |      |  |   |           | 
|--------------------- |  | ---- | ------- | ---- |  | - | --------- | 
|Fee Category          |  | 2004 |         | 2003
|                      |  |      |         |     
|Audit Fees(1)         |  | $    | 536,772 |      |  | $ | 599,734   | 
|Audit-Related Fees(2) |  | $    | 382,661 |      |  | $ | 811,117   | 
|Tax fees and other    |  | $    |        |      |  | $ |          | 
|                      |  |      |         |      |  |   |           | 
|Total Fees            |  | $    | 919,433 |      |  | $ | 1,410,851 | 
|                      |  |      |         |      |  |   |           | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 2004, these services related primarily to
    audit services provided in conjunction with acquisitions,
    accounting consultations, and audits of employee benefit plans.
    These services were approved by the Audit and Finance Committee.

114



---



##### 






PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

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

|                                                                                         |                                                                                                                                                                                                       |  |    |    | 
|---------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -- | -- | 
|Financial Statements                                                                     |                                                                                                                                                                                                       |  |    |   
|Report of Independent Registered Public
    Accounting Firm                              |                                                                                                                                                                                                       |  | 55 |   
|Consolidated Financial Statements:                                                       |                                                                                                                                                                                                       |  |    |   
|                                                                                         | Consolidated Balance Sheets as of
    September 30, 2004 and 2003                                                                                                                                     |  |    | 56 | 
|                                                                                         | Consolidated Statements of Operations for the
    years ended September 30, 2004 and 2003 and for the period
    from October 10, 2001 (inception) through
    September 30, 2002                     |  |    | 57 | 
|                                                                                         | Consolidated Statements of Shareholders
    Equity (Deficit) for the years ended September 30, 2004 and
    2003 and for the period from October 10, 2001
    (inception) through September 30, 2002 |  |    | 58 | 
|                                                                                         | Consolidated Statements of Cash Flows for the
    years ended September 30, 2004 and for the period from
    October 10, 2001 (inception) through
    September 30, 2002                              |  |    | 59 | 
|                                                                                         | Notes to Consolidated Financial Statements                                                                                                                                                            |  |    | 61 | 
|Consolidated Financial Statement
    Schedule                                            |                                                                                                                                                                                                       |  |    |   
|                                                                                         | Schedule II  Valuation and
    Qualifying Accounts                                                                                                                                                   |  |    | 78 | 
|Consolidated Financial Statements of Selected
    Operations of IIT Research Corporation |                                                                                                                                                                                                       |  |    |   
|Independent Auditors Report                                                             |                                                                                                                                                                                                       |  | 79 |   
|Consolidated Financial Statements:                                                       |                                                                                                                                                                                                       |  |    |   
|                                                                                         | Consolidated Balance Sheets as of
    September 30, 2002 and 2001                                                                                                                                     |  |    | 80 | 
|                                                                                         | Consolidated Statements of Income for the years
    ended September 30, 2002, 2001, and 2000                                                                                                          |  |    | 81 | 
|                                                                                         | Consolidated Statements of Changes in
    Owners Net Investment for the years ended
    September 30, 2002, 2001, and 2000                                                                           |  |    | 82 | 
|                                                                                         | Consolidated Statements of Cash Flows for the
    years ended September 30, 2002, 2001, and 2000                                                                                                      |  |    | 83 | 
|Notes to Consolidated Financial Statements                                               |                                                                                                                                                                                                       |  | 84 |   

(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(6)
|        | 3 | .1          |  | Second Amended and Restated Certificate of
    Incorporation of Beagle Holdings, Inc.(3)                                                                               
|       
|        | 3 | .2          |  | Amended and Restated By-laws of Alion Science and
    Technology Corporation.(1)                                                                                       
|       
|        | 4 | .1          |  | Amended and Restated Alion Science and Technology
    Corporation Employee Ownership, Savings and Investment Plan.(2)                                                  
|       
|        | 4 | .2          |  | First Amendment to The Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan.(4)                                            
|       
|        | 4 | .3          |  | Second Amendment to The Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan.(5)                                           
|       
|        | 4 | .4          |  | Third Amendment to The Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan.(5)                                            
|       
|        | 4 | .5          |  | Fourth Amendment to The Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan.(5)                                           
|       
|        | 4 | .6          |  | Fifth Amendment to The Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan.(7)                                            
|       
|        | 4 | .7          |  | Sixth Amendment to The Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan.(7)                                            

115



---



##### 



|        |    |             |  |                                                                                                                                                                                                                                     
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|       
|        | 4  | .8          |  | Seventh Amendment to The Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan.(7)                                                                                                       
|       
|        | 4  | .9          |  | Eighth Amendment to The Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan.(7)                                                                                                        
|       
|        | 4  | .10         |  | Ninth Amendment to The Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan.                                                                                                            
|       
|        | 10 | .5          |  | Seller Note Securities Purchase Agreement by and
    between IITRI and Alion Science and Technology
    Corporation.(4)                                                                                                             
|       
|        | 10 | .8          |  | Rights Agreement.(4)                                                                                                                                                                                                                
|       
|        | 10 | .9          |  | First Amendment to The Alion Science and
    Technology Corporation 2002 Stock Appreciation Rights Plan.(5)*                                                                                                                        
|       
|        | 10 | .14         |  | Employment Agreement between Alion Science and
    Technology Corporation and Bahman Atefi.(4)*                                                                                                                                     
|       
|        | 10 | .15         |  | Employment Agreement between Alion Science and
    Technology Corporation and Stacy Mendler.(4)*                                                                                                                                    
|       
|        | 10 | .16         |  | Employment Agreement between Alion Science and
    Technology Corporation and Randy Crawford.(4)*                                                                                                                                   
|       
|        | 10 | .17         |  | Employment Agreement between Alion Science and
    Technology Corporation and Barry Watson.(4)*                                                                                                                                     
|       
|        | 10 | .18         |  | Employment Agreement between Alion Science and
    Technology Corporation and John Hughes.(4)*                                                                                                                                      
|       
|        | 10 | .23         |  | Alion Executive Deferred Compensation Plan.(4)*                                                                                                                                                                                     
|       
|        | 10 | .24         |  | Alion Director Deferred Compensation Plan.(4)*                                                                                                                                                                                      
|       
|        | 10 | .25         |  | First Amendment to The Alion Science and
    Technology Corporation Director Deferred Compensation Plan.(5)*                                                                                                                        
|       
|        | 10 | .26         |  | Alion Science and Technology Corporation Phantom
    Stock Plan.(4)*                                                                                                                                                                
|       
|        | 10 | .27         |  | First Amendment to The Alion Science and
    Technology Corporation Employee Phantom Stock Plan.(11)*                                                                                                                               
|       
|        | 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.(8)                                                           
|       
|        | 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.(10)                                                         
|       
|        | 10 | .31         |  | Agreement between Alion Science and Technology
    Corporation and James Fontana.(10)*                                                                                                                                              
|       
|        | 10 | .32         |  | Employment Agreement between Alion Science and
    Technology Corporation and Leroy R. Goff III.(10)*                                                                                                                               
|       
|        | 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.(9)                                                           
|       
|        | 10 | .34         |  | Addendum to Employment Agreement between Alion
    Science and Technology Corporation and James Fontana.(9)*                                                                                                                        
|       
|        | 10 | .35         |  | Second Amendment to the Alion Science and
    Technology Corporation Phantom Stock Plan.(9)*                                                                                                                                        
|       
|        | 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.          
|       
|        | 10 | .37         |  | First Amendment to the Mezzanine Warrant
    Agreement.                                                                                                                                                                             
|       
|        | 10 | .38         |  | First Amendment to the Seller Warrant Agreement.                                                                                                                                                                                    
|       
|        | 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.*

116



---



##### 



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                 
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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, and (iii) Identix
    Public Sector, incorporated in the Commonwealth of Virginia, are
    wholly-owned 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.                                                                                                                                                                                                      



---



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



| |     |                                                                                                                                                                                                                                                                                                               
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to the corresponding
    exhibit previously filed as an exhibit to the Companys
    Post-Effective Amendment No. 2 to the Registration
    Statement on Form S-1 filed with the Securities and
    Exchange Commission on December 9, 2002 (File no.
    950133-2-4018).           
|
| | (2) | Incorporated by reference to the corresponding
    exhibit previously filed as an exhibit to the Companys
    Pre-Effective Amendment No. 3 to the Registration Statement
    on Form S-1 filed with the Securities and Exchange
    Commission on October 7, 2002 (File no. 950133-2-3343).                 
|
| | (3) | Incorporated by reference to the corresponding
    exhibit previously filed as an exhibit to the Companys
    Pre-Effective Amendment No. 2 to the Registration Statement
    on Form S-1 filed with the Securities and Exchange
    Commission on September 17, 2002 (File no. 950133-2-3224).              
|
| | (4) | Incorporated by reference to the corresponding
    exhibit previously filed as an exhibit to the Companys
    Post-Effective Amendment No. 3 to the Registration
    Statement on Form S-1 filed with the Securities and
    Exchange Commission on March 24, 2003 (File no.
    950133-3-862).              
|
| | (5) | Incorporated by reference to the corresponding
    exhibit previously filed as an exhibit to the Companys
    quarterly report on Form 10-Q for the quarterly period
    ended July 4, 2003, filed with the Securities and Exchange
    Commission on August 15, 2003.                                       
|
| | (6) | Incorporated by reference to the corresponding
    exhibit previously filed as an exhibit to Companys current
    report on Form 8-K/ A, filed with the Securities and
    Exchange Commission on March 5, 2004 (File no.
    950133-04-000745).                                                             
|
| | (7) | Incorporated by reference to the corresponding
    exhibit previously filed as an exhibit to the Companys
    Registration Statement on Form S-8 filed with the
    Securities and Exchange Commission on April 28, 2004 (File
    no. 950133-04-001602).                                                    
|
| | (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 December 31, 2003, filed with the Securities and
    Exchange Commission on February 17, 2003 (File no.
    950133-04-000432).
|
| | (9) | 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. 950133-04-003228).          



|     |                                                                                                                                                                                                                                                                                                       
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | 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.
    950113-04-002056).

117



---



##### 





|     |                                                                                                                                                                                                                                                                                                 
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(11) | Incorporated by reference to the corresponding
    exhibit previously filed as an exhibit to the Companys
    annual report Form 10-K for the fiscal year ended
    September 30, 2003, filed with the Securities and Exchange
    Commission on December 24, 2003 (File no. 950133-03-004374).

117.1



---



##### 






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

Date: December 22, 2004

Pursuant to the requirements of the Securities
Exchange Act of 1934, as amended, this report has been signed
below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

|                                                             |  |                                                                                            |  |                   |  | 
|------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------ |  | ----------------- |  | 
|                                                             |  |                                                                                            |  |                  
|Signature                                                    |  | Title                                                                                      |  | Date             
|                                                             |  |                                                                                            |  |                  
|                                                            
|/s/ BAHMAN ATEFIBahman Atefi                                 |  | Chairman, Chief Executive Officer and Director                                             |  | December 22, 2004
|                                                            
|/s/ JOHN M. HUGHESJohn M. Jack Hughes                      |  | Chief Financial Officer (Principal Financial
    Officer)                                  |  | December 22, 2004
|                                                            
|/s/ GARY N. AMSTUTZGary N. Amstutz                           |  | Senior Vice President and Executive Director of
    Finance (Principal Accounting Officer) |  | December 22, 2004
|                                                            
|/s/ LESLIE ARMITAGELeslie Armitage                           |  | Director                                                                                   |  | December 22, 2004
|                                                            
|Lewis Collens                                                |  | Director                                                                                   |  | December 22, 2004
|                                                            
|/s/ HAROLD W. GEHMAN, JR.Admiral (Ret.) Harold W. Gehman Jr. |  | Director                                                                                   |  | December 22, 2004
|                                                            
|/s/ DONALD GOSSDonald Goss                                   |  | Director                                                                                   |  | December 22, 2004
|                                                            
|/s/ ROBERT L. GROWNEYRobert L. Growney                       |  | Director                                                                                   |  | December 22, 2004
|                                                            
|/s/ GEORGE A. JOULWANGeneral (Ret.) George A. Joulwan        |  | Director                                                                                   |  | December 22, 2004
|                                                            
|/s/ MICHAEL E. RYANGeneral (Ret.) Michael E. Ryan            |  | Director                                                                                   |  | December 22, 2004
|                                                            
|/s/ EDWARD C. ALDRIDGE, JR.Edward C. Aldridge, Jr.           |  | Director                                                                                   |  | December 22, 2004

118



---



##### 



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

No annual report or proxy material has been sent
to security holders.

119



---



##### 



|        |    |             |  |                                                                                                                                                                          
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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(6)  
|        | 3  | .1          |  | Second Amended and Restated Certificate of
    Incorporation of Beagle Holdings, Inc.(3)                                                                                 
|       
|        | 3  | .2          |  | Amended and Restated By-laws of Alion Science and
    Technology Corporation.(1)                                                                                         
|       
|        | 4  | .1          |  | Amended and Restated Alion Science and Technology
    Corporation Employee Ownership, Savings and Investment Plan.(2)                                                    
|       
|        | 4  | .2          |  | First Amendment to The Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan.(4)                                              
|       
|        | 4  | .3          |  | Second Amendment to The Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan.(5)                                             
|       
|        | 4  | .4          |  | Third Amendment to The Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan.(5)                                              
|       
|        | 4  | .5          |  | Fourth Amendment to The Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan.(5)                                             
|       
|        | 4  | .6          |  | Fifth Amendment to The Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan.(7)                                              
|       
|        | 4  | .7          |  | Sixth Amendment to The Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan.(7)                                              
|       
|        | 4  | .8          |  | Seventh Amendment to The Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan.(7)                                            
|       
|        | 4  | .9          |  | Eighth Amendment to The Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan.(7)                                             
|       
|        | 4  | .10         |  | Ninth Amendment to The Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan.                                                 
|       
|        | 10 | .5          |  | Seller Note Securities Purchase Agreement by and
    between IITRI and Alion Science and Technology
    Corporation.(4)                                                  
|       
|        | 10 | .8          |  | Rights Agreement.(4)                                                                                                                                                     
|       
|        | 10 | .9          |  | First Amendment to The Alion Science and
    Technology Corporation 2002 Stock Appreciation Rights Plan.(5)*                                                             
|       
|        | 10 | .14         |  | Employment Agreement between Alion Science and
    Technology Corporation and Bahman Atefi.(4)*                                                                          
|       
|        | 10 | .15         |  | Employment Agreement between Alion Science and
    Technology Corporation and Stacy Mendler.(4)*                                                                         
|       
|        | 10 | .16         |  | Employment Agreement between Alion Science and
    Technology Corporation and Randy Crawford.(4)*                                                                        
|       
|        | 10 | .17         |  | Employment Agreement between Alion Science and
    Technology Corporation and Barry Watson.(4)*                                                                          
|       
|        | 10 | .18         |  | Employment Agreement between Alion Science and
    Technology Corporation and John Hughes.(4)*                                                                           
|       
|        | 10 | .23         |  | Alion Executive Deferred Compensation Plan.(4)*                                                                                                                          
|       
|        | 10 | .24         |  | Alion Director Deferred Compensation Plan.(4)*                                                                                                                           
|       
|        | 10 | .25         |  | First Amendment to The Alion Science and
    Technology Corporation Director Deferred Compensation Plan.(5)*                                                             
|       
|        | 10 | .26         |  | Alion Science and Technology Corporation Phantom
    Stock Plan.(4)*                                                                                                     
|       
|        | 10 | .27         |  | First Amendment to The Alion Science and
    Technology Corporation Employee Phantom Stock Plan.(11)*                                                                    
|       
|        | 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.(8)

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##### 



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                 
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|       
|        | 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.(10)                                                                                                                                                                                                                                     
|       
|        | 10 | .31         |  | Agreement between Alion Science and Technology
    Corporation and James Fontana.(10)*                                                                                                                                                                                                                                                                                                                          
|       
|        | 10 | .32         |  | Employment Agreement between Alion Science and
    Technology Corporation and Leroy R. Goff III.(10)*                                                                                                                                                                                                                                                                                                           
|       
|        | 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.(9)                                                                                                                                                                                                                                       
|       
|        | 10 | .34         |  | Addendum to Employment Agreement between Alion
    Science and Technology Corporation and James Fontana.(9)*                                                                                                                                                                                                                                                                                                    
|       
|        | 10 | .35         |  | Second Amendment to the Alion Science and
    Technology Corporation Phantom Stock Plan.(9)*                                                                                                                                                                                                                                                                                                                    
|       
|        | 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.                                                                                                                                                                                      
|       
|        | 10 | .37         |  | First Amendment to the Mezzanine Warrant
    Agreement.                                                                                                                                                                                                                                                                                                                                                         
|       
|        | 10 | .38         |  | First Amendment to the Seller Warrant Agreement.                                                                                                                                                                                                                                                                                                                                                                
|       
|        | 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.*                                                                                                                                                                            
|       
|        | 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, and (iii) Identix
    Public Sector, incorporated in the Commonwealth of Virginia, are
    wholly-owned 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.                                                                                                                                                                                                      



---



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

121