##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




---



FORM 10-K


|  |  |                                                                                     
|- |  | ------------------------------------------------------------------------------------
|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2003



---



(ALION SCIENCE AND TECHNOLOGY CORPORATION 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.)

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




(Address, including Zip Code and Telephone Number, including
Area Code, of Principal Executive Offices)




---



Securities registered pursuant to Section 12(b) or 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. x Yes     o 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. x

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). o Yes     x 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 fiscal year: None

The number of shares outstanding of Alion Science and Technology common
stock as of September 30, 2003 was 2,973,813.

Documents Incorporated By Reference: None





---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION

FORM 10-K

TABLE OF CONTENTS

|           |  |                                                                                                                    |  |     |  |  |  | 
|---------- |  | ------------------------------------------------------------------------------------------------------------------ |  | --- |  |  |  | 
|Part I    
|           |  |                                                                                                                    |  |    
|Item 1.    |  | Business                                                                                                           |  | 1  
|           |  |                                                                                                                    |  |    
|Item 2.    |  | Properties                                                                                                         |  | 26 
|           |  |                                                                                                                    |  |    
|Item 3.    |  | Legal
          Proceedings                                                                                        |  | 26 
|           |  |                                                                                                                    |  |    
|Item 4.    |  | Submission
          of Matters to a Vote of Security Holders                                                      |  | 27 
|          
|Part II   
|          
|Item 5.    |  | Market
          for Registrants Common Stock and Related Stockholder Matters                                     |  | 28 
|           |  |                                                                                                                    |  |    
|Item 6.    |  | Selected
          Financial Data                                                                                  |  | 28 
|           |  |                                                                                                                    |  |    
|Item 7.    |  | Managements
          Discussion and Analysis of Financial Condition and Results of Operations                    |  | 32 
|           |  |                                                                                                                    |  |    
|Item 7a.   |  | Quantitative
          and Qualitative Disclosures About Market Risk                                               |  | 45 
|           |  |                                                                                                                    |  |    
|Item 8.    |  | Financial
          Statements and Supplementary Data                                                              |  | 46 
|           |  |                                                                                                                    |  |    
|Item 9.    |  | Changes
          in and Disagreements with Accountants on Accounting and Financial Disclosure                     |  | 81 
|           |  |                                                                                                                    |  |    
|Item 9a.   |  | Controls
          and Procedures                                                                                  |  | 81 
|          
|Part III  
|          
|Item 10.   |  | Directors
          and Executive Officers of the Registrant                                                       |  | 81 
|           |  |                                                                                                                    |  |    
|Item 11.   |  | Executive
          Compensation                                                                                   |  | 86 
|           |  |                                                                                                                    |  |    
|Item 12.   |  | Security
          Ownership of Certain Beneficial Owners and Management and Related Stockholder
          Matters |  | 97 
|           |  |                                                                                                                    |  |    
|Item 13.   |  | Certain
          Relationships and Related Transactions                                                           |  | 98 
|           |  |                                                                                                                    |  |    
|Item 14.   |  | Principal
          Accounting Fees and Services                                                                   |  | 99 
|          
|Part IV   
|          
|Item 15.   |  | Exhibits,
          Financial Statement Schedules and Reports on Form 8-K                                          |  | 100
|           |  |                                                                                                                    |  |    
|Signatures |  |                                                                                                                    |  | 103

i





---



##### 



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 our KSOP; changes to the tax laws relating to the
treatment and deductibility of goodwill, our subchapter S status, or any change
in our 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; the results of current and/or future legal proceedings and government
agency proceedings which may arise out of our operations (including our
contracts with government agencies) and the attendant risks of fines,
liabilities, penalties, suspension and/or debarment; material changes in laws
or regulations applicable to our 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. 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. Pro forma operating data for the fiscal years ended September 30,
2003 and 2002 are 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 100% employee-owned (subject to exercise of warrants owned by holders
of the mezzanine note and the subordinated note, as described elsewhere in this
annual report). We apply our scientific and engineering experience to research
and develop technological solutions for problems relating to national defense,
public health and safety. 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. Federal government
contracts accounted for approximately 98% of our revenues in the fiscal year
ended September 30, 2003, of which approximately 95% came from the U.S.
Department of Defense alone. For the fiscal year ended September 30, 2002,
federal government contracts accounted for approximately 98% of our revenues
and approximately 90% came from the U.S. Department of Defense alone.

1



---



##### 



We apply our expertise to a range of specialized fields, which we describe
below.

The estimated percentage distribution of our annual revenues by core
research field is provided in the table below.

|                                                      |  |                                        |     |      |  |      |     |   |  |  |     |  
|----------------------------------------------------- |  | -------------------------------------- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                                                      |  | Estimated Percentage of Total Revenues
|                                                      |  | by Fiscal Year*                       
|                                                      |  |                                       
|Core Research Field                                   |  | 2003                                   |     | 2002 |  | 2001
|                                                      |  |                                        |     |      |  |     
|- Wireless communications                             |  |                                        | 22  | %    |  |      | 21  | % |  |  | 21  | %
|- Defense operations                                  |  |                                        | 52  |      |  |      | 38  |   |  |  | 34  |  
|- Information technology                              |  |                                        | 10  |      |  |      | 15  |   |  |  | 17  |  
|- Industrial technology                               |  |                                        | 6   |      |  |      | 17  |   |  |  | 15  |  
|- Chemical, environmental and
biodefense technologies |  |                                        | 4   |      |  |      | 3   |   |  |  | 4   |  
|- Explosive science                                   |  |                                        | 5   |      |  |      | 5   |   |  |  | 7   |  
|- Transport systems                                   |  |                                        | 1   |      |  |      | 1   |   |  |  | 2   |  
|- Nuclear safety and analysis**                       |  |                                        | N/A |      |  |      | N/A |   |  |  | N/A |  
|                                                      |  |                                        |     |      |  |      |     |   |  |  |     |  
|                                                      |  |                                        | 100 | %    |  |      | 100 | % |  |  | 100 | %
|                                                      |  |                                        |     |      |  |      |     |   |  |  |     |  



|* Percentages based on management estimates.                                                                                                                                                                                                              
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                          
|** Revenue associated with the core research
      field of nuclear safety and analysis will begin in fiscal year 2004 as it
      relates to our acquisition of Innovative Technology Solutions Corporation
      (ITSC), which occurred in October 2003.
|                                                                                                                                                                                                                                                          

Wireless Communications
  and Spectrum Engineering.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 three primary areas:



| |  |  | wireless and communications-electronics engineering,
| | - |  | ----------------------------------------------------
|
| |  |  | spectrum management, and                            
|
| |  |  | electromagnetic environmental effects.              

The spectrum engineering services that we provide to the U.S. Department
of Defenses Joint Spectrum Center were responsible for approximately 21% of
total revenues for each fiscal year ended September 30, 2003, 2002, and 2001.

Wireless and communications-electronics
  engineering: We perform work for the government communications-electronics
  and commercial wireless communities. The term communications-electronics
  refers to all devices or systems that use the radio frequency spectrum. Our
  work for the government sector includes such tasks as conducting modeling and
  simulation of communications networks, testing and evaluating navigational
  systems, and analyzing radar and space systems performance. For our commercial
  customers, both foreign and domestic, we determine whether wireless communication
  networks have the geographic coverage the customers desire, and whether the
  systems operate free of interference, and we make recommendations designed to
  improve network performance. We also evaluate and make recommendations for the
  design of radio transmitters, receivers and antennas for our commercial customers.

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.

2



---



##### 



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 for
protecting people, systems, and critical infrastructure tools for
decision support, risk assessment, information assurance, and
physical security.                                                                                                                                                                                                                                                             
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Strategic planning and operational analysis to the federal
government: 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. We participate in
operational support by providing staffing of critical roles
supporting policy development, mission planning, and program
management.
|
| |  |  | Modeling, simulation, and analysis of military operations: we
assist our customers in examining, in a virtual environment, the
likely outcome of events without the risk or expense present in the
real world.                                                                                                                                                                                                                                                        
|
| |  |  | Distance learning services: we research and develop policy
and technology 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 medium so that the student can
interact with the courseware at a remote location.                                                                                                
|
|
| |  |  | Development of technology to improve weapons
      and systems support: we assist the U.S. Department of Defense in weapons
      systems design enhancement to achieve each systems designated military
      purposes while minimizing collateral damage.                                                                                                                                                                                                          
|

In addition, we have researched and developed the following products on
behalf of government and commercial customers:



| |  |  | Cave Dog: This tool is a hemispherical, multi-spectral
vision robot used for surveillance and reconnaissance.                            
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | FiRST: This tool is a course-of-action and mission rehearsal
tool designed to provide critical situational awareness to first
responders.

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



| |  |  | Modernization of legacy systems: we assist
      customers in replacing their old information processing systems with more
      modern web-based or network solutions.                                                            
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Knowledge management: we develop software applications
      for storage and retrieval of information. Our software is designed to facilitate
      data-gathering as part of routine inquiries or a fraud detection investigation.

3



---



##### 





| |  |  | Telemedicine research: we develop technology to allow for
remote performance of medical procedures. An example of our service
is the development of a robot that is designed to enter a
contaminated area to attend to an injured person. A medical expert
instructs the robot from a remote location how to tend to the
patient. We also develop technology that permits the performance of
triage monitoring by doctors from remote locations.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Medical informatics: we develop systems that are designed to
sort through vast quantities of medical information for the purpose
of identifying topic-specific relevant materials.                                                                                                                                                                                                                                                              
|
| |  |  | Creation of web-based systems: we develop software
applications for use on unclassified, as well as secure, computer
networks for purposes of information sharing.                                                                                                                                                                                                                                                                              

We have a sophisticated information technology laboratory which allows us
to assess systems before our customers implement them.

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



| |  |  | research in developing and optimizing manufacturing processes,                                                                                  
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | research in decision analysis designed to result in improved
performance and extended lifetime for products, and also cost
savings of materials,
|
| |  |  | research in reliability analysis
of customers products and systems, and                                                                        
|
| |  |  | provision of engineering design solutions that are intended
to be practical, cost-effective and fast to implement.                              

Chemical, Environmental and Biodefense Technologies.Our chemical,
environmental and biodefense technology operations provide a wide range of
research primarily to the U.S. Department of Defense and the Environmental
Protection Agency, but also to other departments of federal, state and local
governments, including:



| |  |  | chemical and biological research that examines the
fundamentals necessary to improve defense strategy against chemical
and biological weapons;                                                                            
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the pursuit of analytical and procedural methods to enhance safe
handling of chemical substances;                                                                                                                         
|
| |  |  | the application of methods designed to convert harmful
chemical and biological materials into harmless materials;                                                                                                         
|
| |  |  | technical expertise to branches of the military, the FBI,
police departments, hospitals, fire departments, and the federal
government and commercial customers, to reduce the threat of
chemical-biological terrorism; and
|
| |  |  | laboratory support to the U.S. Environmental Protection
Agency for identifying and monitoring chemical contaminants in soil,
air and water at specified Superfund sites.                                                  

In addition, we have researched and developed the following products on
behalf of government and commercial customers:



| |  |  | Emergency Personal Isolation and Containment (EPIC®)
transport pod designed for isolation of individuals contaminated
with biological or chemical agents while enabling first responders
to administer emergency medical treatment.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4



---



##### 





| |  |  | Aerospace coating designed to protect spacecraft, such as
defense and commercial satellites, from the environmental effects of
outer space.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------

Explosive Sciences.Our primary customer for our unexploded ordnance work
is the U.S. Army Corps of Engineers. We also provide our services 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.

We provide ordnance management services to the U.S. Navy, which includes
the maintenance of, and accounting for, weapons inventories.

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.

Software Tools.We have developed a series of software tools that
complement our core research fields. Examples of some of these tools include:



| |  |  | Frequency Assignment & Certification Engineering Tool
(FACET). This 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. This software tool has been used by the
government of South Africa and will soon be used by the government
of Nigeria.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Advanced Cosite Analysis Tool (ACAT). This tool is designed
to permit co-location of numerous antennas on towers, rooftops and
other platforms by predicting interference between the various
systems and informing the user how to minimize interference.                                                                                                                                         
|
| |  |  | Spectrum Monitoring Automatic Reporting and Tracking System
(SMART). 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.                                                                                                                   
|
| |  |  | Real Time Location System. This tool 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.                                                                                                                                                                                

Nuclear Safety and Analysis.Through our recent acquisition of Innovative
Technology Solutions Corporation (ITSC), 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 services in the areas of
computational fluid dynamics, structural response, materials
behavior, and neutronics.                              
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Safety and risk performance analysis in the areas of
probabilistic safety assessments, accident consequence analysis, and
source term dose assessment.               
|
| |  |  | Design and performance assessment services related to nuclear
power facilities in the areas of control room habitability, power
rate analysis, and license extension.
|
| |  |  | Management systems and program services in the areas of
compliance (e.g., regulatory analysis, policy development, and
audits), project management, and training.    

5



---



##### 





| |  |  | Regulatory compliance support services in the areas of
nuclear plant operational readiness reviews and conduct of
operations.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------

Five and
a half years ago IITRI
hired a new president to foster
innovation, improve its financial administration and increase its prominence in
its core research areas. The new president hired several new senior managers
who undertook to assist in implementing these changes.

Under the new management team, we:



| |  |  | created a new process to track proposal performance against
pre-established annual goals. This process focused on increasing
proposal volume, including bidding larger and more strategic
proposals as a prime contractor. Our success rate in winning
research contracts was approximately 49% and 60% for the fiscal
years ended September 30, 2003, and 2002, respectively.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | created an organizational structure designed to promote the
development of new research opportunities and emphasize financial
accountability at all levels of management,                                                                                                                                                                                                     
|
| |  |  | developed a financial reporting system designed to provide a
detailed understanding of our organizations financial condition at
all levels,                                                                                                                                                                                                                                  
|
| |  |  | developed internal training programs in research and
development, financial management, project management, fixed price
management and people management,                                                                                                                                                                                                                     
|
| |  |  | created an information management system designed to enable
managers to make decisions based on better and more timely
information,                                                                                                                                                                                                                                           
|
|
| |  |  | invested funds in internal research and development, hiring
of key staff and increased promotional activities; and                                                                                                                                                                                                                                                            
|
|
| |  |  | completed five acquisitions and integrated, or are
integrating, those acquisitions into our existing research fields.                                                                                                                                                                                                                                                         

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 the 100% employee-owned
  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).

The Acquisition And Deal Terms For The Purchase Of Assets From IITRI (The
Transaction)

Acquired Business.Effective as of December 20, 2002, pursuant to the terms of an asset
  purchase agreement, 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.

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

6



---



##### 



|  |                                                                                                                                                                                      |                                                                                                                        |                              |                                |  |                                                          
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------- | ---------------------------- | ------------------------------ |  | ---------------------------------------------------------
| | 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 IITRIs approximately $6.2 million in outstanding
        bank debt for working capital;                                                  |                                                                                                                        | $6.2 million (approximately) |                                | 
|  |                                                                                                                                                                                      |                                                                                                                        |                              |                                |  |                                                          
| | the payment by Alion following closing of approximately
$0.5 million in net cost of the Life Sciences Operation
purchase price adjustment (as described below);                      |                                                                                                                        | $0.5 million (approximately) |                                | 
|  |                                                                                                                                                                                      |                                                                                                                        |                              |                                |  |                                                          
| | the payment by Alion following closing of the net
income purchase price adjustment net of credits due Alion
(as described below);                                                    |                                                                                                                        | $1.1 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                     |                                | 
|  |                                                                                                                                                                                      |                                                                                                                        |                              |                                |  |                                                          
| | payment of $2.3 million of IITRIs costs related to the
acquisition                                                                                                                  |                                                                                                                        | $2.3 million                 |                                | 
|  |                                                                                                                                                                                      |                                                                                                                        |                              |                                |  |                                                          
|  |                                                                                                                                                                                      |                                                                                                                        |                              | $127.3 million
(approximately) |  | plus warrants, plus
assumption of
additional
liabilities.

Alion also assumed
  IITRIs contingent contractual liabilities to AB Technologies related to
  an earnout arrangement, which can not exceed $11.5 million.

Purchase Price
  Adjustments.The purchase price included two post-closing adjustments. One
  was for the amount of the deferred revenues, accrued payroll expense, and accounts
  payable of Life Sciences Operation at the closing date. The purchase price adjustment
  of $0.5 million made pursuant to this provision resulted from
  a credit of approximately $1.1 million due Alion offset by a cash payment
  due IITRI of approximately $1.6 million for accounts receivable collections
  on behalf of the Life Sciences Operation.

7



---



##### 



The second post-closing
  adjustment was 75% of net income that IITRIs business, excluding
  the Life Sciences Operation, earned from October 1, 2002 to December 20,
  2002 because the closing occurred after October 15, 2002. We paid this
  addition to the purchase price in cash to IITRI. The actual amount paid was
  approximately $1.3 million, which included an offset of approximately $0.2 million
  representing an overpayment of transaction expenses by Alion on behalf of IITRI.

Assumption of Liabilities.Alion assumed substantially all of the
liabilities of IITRIs business, including certain liabilities with respect to:



| |  |  | employees of IITRI who became Alion employees;                                                          
| | - |  | --------------------------------------------------------------------------------------------------------
|
| |  |  | certain employees of IITRI whose employment terminated prior to closing;                                
|
| |  |  | trade creditors, contracts transferred to Alion and existing claims incurred since October 1, 1997;     
|
| |  |  | workers compensation claims and general liability
      claims related to the assets Alion acquired; and
|
| |  |  | the initial one-time ESOP investment election offered by us to IITRIs employees.                       

IITRI, however, retained, and we did not assume:



| |  |  | liabilities associated with the Life Sciences Operation;                  
| | - |  | --------------------------------------------------------------------------
|
| |  |  | liabilities associated with real property of IITRI;                       
|
| |  |  | tax liabilities for periods prior to closing;                             
|
| |  |  | liabilities of IITRI to the Illinois Institute of Technology;             
|
| |  |  | liabilities associated with multi-employer benefits plans under ERISA; and
|
| |  |  | liabilities incurred prior to October 1, 1997.                            

The liabilities we
  assumed included IITRIs contractual obligation under the earnout provisions
  of the AB Technologies acquisition agreement, which obligation can not exceed
  $11.5 million. In addition, we paid $2.3 million of IITRIs out-of-pocket
  expenses incurred in the acquisition transaction.

Indemnification.IITRI agreed to indemnify us 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 against losses resulting from our breach of any of our
representations, warranties or covenants and against losses resulting from
liabilities we assumed.

The liability of IITRI and Alion under the purchase agreement is limited
as follows:



| |  |  | except for a number of specific representations and
warranties which will survive until the end of the applicable
statute of limitations period, there is no obligation for either
IITRI or us to indemnify the other party for breaches occurring
after the 18-month anniversary of the closing;                                                                                                    
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | only losses due to a partys breaches of representations and
warranties exceeding a total amount of $750,000 will be indemnified;                                                                                                                                                                                                                                                                    
|
| |  |  | except for a number of specific exceptions, the total amount
of indemnified losses due to a partys breaches of representations
and warranties cannot exceed $25.0 million; and                                                                                                                                                                                                                      
|
| |  |  | we are entitled to set off any indemnification payments
payable by IITRI under the purchase agreement against any cash
purchase price adjustment and against our obligations under the
subordinated note, unless such notes have been transferred to a
party other than IITRI, the Illinois Institute of Technology or
their affiliates. Any set-off against the principal amount of the
subordinated

8



---



##### 





| |  |  | note will be at the rate of $2.723 of the principal amount of the
subordinated note for any $1.0 of our indemnifiable loss.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------

Guarantee of the Illinois Institute of Technology. In a separate
agreement, the Illinois Institute of Technology gave us a guarantee that IITRI
will fulfill all its payment and performance obligations arising under the
purchase agreement.

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 in the initial one-time ESOP investment election.

Representations and Warranties.Within the stock purchase agreement, we
made representations and warranties to the ESOP trust, relating to:



| |  |  | Alions our 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 compliance of the stock purchase agreement
      with Alions and HFAs charter documents and material agreements
      and with third parties rights, governmental permits and applicable
      laws;                       
|
| |  |  | 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;
|
| |  |  | the absence of facts and events materially
      adversely affecting Alion, HFA, or IITRIs transferred business and
      the absence of undisclosed liabilities;                                                                
|
| |  |  | the absence of materially adverse litigation
      proceedings against Alion, HFA or IITRIs transferred business;                                                                                                                
|
| |  |  | the identification of employee plans and major contracts;                                                                                                                                                                         
|
| |  |  | the property ownership rights and the condition of the transferred assets;                                                                                                                                                        
|
| |  |  | taxes and tax returns of Alion and HFA;                                                                                                                                                                                           
|
| |  |  | audits, security clearances and pre-contract
      costs relating to Alions, HFAs and IITRIs government contracting
      businesses; and                                                                                      
|
| |  |  | our obligation to repurchase any shares of our common stock
distributed to ESOP participants.                                                                                                                                     

Some of the representations and warranties that we gave were subject to
the knowledge of certain members of our management.

The ESOP trustee, on behalf of the ESOP trust, made representations and
warranties to us, relating to:



| |  |  | the trustees authority to enter into the stock purchase
agreement and the binding effect of the agreement on the ESOP trust;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the compliance of the stock purchase agreement with third
parties rights, governmental permits and applicable laws; and     
|
| |  |  | the investment intent of the ESOP trust.                                                                                     

9



---



##### 



Covenants.As
  part of the stock purchase agreement, we agreed with and the ESOP trust that:



| | 1. |  | 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;        
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | we will submit the ESOP and ESOP trust documents to the
Internal Revenue Service for determination of qualified plan and
tax-exempt status;                                                             
|
| | 3. |  | 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;                              
|
| | 4. |  | we will not take any steps without the ESOP trusts consent
to change our status as an S corporation;                                                                                                   
|
| | 5. |  | we will not enter into any transactions with any of our
officers or directors without approval from our board of directors
or compensation committee;                                                   
|
| | 6. |  | we will enforce our obligations under the asset purchase
agreement with IITRI and other related agreements;                                                                                             
|
| | 7. |  | we will obtain the ESOP trusts consent before effecting our
first public offering of stock to be listed on any securities
exchange;                                                                    
|
| | 8. |  | 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; and
|
| | 9. |  | 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.                                         

Covenants 4, 5, 6, 7 and 8 listed above will survive for as long as the
ESOP trust owns or otherwise controls at least 20% of the voting power of all
our capital stock. Covenant 9 will survive for as long as the ESOP trust owns
or otherwise controls at least a majority of the voting power of all our
capital stock.

Indemnification.We agreed to indemnify the ESOP trust against any losses
resulting from our breach of any of our representations, warranties or
covenants and against losses resulting from earnout payments and for any other
payments in excess of $5.4 million under IITRIs asset purchase agreement with
AB Technologies, Inc. and litigation in connection with that agreement.

The ESOP trust will indemnify us against losses resulting from its breach
of any of its representations, warranties or covenants.

The liability of the ESOP trust and Alion under the stock purchase agreement is
limited as follows:



| |  |  | except for a number of specific representations and
warranties which will survive without any expiration, and certain
others that survive until the end of the applicable statute of
limitations period, there is no obligation for us or the ESOP trust
to indemnify the other party for breaches occurring after the
18-month anniversary of the closing;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | except for a number of specific exceptions, only losses due
to a partys breaches of representations and warranties exceeding a
total amount of $250,000 will be indemnified; and                                                                                                                                                                          
|
| |  |  | except for a number of specific exceptions, the total amount
of indemnified losses due to a partys breaches of representations
and warranties will not exceed the aggregate purchase price paid by
the ESOP trust to us in connection with the stock purchase
agreement.                                                                                  

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.

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
moneys 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.



10



---



##### 



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                                                                                 
|
| |  |  | some types of shareholders, such as individuals, trusts and
some tax-exempt organizations, including ESOPs.

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, it 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. It is possible, however, that in
  some states we may be subject to different tax treatment for state income
  tax purposes than federal income tax purposes. Alion and its subsidiary may
  operate in certain jurisdictions that will subject the corporations to state
  income tax. Alion may also be subject to additional types of taxes in certain
  jurisdictions, including franchise and business taxes.

Alion filed an election
  under the Internal Revenue Code with the IRS to treat HFA, all the stock of
  which was purchased in the IITRI acquisition, as a qualified subchapter S subsidiary,
  which we refer to as a Q-Sub. The election was accepted and became effective
  on December 21, 2002. As a Q-Sub, HFA will not be treated as a separate
  corporation for federal income tax purposes. All of HFAs assets and liabilities,
  and all of HFAs items of income, deduction and credit should be treated
  as assets and liabilities, and items of income, deduction and credit of Alion
  for federal income tax purposes.

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 acquisition, no one person is expected to hold ownership
  interests representing more than 5% of Alion.

11



---



##### 



GROWTH STRATEGY

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



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

12



---



##### 



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:



| |  |  | Overall defense spending. Congress authorized $368.2 billion
in defense spending for fiscal year 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Increased interest in procurement and development.We expect
that the U.S. Department of Defense budgets for research and
development, testing and evaluation, and procurement, all of which
fund our programs, will grow proportionately with overall defense
spending.                                                                                                                                                                                                                                                                                    
|
| |  |  | Adoption of capabilities based approach.The Bush
Administrations Quadrennial Defense Review, published September 30,
2001, reflects a capabilities based approach, calling for the U.S.
military to maintain its current capabilities while developing new
areas of military advantage. This review calls for an increase in
military readiness through the upgrade of existing force structure
and continued investment in next-generation technologies and
capabilities to enable U.S. military forces to more effectively
counter emerging threats.

We believe that the increase in defense spending will result in a growth
of our revenues because of the correlation between the areas of projected
growth in defense spending and our core research fields. The following areas of
projected growth in defense spending, as identified in the U.S. Budget for
fiscal year 2004, have a direct correlation with our core research and service
fields:



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

We are primarily a government contractor.

On a pro forma basis, 98% of our revenues in the fiscal year ended
September 30, 2003, and 98% of our revenues for the fiscal year ended September
30, 2002, were obtained from federal government contracts. 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 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

13



---



##### 



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.

Pricing of Contracts. On a pro forma basis, during fiscal year 2003,
approximately 62% of our federal government contracts were performed on a
cost-reimbursement basis, 16% on a fixed-price basis and about 22% on a
time-and-material basis. On a pro forma basis, during the fiscal year ended
2002, approximately 60%, 18%, and 22% of our federal government contracts were
performed on a cost-reimbursement, fixed price, and time-and-material basis,
respectively.



| |  |  | Cost-plus 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Under fixed-price contracts, customers pay us a fixed dollar
amount to cover all direct and indirect costs, and fees. Under
fixed-price contracts we assume the risk of any cost overruns and
receive the benefit of any cost savings.                                                         
|
| |  |  | Time-and-material contracts allow us to recover our labor
costs, based on negotiated, fixed hourly rates, as well as certain
other costs.                                                                                                                                                      

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, 2003, we had incurred $2.4 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

14



---



##### 



which are outside of our control. The table below shows the value of our
funded and unfunded contract backlog as of September 30, 2003 and September 30,
2002, respectively.

|                                                              |  |                          |     |                          |  |               |       |         |  |          |       |         |  |   |    |               |  |   |     |  |  |   |       | 
|------------------------------------------------------------- |  | ------------------------ | --- | ------------------------ |  | ------------- | ----- | ------- |  | -------- | ----- | ------- |  | - | -- | ------------- |  | - | --- |  |  | - | ----- | 
|                                                              |  | As of September 30, 2003 |     | As of September 30, 2002
|                                                              |  |                          |     |                         
|                                                              |  | Funded                   |     | Unfunded                 |  | Total         |       | Funded  |  | Unfunded |       | Total  
|                                                              |  | Backlog                  |     | Backlog                  |  | Backlog       |       | Backlog |  | Backlog  |       | Backlog
|                                                              |  |                          |     |                          |  |               |       |         |  |          |       |        
|                                                              |  |                          |     |                          |  | (in millions) |       |         |  |          |       |         |  |   |    | (in millions) |  |   |     | 
|Federal government,
other government
and commercial
contracts |  | $                        | 107 |                          |  | $             | 1,075 |         |  | $        | 1,182 |         |  | $ | 72 |               |  | $ | 997 |  |  | $ | 1,069 | 

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 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, 2003 and September 30, 2002, respectively.

|                           |  |                          |    |                          |  |       |     |               |  |           |     |       |  |   |     |  |  |   |     |  |  |   |     | 
|-------------------------- |  | ------------------------ | -- | ------------------------ |  | ----- | --- | ------------- |  | --------- | --- | ----- |  | - | --- |  |  | - | --- |  |  | - | --- | 
|                           |  | As of September 30, 2003 |    | As of September 30, 2002
|                           |  |                          |    |                         
|                           |  | In process               |    | Submitted                |  | Total |     | In process    |  | Submitted |     | Total
|                           |  |                          |    |                          |  |       |     |               |  |           |     |      
|                           |  | (in millions)            |    |                          |  |       |     | (in millions) |  |           |     |      
|Proposal
          backlog |  | $                        | 31 |                          |  | $     | 397 |               |  | $         | 428 |       |  | $ | 290 |  |  | $ | 205 |  |  | $ | 495 | 

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.

15



---



##### 



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, 2003, we had 1,604 employees, of which 1,473 were
full-time, 60 half-time, and 71 part-time employees. Approximately 4% of our
employees have Ph.D.s, approximately 33% have masters degrees, and
approximately 64% 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; and Rome, New York where we
provide our engineers and scientists with advanced tools to research and apply
new technologies to issues of national significance.

OUR CUSTOMERS

On a pro forma basis, during the fiscal year ended September 30, 2003, we
derived approximately 98% of our revenue from contracts with various agencies
or departments of the federal government. Of our total revenue, we derived 95%
from contracts with the U.S. Department of Defense. Also on a pro forma basis,
for the fiscal year ended September 30, 2002, approximately 98% of our revenue
was from contracts with the federal government, and 90% was derived from
contracts with the U.S. Department of Defense alone. 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 year ended September 30, 2003 and
approximately 1% in the fiscal year ended September 30, 2002. The table below
shows pro forma revenues, by customer, for fiscal years 2003 and 2002,
respectively:

|                                                           |  |                                  |     |                   |  |               |     |   |  |   |     |  |  |  |     |  
|---------------------------------------------------------- |  | -------------------------------- | --- | ----------------- |  | ------------- | --- | - |  | - | --- |  |  |  | --- | -
|                                                           |  | For the year ended September 30,
|                                                           |  |                                 
|                                                           |  | 2003                             |     | 2002             
|                                                           |  |                                  |     |                  
|                                                           |  |                                  |     |                   |  | (in millions) |     |   |  |  
|                                                           |  | Pro Forma Revenue                |     | Pro Forma Revenue
|U.S. Department of Defense (DoD)                           |  | $                                | 202 |                   |  |               | 95  | % |  | $ | 182 |  |  |  | 90  | %
|Other
          U.S. Federal, state, and local governments |  |                                  | 7   |                   |  |               | 3   |   |  |   | 16  |  |  |  | 8   |  
|Commercial
          and international                     |  |                                  | 4   |                   |  |               | 2   |   |  |   | 4   |  |  |  | 2   |  
|                                                           |  |                                  |     |                   |  |               |     |   |  |   |     |  |  |  |     |  
|                                                           |  | $                                | 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,
  Lockheed Martin Corporation, Science Applications International Corporation,
  Litton Industries, Sverdrup, Battelle Memorial Institute, 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,
  Elite Electronic Engineering, Inc., and L-3 Communications Corporation.

16



---



##### 



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.

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 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 promotion,
developing proposal strategies and preparing proposals.

On a pro forma basis, we spent approximately $0.2 million on internal
research and development in fiscal year 2003, and $0.6 million in fiscal year
2002. 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 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.

17



---



##### 



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 year 2003, nearly 100% of the Companys revenue was derived from
services provided under contracts with U.S.-based customers. In 2002,
approximately 99% and 1% of revenue was derived from services provided for U.S.
and foreign-based customers, respectively.

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 unfurnished 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 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.

18



---



##### 



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, 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 a pro forma basis after giving effect to
the acquisition, our consolidated debt was approximately $103.1 million at
closing, and approximately $90.4 million at September 30, 2003. 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;                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | 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.                                                                                                                                                                                                                                                                                                                                                                                     

19



---



##### 



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 2007, 2008, 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. Any of these actions would result in a substantial
diminution in the value of your investment in the ESOP and could result in the
loss of your entire investment.

Risks Related To Our Industry

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

On a pro forma basis, approximately 98% of our revenues for fiscal year
2003 were derived from contracts with the federal government. Contracts with
the U.S. Department of Defense accounted for approximately 95%, and contracts
with other government agencies accounted for approximately 3%, of our total
revenues in fiscal year 2003. On a pro forma basis for fiscal year 2002,
contracts with the U.S. Department of Defense accounted for approximately 90%
of our revenues, and contracts with other government agencies accounted for
approximately 8% 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.

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 71% of our pro forma revenues for the fiscal year ended September
30, 2003:



| | 1. |  | Information Technology Services for General Services
Administration  U.S. Department of Defense (24%);
| | -- |  | -------------------------------------------------------------------------------------------------------

20



---



##### 





| | 2. |  | Joint Spectrum Center Engineering Support Services for the
U.S. Department of Defense Joint Spectrum Center (21%);                           
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|
| | 3. |  | Modeling and Simulation Information Analysis Center for the
U.S. Department of Defense  Defense Information Systems Agency
(18%);           
|
| | 4. |  | Weapons Systems Technology Information Analysis Center for
the U.S. Department of Defense  Defense Information Systems Agency
(4%); and     
|
| | 5. |  | Subcontract (to Raytheon Corporation) for Annex 14- Ordnance
Services under the Guam Base Operating Services contract for the
U.S. Navy (4%).

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.

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

21



---



##### 



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. For example, a contract on which we
perform ordnance handling services for the U.S. Navy in Guam may be subject to
a recompete earlier than anticipated. If Alion is not successful in winning its
bid in this recompete, the loss of the contract would adversely affect our
backlog and our revenues.

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, 2003, we had
pre-contract costs of $2.4 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.

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 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 pro forma revenues for fiscal year 2003, and
18% of our pro forma revenues for the fiscal year 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

22



---



##### 



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.

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.

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, 2003, forty-six of our government contracts required
us to maintain facility security clearances and some of our employees to
maintain individual security clearances. Each security-cleared facility has at
least one key manager and a facility security officer who hold security
clearances. Additional personnel security clearances for technical, management
or administrative staff are based on a particular employees need to have
access to classified information in order to perform the classified tasks
required by the contract. Types of employees that may require security
clearances include program or project managers, scientists, researchers,
managers and administrators. If we lose a facility clearance or our employees
lose or are unable to timely obtain security clearances, the government
customer can terminate the contract or decide not to renew it upon its
expiration. If we cannot obtain the required security clearances for our
facilities or employees, or we fail to obtain them on a timely basis, we may be
unable to perform a contract, bid on or win new contracts, which may cause us
to have to terminate current research activities, and may damage our
reputation. If this were to occur, 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.

23



---



##### 



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.

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.

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.

24



---



##### 



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 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 fixed
charge coverage, interest coverage, debt coverage, and minimum consolidated net
worth. 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

25



---



##### 





| |  |  | the discovery of previously unknown contamination.
| | - |  | --------------------------------------------------

Item 2. PROPERTIES

Our principal operating facilities are located in Chicago, Illinois and
McLean, Virginia, and consist of approximately 66,675 square feet and 21,573
square feet of office space, respectively, held under leases. We also lease an
additional 28 office facilities totaling approximately 299,844 square feet. Of
these, our largest offices are located in 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 three in Alexandria, Virginia.

We lease thirteen laboratory facilities totaling 125,472 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.

On a pro forma basis, aggregate average monthly base rental expense for
fiscal year 2003 was $667,043 and the aggregate average monthly base rental
expense for fiscal year 2002 was $670,628.

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.

Item 3. LEGAL PROCEEDINGS

On September 16, 2002, IITRI filed a lawsuit against Clyde Andrews and
William Bewley, former shareholders of AB Technologies, Inc., in the U.S.
District Court for the Eastern District of Virginia. IITRI acquired
substantially all of the assets of AB Technologies in February 2000.

The lawsuit sought to compel the defendants to submit disputed issues to
an independent accounting firm, in accordance with the terms of the asset
purchase agreement. The Company also sought declaratory judgment that it is
entitled to a downward adjustment to the purchase price and a finding that it
properly computed the earnout required by the asset purchase agreement.

Messrs. Andrews and Bewley filed a lawsuit against IITRI for breach of the
AB Technologies asset purchase agreement claiming at least $8.2 million in
damages. The Andrews-Bewley lawsuit was removed to federal court and
consolidated into IITRIs lawsuit. The federal court stayed the litigation and
ordered both parties to submit the dispute to the independent accounting firm
of Grant Thornton for arbitration. The consolidated federal action was
subsequently dismissed without prejudice. The arbitration hearing was held in
October and November 2003. Alion expects a decision before the end of 2003.
Alion assumed responsibility for and acquired all claims under both of these
lawsuits, and the ensuing arbitration, as part of its acquisition of IITRIs
assets.

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

Alions complaint alleges that:



| |  |  | Under contract to the U.S. Army, IITRI developed a mobile
rescue devicean Emergency Personal Isolation and Containment
(EPIC) Pod  to enable rescuers to safely attend to and support
victims of chemical or biological attacks;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

26



---



##### 





| |  |  | IITRI assembled a team of employees to conceive the device,
including Messrs. Gauger, Stefanek and Petrovic, each of whom
executed an agreement assigning to IITRI all intellectual property
rights arising out of his employment. Messrs. Gauger, Stefanek and
Petrovic also acknowledged receipt of the IITRI Code of Ethics
prohibiting outside activities in conflict with IITRIs interests;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | In December 1998, IITRI filed a provisional patent
application for the device;                                                                                                                                                                                                                                                                                                                   
|
| |  |  | In August 1999, Messrs. Gauger, Stefanek and Petrovic and
IITRI employee Robert Mullins jointly filed a patent application,
which assigned the patent to IITRI and that related back to IITRIs
December 1998 provisional patent application. The patent was awarded
to IITRI in November 2001;                                                                                                  
|
| |  |  | Messrs. Gauger, Stefanek and Petrovic began a process
starting in March 1999, while they were still IITRI employees, to
form companies that would compete with IITRI using IITRIs trade
secrets;                                                                                                                                                                                                
|
| |  |  | Isovac Products, L.L.C., Inteledatics, Inc., James R. Gauger,
George L. Stefanek and Joseph J. Petrovic, collectively the
defendants, misappropriated IITRIs trade secrets and filed a patent
application on behalf of Isovac Products, L.L.C.;                                                                                                                                                 
|
| |  |  | Mr. Petrovic defamed IITRIs product in an interview with the
New York Times for the defendants pecuniary gain and to cause harm
to the reputation of IITRIs products; and                                                                                                                                                                                                                     
|
| |  |  | IITRI assigned to Alion its intellectual property rights in
the EPIC Pod and its rights to claims against the defendants as part
of Alions purchase of substantially all of IITRIs assets.                                                                                                                                                                                                     

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

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

As a government contractor, the Company may be subject from time to time
to federal government inquiries relating to its operations and audits by the
Defense Contract Audit Agency. Contractors found to have violated the False
Claims Act, or which are indicted or convicted of violations of other federal
laws, may be suspended or debarred from federal government contracting for some
period. Such an event could also result in fines or penalties. Given the
Companys dependence on federal government contracts, suspension or debarment
could have a material adverse effect on 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

None

27



---



##### 



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, 2003, the ESOP was the only holder of our common stock.

In March and May 2003, the Company raised approximately $0.7 million in
cash through a private placement of its common stock. The Company sold 55,028
shares of common stock to the ESOP Trust for $10.00 per share and 16,599 shares
at $11.13 per share. The Company issued an additional 89,955 shares of common
stock to the ESOP Trust at $11.13 per share as a contribution to the KSOP Plan.
The shares of common stock were offered pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933.

In September 2003, the Company raised approximately $1.2 million in cash
through a private placement of its common stock. The Company sold 109,627
shares of common stock to the ESOP Trust for $11.13 per share and 2,649 shares
at $14.71 per share. The Company also issued 124,447 additional shares of
common stock to the ESOP Trust at $14.71 per share as a contribution to the
KSOP Plan. The shares of common 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, the mezzanine note 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, 2003. 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 year ended September 30, 2003 and the consolidated balance sheet
data as of September 30, 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
operating data for the year ended September 30, 1999 is derived from and is
qualified by reference to the consolidated statement of income of Selected
Operations of IIT Research Institute, not included in this annual report. The
consolidated balance sheet data as of September 30, 1999 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 were sold and gives effect to allocations of expenses from IITRI.

28



---



##### 



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, 2002 and
2003, 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.

Selected Financial Data of Alion Science and Technology Corporation

For Years Ended September 30,


(in thousands except per share data)


|                                                                                                                               |                      |   |           |         |         |   |         |        |         |   |         |         |           |   |           |        |   |   |         |         |   |   |                  |   |                  |   |         |   | 
|------------------------------------------------------------------------------------------------------------------------------ | -------------------- | - | --------- | ------- | ------- | - | ------- | ------ | ------- | - | ------- | ------- | --------- | - | --------- | ------ | - | - | ------- | ------- | - | - | ---------------- | - | ---------------- | - | ------- | - | 
|                                                                                                                               |                      |   |           |         |         |   |         |        |         |   |         |         |           |   |           |        |   |   |         |         |   |   | Pro Forma Fiscal |   | Pro Forma Fiscal
|                                                                                                                               |                      |   | 2003(1)   |         | 2002(2) |   | 2001(2) |        | 2000(2) |   | 1999(2) |         | 2003 (10) |   | 2002 (10)
|                                                                                                                               |                      |   |           |         |         |   |         |        |         |   |         |         |           |   |          
|Consolidated Operating Data                                                                                                    |                      |   |           |         |         |   |         |        |         |   |         |         |           |   |           |        |   |   |         |         |   |   |                  |   |                  |   |         |  
|Contract revenue                                                                                                               |                      | $ | 165,917   |         |         | $ | 201,738 |        |         | $ | 193,152 |         |           | $ | 156,137   |        |   | $ | 117,500 |         |   | $ | 213,182          |   |                  | $ | 201,738 |  
|Direct contract expenses                                                                                                       |                      |   | 120,559   |         |         |   | 147,377 |        |         |   | 140,555 |         |           |   | 111,122   |        |   |   | 88,731  |         |   |   | 155,214          |   |                  |   | 147,377 |  
|Operating expenses (3)                                                                                                         |                      |   | 45,467    |         |         |   | 48,488  |        |         |   | 41,726  |         |           |   | 39,641    |        |   |   | 25,416  |         |   |   | 64,037           |   |                  |   | 57,942  |  
|                                                                                                                               |                      |   |           |         |         |   |         |        |         |   |         |         |           |   |           |        |   |   |         |         |   |   |                  |   |                  |   |         |  
|Operating income (loss)                                                                                                        |                      |   | (109      | )       |         |   | 5,873   |        |         |   | 10,871  |         |           |   | 5,374     |        |   |   | 3,353   |         |   |   | (6,069           | ) |                  |   | (3,581  | )
|Other income (expense)(4)                                                                                                      |                      |   | (12,507   | )       |         |   | (586    | )      |         |   | (1,072  | )       |           |   | (694      | )      |   |   | 12      |         |   |   | (14,652          | ) |                  |   | (9,652  | )
|Income tax (expense) benefit (5)                                                                                               |                      |   |          |         |         |   | (589    | )      |         |   | (302    | )       |           |   | (398      | )      |   |   | 246     |         |   |   | (27              | ) |                  |   | (589    | )
|                                                                                                                               |                      |   |           |         |         |   |         |        |         |   |         |         |           |   |           |        |   |   |         |         |   |   |                  |   |                  |   |         |  
|Net income (loss)(6)                                                                                                           |                      | $ | (12,616   | )       |         | $ | 4,698   |        |         | $ | 9,497   |         |           | $ | 4,282     |        |   | $ | 3,611   |         |   | $ | (20,748          | ) |                  |   | (13,822 | )
|                                                                                                                               |                      |   |           |         |         |   |         |        |         |   |         |         |           |   |           |        |   |   |         |         |   |   |                  |   |                  |   |         |  
|Unaudited pro forma as adjusted basic and
diluted earnings (loss) per common share
(7)                                         |                      |   |           |         |         |   |         |        |         |   |         |         |           |   |           |        |   |   |         |         |   | $ | (7.83            | ) |                  |   | (5.37   | )
|                                                                                                                               |                      |   |           |         |         |   |         |        |         |   |         |         |           |   |           |        |   |   |         |         |   |   |                  |   |                  |   |         |  
|Consolidated Balance Sheet Data
at End of Period                                                                               |                      |   |           |         |         |   |         |        |         |   |         |         |           |   |           |        |   |   |         |         |   |   |                  |   |                  |   |         |  
|Net accounts receivable                                                                                                        |                      | $ | 42,777    |         |         | $ | 49,051  |        |         | $ | 56,095  |         |           | $ | 56,473    |        |   | $ | 37,706  |         |   |   |                  |   |                  |   |         |  
|Total assets                                                                                                                   |                      |   | 144,754   |         |         |   | 71,096  |        |         |   | 76,309  |         |           |   | 82,702    |        |   |   | 65,328  |         |   |   |                  |   |                  |   |         |  
|Current portion of long-term debt                                                                                              |                      |   | 5,000     |         |         |   | 3,330   |        |         |   | 141     |         |           |   | 3,646     |        |   |   | 5,500   |         |   |   |                  |   |                  |   |         |  
|Long-term debt, excluding current portion                                                                                      |                      |   | 77,647    |         |         |   | 1,654   |        |         |   | 11,886  |         |           |   | 22,289    |        |   |   | 2,642   |         |   |   |                  |   |                  |   |         |  
|Redeemable common stock warrants                                                                                               |                      |   | 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                                                                                                  |                      | $ | 9,553     |         |         | $ | 3,447   |        |         | $ | 3,488   |         |           | $ | 3,754     |        |   | $ | 1,832   |         |   |   |                  |   |                  |   |         |  
|Capital expenditures                                                                                                           |                      |   | 1,329     |         |         |   | 3,643   |        |         |   | 1,940   |         |           |   | 2,795     |        |   |   | 4,213   |         |   |   |                  |   |                  |   |         |  
|Cash flows provided by (used in):                                                                                              |                      |   |           |         |         |   |         |        |         |   |         |         |           |   |           |        |   |   |         |         |   |   |                  |   |                  |   |         |  
|                                                                                                                               | Operating activities |   | $         | 14,264  |         |   | $       | 14,713 |         |   | $       | 7,907   |           |   | $         | (5,306 | ) |   | $       | 1,608   |   |   |                  |   |                  |   |         |   | 
|                                                                                                                               | Investing activities |   |           | (61,273 | )       |   |         | (4,466 | )       |   |         | 9,863   |           |   |           | (2,967 | ) |   |         | (12,264 | ) |   |                  |   |                  |   |         |   | 
|                                                                                                                               | Financing activities |   |           | 47,497  |         |   |         | (9,851 | )       |   |         | (17,770 | )         |   |           | 4,961  |   |   |         | 4,683   |   |   |                  |   |                  |   |         |   | 
|Funded contract backlog (8)                                                                                                    |                      |   | 107,000   |         |         |   | 72,000  |        |         |   | 67,000  |         |           |   | 88,000    |        |   |   |         |         |   |   |                  |   |                  |   |         |  
|Unfunded contract backlog (9)                                                                                                  |                      |   | 1,075,000 |         |         |   | 997,000 |        |         |   | 737,000 |         |           |   | 849,000   |        |   |   |         |         |   |   |                  |   |                  |   |         |  
|Number of employees                                                                                                            |                      |   | 1,604     |         |         |   | 1,622   |        |         |   | 1,458   |         |           |   | 1,334     |        |   |   | 1,074   |         |   |   |                  |   |                  |   |         |  





|(1) |  | For historical operating year 2003 (October 1,
      2002 to September 30, 2003), the operations data presented reflect
      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 2003. During the period October 1, 2002 to December 20,
      2002, Alion was organizationally a business shell, operationally inactive
      until the Transaction occurred.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

29



---



##### 





|(2)  |  | Represents consolidated operating and balance sheet data of the Selected
Operations of IIT Research Institute which was acquired by Alion on
December 20, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(3)  |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    
|(4)  |  | Other income (expense) for the year ended September 30, 2003, includes
approximately $7.5 million in interest-related expense associated with the
debt financing 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    
|(5)  |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    
|(6)  |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    
|    
|(7)  |  | 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.                                                                                                                                                                                                                                                                                                                    
|    
|    
|(8)  |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    
|(9)  |  | Unfunded backlog refers to the estimated total value of contracts which
have been awarded but whose funding has not yet been authorized for
expenditure.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    
|(10) |  | 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, please read Managements Discussion
and Analysis of Financial Condition and Operating Results 
Liquidity and Capital Resources for further discussion about the
debt we are assuming and about the warrants; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the acquisition of IITRIs
assets, which was accounted for
under the purchase method of accounting, including a preliminary
estimate of fair value of the identifiable net assets acquired; 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 September 30, 2002
(In thousands, except share and per share information)

|                                                             |                                   |                          |         |                               |         |                               |       |           |      |            |         |             |         |           |         |        |        |           |        |        |      |   |         |        |         |  
|------------------------------------------------------------ | --------------------------------- | ------------------------ | ------- | ----------------------------- | ------- | ----------------------------- | ----- | --------- | ---- | ---------- | ------- | ----------- | ------- | --------- | ------- | ------ | ------ | --------- | ------ | ------ | ---- | - | ------- | ------ | ------- | -
|                                                             |                                   |                          |         | Year Ended September 30, 2003 |         | Year Ended September 30, 2002
|                                                             |                                   |                          |         |                               |         |                              
|                                                             |                                   |                          |         |                               |         |                               |       | Pro Forma |      |            |         |             |         |           |         |        |        | Pro Forma |        |        |      |  
|                                                             |                                   |                          |         | Historical                    |         | Adjustments                   |       | Pro Forma |      | Historical |         | Adjustments |         | Pro Forma
|                                                             |                                   |                          |         |                               |         |                               |       |           |      |            |         |             |         |          
|Contract revenue                                             |                                   | $                        | 213,182 |                               |         |                               |       |           |      | $          | 213,182 |             |         | $         | 201,738 |        |        |           |        |        |      | $ | 201,738 |       
|Direct contract expense                                      |                                   |                          | 155,214 |                               |         |                               |       |           |      |            | 155,214 |             |         |           | 147,377 |        |        |           |        |        |      |   | 147,377 |       
|                                                             |                                   |                          |         |                               |         |                               |       |           |      |            |         |             |         |           |         |        |        |           |        |        |      |   |         |       
|                                                             |                                   | Gross profit             |         |                               | 57,968  |                               |       |           |      |            |         |             | 57,968  |           |         |        | 54,361 |           |        |        |      |   |         |        | 54,361  |  
|                                                             |                                   |                          |         |                               |         |                               |       |           |      |            |         |             |         |           |         |        |        |           |        |        |      |   |         |       
|Operating expenses:                                          |                                   |                          |         |                               |         |                               |       |           |      |            |         |             |         |           |         |        |        |           |        |        |      |   |         |       
|                                                             | Indirect contract expense         |                          |         | 11,253                        |         |                               |       |           |      |            |         | 11,253      |         |           |         | 11,153 |        |           |        |        |      |   |         | 11,153 |        
|                                                             | Research and development          |                          |         | 213                           |         |                               |       |           |      |            |         | 213         |         |           |         | 575    |        |           |        |        |      |   |         | 575    |        
|                                                             | General and administrative        |                          |         | 24,165                        |         |                               |       | 29        | (1)  |            |         | 24,194      |         |           |         | 19,093 |        |           |        | 126    | (1)  |   |         | 19,219 |        
|                                                             | Deferred compensation             |                          |         | 527                           |         |                               |       |           |      |            |         | 527         |         |           |         |       |        |           |        |        |      |   |         |       |        
|                                                             | Non-recurring transaction
expense |                          |         | 6,726                         |         |                               |       |           |      |            |         | 6,726       |         |           |         | 6,361  |        |           |        |        |      |   |         | 6,361  |        
|                                                             | Rental and occupancy expense      |                          |         | 8,981                         |         |                               |       | 112       | (2)  |            |         | 9,093       |         |           |         | 7,796  |        |           |        | 483    | (2)  |   |         | 8,279  |        
|                                                             | Depreciation and amortization     |                          |         | 10,439                        |         |                               |       | (474      | )(3) |            |         | 12,436      |         |           |         | 3,447  |        |           |        | (1,953 | )(3) |   |         | 12,201 |        
|                                                             |                                   |                          |         |                               |         |                               | 2,471 | (4)       |      |            |         |             |         |           |         |        |        |           | 10,707 | (4)    |      |   |         |       
|                                                             | Bad debt expense (recovery)       |                          |         | (405                          | )       |                               |       |           |      |            |         | (405        | )       |           |         | 154    |        |           |        |        |      |   |         | 154    |        
|                                                             |                                   |                          |         |                               |         |                               |       |           |      |            |         |             |         |           |         |        |        |           |        |        |      |   |         |       
|Total operating expenses                                     |                                   |                          | 61,899  |                               |         |                               |       |           |      |            | 64,037  |             |         |           | 48,579  |        |        |           |        |        |      |   | 57,942  |       
|                                                             |                                   |                          |         |                               |         |                               |       |           |      |            |         |             |         |           |         |        |        |           |        |        |      |   |         |       
|                                                             |                                   | Operating income (loss)  |         |                               | (3,931  | )                             |       |           |      |            |         |             | (6,069  | )         |         |        | 5,782  |           |        |        |      |   |         |        | (3,581  | )
|Other income (expense):                                      |                                   |                          |         |                               |         |                               |       |           |      |            |         |             |         |           |         |        |        |           |        |        |      |   |         |       
|                                                             | Interest income                   |                          |         | 43                            |         |                               |       |           |      |            |         | 43          |         |           |         | 40     |        |           |        |        |      |   |         | 40     |        
|                                                             | Interest expense                  |                          |         | (11,811                       | )       |                               |       | (1,685    | )(5) |            |         | (13,905     | )       |           |         | (563   | )      |           |        | (7,298 | )(5) |   |         | (9,629 | )      
|                                                             | Other                             |                          |         | (790                          | )       |                               |       | (106      | )(6) |            |         | (790        | )       |           |         | (63    | )      |           |        | (459   | )(6) |   |         | (63    | )      
|                                                             |                                   |                          |         |                               |         |                               | (303  | )(7)      |      |            |         |             |         |           |         |        |        |           | (1,309 | )(7)   |      |   |         |       
|                                                             |                                   |                          |         |                               |         |                               |       |           |      |            |         |             |         |           |         |        |        |           |        |        |      |   |         |       
|                                                             |                                   | Loss before income taxes |         |                               | (16,489 | )                             |       |           |      |            |         |             | (20,721 | )         |         |        | 5,196  |           |        |        |      |   |         |        | (13,233 | )
|                                                             |                                   | Income tax expense       |         |                               | (27     | )                             |       |           |      |            |         |             | (27     | )         |         |        | (589   | )         |        |        |      |   |         |        | (589    | )
|                                                             |                                   |                          |         |                               |         |                               |       |           |      |            |         |             |         |           |         |        |        |           |        |        |      |   |         |       
|                                                             |                                   | Net (loss)               |         | $                             | (16,516 | )                             |       |           |      |            |         |             | (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)   



|(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. 142,Goodwill
      and Other Intangible Assets, 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 a 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 capital structure and, accordingly, historical earnings
      per share information has not been presented. 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
      election 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 19 and elsewhere in this annual report
were outstanding for the entire period presented.

OVERVIEW



We apply our scientific
  and engineering expertise to research and develop technological solutions for
  problems relating to national defense, public health and safety. 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. On a pro forma basis,
  our revenues increased 5.7%, 4.4%, and 23.7 % for the years ended September 30,
  2003, 2002, and 2001, respectively, through a combination of internal growth
  and acquisitions.




We completed the
  acquisition of substantially all of the assets and certain of the liabilities
  of IITRI on December 20, 2002 (the Transaction). The following discussion
  and analysis of results of operations relates to the pro forma results of operations
  for the fiscal years ended September 30, 2003, 2002, and 2001, assuming
  that the acquisition had been consummated on October 1, 2001. The acquisition of the Selected Operations of IITRI and the resulting structure
  of the Transaction had two significant impacts on net income: first, the value assigned to the purchased contracts being amortized
  on a straight-line basis over three years resulted in approximately a
  $10.5 million, non-cash expense per year, for fiscal years ended September 30,
  2003 and 2002 and  second, there are two additional line item expenses because of the transaction: non-recurring third party transaction
  expenses (e.g. outside legal, finance, accounting and audit fees of
approximately $6.7 million and $6.4
million for fiscal years 2003 and 2002, respectively) and the expense
  associated with the Companys indebtedness as a result of the Transaction (approximately $13.9 million and $9.6 million for the fiscal
years ended September 30, 2003 and 2002, respectively).


32



---



##### 



The following information reflects summary results of operations and
backlog data for the periods set forth below:

|                  |          |   |                                             |         |      |   |               |       |  |   |       |       | 
|----------------- | -------- | - | ------------------------------------------- | ------- | ---- | - | ------------- | ----- |  | - | ----- | ----- | 
|                  |          |   | Pro Forma For the Years Ended September 30,
|                  |          |   | 2003                                        |         | 2002 |   | 2001         
|                  |          |   |                                             |         |      |   |              
|                  |          |   |                                             |         |      |   | (in millions) |       |  |   |      
|Revenue           |          | $ | 213.2                                       |         |      | $ | 201.7         |       |  | $ | 193.2 |      
|                  |          |   |                                             |         |      |   |               |       |  |   |       |      
|Net Income (loss) |          |   | (20.8                                       | )       |      |   | (13.8         | )     |  |   | 9.5   |      
|                  |          |   |                                             |         |      |   |               |       |  |   |       |      
|Contract Backlog: |          |   |                                             |         |      |   |               |       |  |   |       |      
|                  | Funded   |   |                                             | 107.0   |      |   |               | 72.0  |  |   |       | 67.0  | 
|                  | Unfunded |   |                                             | 1,075.0 |      |   |               | 997.0 |  |   |       | 737.0 | 
|                  |          |   |                                             |         |      |   |               |       |  |   |       |      
|Total             |          | $ | 1,182.0                                     |         |      | $ | 1,069.0       |       |  | $ | 804.0 |      
|                  |          |   |                                             |         |      |   |               |       |  |   |       |      

The following table sets forth, for each fiscal year indicated, the
percentage of the Companys revenue derived from each of its major types of
customers:

|                                             |  |                                             |     |      |  |      |     |   |  |  |     |  
|-------------------------------------------- |  | ------------------------------------------- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                                             |  | Pro Forma for the Years Ended September 30,
|                                             |  |                                            
|                                             |  | 2003                                        |     | 2002 |  | 2001
|                                             |  |                                             |     |      |  |     
|U.S. Department of Defense (DoD)             |  |                                             | 95  | %    |  |      | 90  | % |  |  | 93  | %
|Other Federal Civilian Agencies              |  |                                             | 3   |      |  |      | 8   |   |  |  | 5   |  
|Commercial / State / Local and
International |  |                                             | 2   |      |  |      | 2   |   |  |  | 2   |  
|                                             |  |                                             |     |      |  |      |     |   |  |  |     |  
|Total                                        |  |                                             | 100 | %    |  |      | 100 | % |  |  | 100 | %
|                                             |  |                                             |     |      |  |      |     |   |  |  |     |  

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. The Company and its predecessor, IITRI, have
completed four acquisitions since 1998 through September 30, 2003. 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.

Additionally,
in October 2003, we completed the acquisition of Innovative
Technology Solutions Corporation which provides
nuclear safety and analysis services for the U.S. Department of Energy (DOE)
and the commercial nuclear power industry. Except for HFA, which is a
separately operated wholly-owned subsidiary, we have fully integrated, or are
integrating, 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;

33



---



##### 





| |  |  | 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.                                                                  

We contract primarily with the federal government. Revenue derived from
government contracts as a percentage of total revenue was 98% in fiscal years
2003, 2002 and 2001. 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.

34



---



##### 



Our largest single contract is to provide spectrum engineering services to
the U.S. Department of Defenses Joint Spectrum Center. The Joint Spectrum
Center contract generated revenue of $45.4 million, $41.9 million, and $41.1
million for the fiscal years ended September 30, 2003, 2002, and 2001,
respectively, and accounted for approximately 21% of our total annual revenues
in each of these years. The table below provides a summary of annual pro forma
revenues by significant contracts performed by the Company.

Summary of Annual Pro Forma Revenues by Customer / Government Agency

|                        |  |                                                                                   |  |                                                        |  |                |         |         |  |            |     |         |  |         |         |            |  |  |     |   |  |            |         |  |  |  |     |  
|----------------------- |  | --------------------------------------------------------------------------------- |  | ------------------------------------------------------ |  | -------------- | ------- | ------- |  | ---------- | --- | ------- |  | ------- | ------- | ---------- |  |  | --- | - |  | ---------- | ------- |  |  |  | --- | -
|                        |  |                                                                                   |  |                                                        |  |                |         |         |  | Percentage |     |         |  |         |         | Percentage |  |  |     |   |  | Percentage
|                        |  |                                                                                   |  |                                                        |  | FY03           |         | of FY03 |  | FY02       |     | of FY02 |  | FY01    |         | of FY01   
|Core Research           |  | Sponsor/Govern                                                                    |  |                                                        |  | Annual         |         | Annual  |  | Annual     |     | Annual  |  | Annual  |         | Annual    
|Area                    |  | ment Agency                                                                       |  | Title                                                  |  | Revenue        |         | Revenue |  | Revenue    |     | Revenue |  | Revenue |         | Revenue   
|                        |  |                                                                                   |  |                                                        |  |                |         |         |  |            |     |         |  |         |         |           
|                        |  |                                                                                   |  |                                                        |  | (in thousands)
|Wireless
Communications |  | Dept of Defense
Joint Spectrum
Center                                             |  | Joint Spectrum
Center Engineering
Support Services     |  | $              | 45,409  |         |  |            | 21  | %       |  | $       | 41,929  |            |  |  | 21  | % |  | $          | 41,123  |  |  |  | 21  | %
|Defense Operations      |  | Dept of Defense -
Defense Information
Systems Agency                              |  | Modeling and
Simulation
Information
Analysis Center    |  | $              | 38,553  |         |  |            | 18  | %       |  | $       | 29,517  |            |  |  | 16  | % |  | $          | 30,917  |  |  |  | 16  | %
|Defense Operations      |  | Dept of Defense -
Defense Information
Systems Agency                              |  | Weapons Systems
Technology
Information
Analysis Center |  | $              | 9,304   |         |  |            | 4   | %       |  | $       | 9,629   |            |  |  | 5   | % |  | $          | 11,942  |  |  |  | 6   | %
|Explosive Science       |  | Dept of Defense -
Navy (subcontractor
to Raytheon
Technical Services
Corporation) |  | Guam Ordnance
Services                                 |  | $              | 8,315   |         |  |            | 4   | %       |  | $       | 8,035   |            |  |  | 4   | % |  | $          | 8,653   |  |  |  | 5   | %
|Industrial
Technology   |  | Dept of Defense -
Defense Information
Systems Agency                              |  | Reliability
Analysis Center                            |  | $              | 6,895   |         |  |            | 3   | %       |  | $       | 8,316   |            |  |  | 4   | % |  | $          | 6,213   |  |  |  | 3   | %
|Industrial
Technology   |  | Dept of Defense -
Defense Information
Systems Agency                              |  | Manufacturing
Technology
Information
Analysis Center   |  | $              | 2,767   |         |  |            | 1   | %       |  | $       | 7,563   |            |  |  | 3   | % |  | $          | 5,177   |  |  |  | 3   | %
|Wireless
Communications |  | Dept of Defense -
Navy                                                            |  | Extremely Low
Frequency
Communication
Systems          |  | $              | 4,350   |         |  |            | 2   | %       |  | $       | 4,323   |            |  |  | 2   | % |  | $          | 4,020   |  |  |  | 2   | %
|Chemical and
Biodefense |  | Department of
Defense - Army                                                      |  | Newport Chemical
Agent
Disposal Facility               |  | $              | 8,734   |         |  |            | 4   | %       |  | $       | 1,140   |            |  |  | 1   | % |  | $          | 823     |  |  |  |    |  
|Industrial
Technology   |  | Department of
Defense                                                             |  | Mobil Parts Hospital                                   |  | $              | 5,649   |         |  |            | 3   | %       |  | $       | 102     |            |  |  |    |   |  |            |        |  |  |  |    |  
|                        |  |                                                                                   |  |                                                        |  |                |         |         |  |            |     |         |  |         |         |            |  |  |     |   |  |            |         |  |  |  |     |  
|                        |  | Subtotal                                                                          |  |                                                        |  | $              | 129,976 |         |  |            | 60  | %       |  | $       | 110,554 |            |  |  | 56  | % |  | $          | 108,868 |  |  |  | 56  | %
|                        |  | Other Sponsors/
Agencies                                                          |  |                                                        |  | $              | 83,206  |         |  |            | 40  | %       |  | $       | 91,184  |            |  |  | 44  | % |  | $          | 84,284  |  |  |  | 44  | %
|                        |  |                                                                                   |  |                                                        |  |                |         |         |  |            |     |         |  |         |         |            |  |  |     |   |  |            |         |  |  |  |     |  
|                        |  | Total Revenues                                                                    |  |                                                        |  | $              | 213,182 |         |  |            | 100 | %       |  | $       | 201,738 |            |  |  | 100 | % |  | $          | 193,152 |  |  |  | 100 | %
|                        |  |                                                                                   |  |                                                        |  |                |         |         |  |            |     |         |  |         |         |            |  |  |     |   |  |            |         |  |  |  |     |  

35



---



##### 



We intend to expand our research offerings in commercial and international
markets; however, the expansion, if any, will be incremental. Revenues from
commercial and international research together amounted to approximately 1%,
2%, and 6% of total revenues for fiscal years 2003, 2002, and 2001,
respectively. We derive our international revenue from spectrum management
research and software tools and our locomotive simulation and training services
to foreign governmental customers.

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), as well as the proportion of our revenues that come from
higher margin commercial and international work. 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 direct expenses are incurred. The following table summarizes
the percentage of revenues attributable to each contract type for the periods
indicated.

|                  |  |                                             |     |      |  |      |     |   |  |   |     |  |  |  |     |   |  |   |     |  |  |  |     |  
|----------------- |  | ------------------------------------------- | --- | ---- |  | ---- | --- | - |  | - | --- |  |  |  | --- | - |  | - | --- |  |  |  | --- | -
|                  |  | Pro Forma For the Years Ended September 30,
|                  |  |                                            
|Contract Type     |  | 2003                                        |     | 2002 |  | 2001
|                  |  |                                             |     |      |  |     
|Cost-plus         |  | $                                           | 133 |      |  |      | 62  | % |  | $ | 121 |  |  |  | 60  | % |  | $ | 114 |  |  |  | 59  | %
|Fixed-price       |  |                                             | 34  |      |  |      | 16  |   |  |   | 37  |  |  |  | 18  |   |  |   | 44  |  |  |  | 23  |  
|Time-and-material |  |                                             | 46  |      |  |      | 22  |   |  |   | 44  |  |  |  | 22  |   |  |   | 35  |  |  |  | 18  |  
|                  |  |                                             |     |      |  |      |     |   |  |   |     |  |  |  |     |   |  |   |     |  |  |  |     |  
|Total             |  | $                                           | 213 |      |  |      | 100 | % |  | $ | 202 |  |  |  | 100 | % |  | $ | 193 |  |  |  | 100 | %
|                  |  |                                             |     |      |  |      |     |   |  |   |     |  |  |  |     |   |  |   |     |  |  |  |     |  

For the three years ended September 30, 2003, 2002, and 2001, the
percentage distribution among these three types of contracts has remained
relatively constant. Nonetheless, the 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.

Pro Forma Comparisons of Results of Operations

Alion completed the acquisition of substantially all of the assets and
certain of the liabilities of IITRI on December 20, 2002. The following
discussion and analysis of results of operations relates to pro forma results
of operations for the fiscal years ended September 30, 2003 and 2002, assuming
that the acquisition had been consummated on October 1, 2001.

Results of Operations

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



Contract Revenue.Contract revenue increased $11.4 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.


36



---



##### 



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 Mobil
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 firm-fixed price contracts involved.



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 as described below.
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 $20.4 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 approximately a
$0.4 million release of reserves


37



---



##### 



associated with the Companys
performance on a subcontract to a prime contractor. 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
general and administrative expense, approximately $4.0 million of the increase
can be categorized as follows:


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

38



---



##### 



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.

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

Prior to December 20, 2002, the primary liquidity requirements of the
business we acquired from IITRI were for debt service, working capital, capital
expenditures, and acquisitions. The principal working capital need was to fund
accounts receivable, which increased 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.

The following discussion relates to both the cash flows of the business
that Alion acquired from IITRI through December 20, 2002, and those which are
reflected in the consolidated statements of cash flows provided herein. The
cash flows presented cover the years ended September 30, 2003 and September 30,
2002.

Net cash provided by operating activities of Alion was approximately $14.3
million for the year ended September 30, 2003, as compared to cash provided by
operations of approximately $14.7 million for the year ended September 30,
2002. Accounts receivable management generated $4.6 million and $5.9 million in
net cash for the years ended September 30, 2003 and 2002, respectively.

Net cash used in investing activities was approximately $61.3 million for
the year ended September 30, 2003. The selected operations of IITRI that Alion
acquired on December 20, 2002 used approximately $4.5 million of cash for
investing activities for the year ended September 30, 2002. 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 $47.5 million
for the year ended September 30, 2003, compared to cash used in financing
activities of approximately $9.9 million for the year ended September 30, 2002.
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 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 the Companys revolving credit facility. In addition, approximately $0.2
million was paid related to the Daedalic acquisition and approximately $0.2
million was paid for the interest rate cap arrangement.

39



---



##### 



Discussion of debt structure:

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

|       |  |             
|------ |  | ------------
|Year 1 |  | $5.0 million
|Year 2 |  | $5.0 million
|Year 3 |  | $7.5 million
|Year 4 |  | $8.5 million
|Year 5 |  | $9.0 million

The Company must repay all principal obligations under the revolving
credit facility no later than December 20, 2007. The senior credit facility is
secured by a first priority, perfected security interest in all of the
Companys current and future tangible and intangible property.

For the periods until the lenders receive the compliance certificate and
audited financial statements for the fiscal year ending September 30, 2003, the
term note and the revolving line of credit under the senior credit facility
will bear interest at either of two floating rates at the Companys choice: an
annual rate equal to the Eurodollar rate plus 350 basis points, or the LaSalle
Bank prime rate plus 200 basis points. After the lenders receive the Companys
audited financial statements for the fiscal year ending September 30, 2003, the
interest rate will equal the Eurodollar rate or the prime rate plus margins
which will vary depending upon the Companys leverage ratio. Leverage is the
ratio of total funded debt, excluding the subordinated note (described below),
to earnings before interest, taxes, depreciation, amortization, ESOP repurchase
obligations and non-cash compensation expenses.

|                                                    |  |                      |  |                                                              |  |                                                              |  |                                    
|--------------------------------------------------- |  | -------------------- |  | ------------------------------------------------------------ |  | ------------------------------------------------------------ |  | -----------------------------------
|Revolving Credit                                    |  |                      |  |                                                              |  |                                                              |  |                                    
|and Term Loan                                       |  | Level I              |  | Level II                                                     |  | Level III                                                    |  | Level IV                           
|                                                    |  |                      |  |                                                              |  |                                                              |  |                                    
|Leverage ratio                                      |  | Less than 2.0 to 1.0 |  | Less than 2.5 to
1.0 and greater
than or equal to
2.0 to 1.0 |  | Less than 3.0 to
1.0 and greater
than or equal to
2.5 to 1.0 |  | Greater than or
equal to 3.0 to 1.0
|                                                    |  |                      |  |                                                              |  |                                                              |  |                                    
|Base rate margin                                    |  | 125 basis points     |  | 150 basis points                                             |  | 175 basis points                                             |  | 200 basis points                   
|                                                    |  |                      |  |                                                              |  |                                                              |  |                                    
|Eurodollar margin                                   |  | 275 basis points     |  | 300 basis points                                             |  | 325 basis points                                             |  | 350 basis points                   
|                                                    |  |                      |  |                                                              |  |                                                              |  |                                    
|Commitment fee
(usage less than
40%)                |  | 100 basis points     |  | 100 basis points                                             |  | 100 basis points                                             |  | 100 basis points                   
|                                                    |  |                      |  |                                                              |  |                                                              |  |                                    
|Commitment fee
(usage greater than
or equal to 40%) |  | 50 basis points      |  | 50 basis points                                              |  | 50 basis points                                              |  | 50 basis points                    

Effective February 14, 2003, the Company exercised its right to have the
term note bear interest at a Eurodollar rate. This does not affect the interest
rate on the revolving line of credit. Interest on the term note was payable at
the LaSalle Bank prime rate plus 200 basis points through February 14, 2003.
Thereafter and until the lenders receive the Companys audited financial
statements for the fiscal year ending September 30, 2003, the term note will
bear interest at the Eurodollar rate plus 350 basis points (4.61% as of September 30, 2003).

40



---



##### 



The Company and one of its senior lenders entered into an interest rate
cap agreement which runs from February 3, 2003 through February 3, 2007. Under
this agreement, the Companys maximum effective interest rate on the first
$25.0 million of term loan principal will not exceed 6%. The senior lender
counterparty to the cap agreement will semiannually calculate and reimburse the
Company for all interest payments in excess of this 6% ceiling.

On July 3, 2003, July 18, 2003, and September 18, 2003, the Company made
$0.6 million, $0.7 million, and $0.7 million advance payments, respectively, on
the senior term loan. The Company paid the second and third quarterly
installments of $1.25 million each on the senior term loan on Monday, July 7,
2003 (with the approval of the senior lender because Friday, July 4, 2003, was
a bank holiday) and September 30, 2003, respectively. On September 30, 2003,
the Company had approximately $29.3 million in borrowings outstanding under the
senior term note with no amounts outstanding under the revolving credit
facility.

The revolving credit facility bears interest at the LaSalle Bank prime
rate plus 200 basis points, which was 6.0% as of September 30, 2003. The
approximately $29.3 million balance remaining under the senior term note bears
interest at the Eurodollar rate plus 350 basis points, which was 4.61% as of
September 30, 2003.

The Company may prepay its borrowings under the senior credit facility in
designated minimum amounts without premium or penalty, other than (i) customary
breakage costs related to repayment of Eurodollar-based loans prior to the end
of an interest period, and (ii) breakage costs associated with the early
termination of any interest rate derivative related to the senior credit
facilities. The Company must prepay its borrowings with a portion of its excess
cash flow each year along with proceeds of any permitted debt or equity
issuance or asset sale.

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
Transaction. 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. 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.

Also on December 20, 2002, the Company issued a seller note to IITRI (the
subordinated note), with a face value of $39.9 million, as part of the
consideration for the Transaction. The subordinated note bears interest at a
rate of 6% per year through December 2008, payable quarterly by the issuance of
non-interest bearing notes, called paid-in-kind or (PIK) notes, which mature at
the same time as the subordinated note. Issuance of the PIK notes 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.

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.

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 12% of the Companys shares of common
stock on a fully diluted basis (assuming the exercise of all warrants
outstanding on September 30, 2003), 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. The warrants associated with the subordinated note represent the right
to buy approximately 26% of the Companys shares of common stock on a fully
diluted basis (assuming the exercise of all warrants outstanding on September
30, 2003), at an exercise price of $10.00 per share. These warrants are
exercisable until December 20,

41



---



##### 



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).

Under the terms of the senior credit facility, 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 and minimum EBITDAE. EBITDAE is defined in the senior
credit facility as earnings before interest, taxes, depreciation, amortization,
ESOP repurchase obligations and non-cash compensation expenses. The mezzanine
note contains financial covenants similar to those contained in the senior
credit facility, but on less onerous terms mutually agreed upon by the Company,
IITRI and the senior lenders. The subordinated note includes covenants
customary for deeply subordinated obligations, such as the timely payment of
principal and interest.

During the next seven fiscal years, at a minimum, the Company anticipates
that it will have to make the estimated interest and principal payments set
forth below.

|                                              |                           |  |                                |        |      |  |       |        |      |  |       |        |      |  |       |       |  |  |        |        |  |  |        |        |  |  |        |        | 
|--------------------------------------------- | ------------------------- |  | ------------------------------ | ------ | ---- |  | ----- | ------ | ---- |  | ----- | ------ | ---- |  | ----- | ----- |  |  | ------ | ------ |  |  | ------ | ------ |  |  | ------ | ------ | 
|                                              |                           |  | 7-Year Period ($ in thousands)
|                                              |                           |  |                               
|                                              |                           |  | 2004                           |        | 2005 |  | 2006  |        | 2007 |  | 2008  |        | 2009 |  | 2010 
|                                              |                           |  |                                |        |      |  |       |        |      |  |       |        |      |  |      
|Bank revolving credit facility                |                           |  |                                |        |      |  |       |        |      |  |       |        |      |  |       |       |  |  |        |        |  |  |        |        |  |  |        |       
|                                              | - Interest(1)             |  | $                              | 438    |      |  | $     | 491    |      |  | $     | 549    |      |  | $     | 615   |  |  | $      | 689    |  |  | $      | 772    |  |  | $      | 865    | 
|Senior term note                              |                           |  |                                |        |      |  |       |        |      |  |       |        |      |  |       |       |  |  |        |        |  |  |        |        |  |  |        |       
|                                              | - Interest(2)             |  |                                | 1,800  |      |  |       | 1,192  |      |  |       | 611    |      |  |       | 135   |  |  |        |       |  |  |        |       |  |  |        |       | 
|                                              | - Principal(3)            |  |                                | 3,286  |      |  |       | 3,838  |      |  |       | 1,757  |      |  |       | 2,256 |  |  |        |       |  |  |        |       |  |  |        |       | 
|                                              | - Mandatory prepayment(3) |  |                                | 6,855  |      |  |       | 5,846  |      |  |       | 6,162  |      |  |       |      |  |  |        |       |  |  |        |       |  |  |        |       | 
|Mezzanine note and agreement with officer (4) |                           |  |                                |        |      |  |       |        |      |  |       |        |      |  |       |       |  |  |        |        |  |  |        |        |  |  |        |       
|                                              | - Interest                |  |                                | 2,544  |      |  |       | 2,544  |      |  |       | 2,544  |      |  |       | 2,544 |  |  |        | 2,544  |  |  |        |       |  |  |        |       | 
|                                              | - Principal               |  |                                |       |      |  |       |       |      |  |       |       |      |  |       |      |  |  |        | 21,200 |  |  |        |       |  |  |        |       | 
|Subordinated note                             |                           |  |                                |        |      |  |       |        |      |  |       |        |      |  |       |       |  |  |        |        |  |  |        |        |  |  |        |       
|                                              | - Interest(5)             |  |                                |       |      |  |       |       |      |  |       |       |      |  |       |      |  |  |        |       |  |  |        | 6,384  |  |  |        | 3,192  | 
|                                              | - Principal               |  |                                |       |      |  |       |       |      |  |       |       |      |  |       |      |  |  |        |       |  |  |        | 27,132 |  |  |        | 27,132 | 
|                                              |                           |  |                                |        |      |  |       |        |      |  |       |        |      |  |       |       |  |  |        |        |  |  |        |        |  |  |        |       
|Total cash - Pay interest                     |                           |  | 4,782                          |        |      |  | 4,227 |        |      |  | 3,704 |        |      |  | 3,294 |       |  |  | 3,233  |        |  |  | 7,156  |        |  |  | 4,057  |       
|Total cash - Pay principal                    |                           |  | 10,141                         |        |      |  | 9,684 |        |      |  | 7,919 |        |      |  | 2,256 |       |  |  | 21,200 |        |  |  | 27,132 |        |  |  | 27,132 |       
|                                              |                           |  |                                |        |      |  |       |        |      |  |       |        |      |  |       |       |  |  |        |        |  |  |        |        |  |  |        |        | 
|                                              | Total                     |  | $                              | 14,923 |      |  | $     | 13,911 |      |  | $     | 11,623 |      |  | $     | 5,550 |  |  | $      | 24,433 |  |  | $      | 34,288 |  |  | $      | 31,189 | 
|                                              |                           |  |                                |        |      |  |       |        |      |  |       |        |      |  |       |       |  |  |        |        |  |  |        |        |  |  |        |       



|(1) |  | The Company anticipates a continuing requirement for a $25.0 million
revolving credit facility available for working capital. The average
balance on the revolving credit facility was approximately $5.2 million
for that nine-month period from December 21, 2002 to September 30, 2003,
in which it was in place, bearing interest at 6.25%. In 2004, the average
balance on the revolving credit facility is expected to be $7.0 million,
bearing interest at 6.25%. In subsequent years (2005  2010), the balance
on the revolving credit facility, and the amount of interest payable, will
depend upon the Companys working capital needs. The Company expects that
working capital needs will increase if revenue increases. The forecast
interest rate is 6.25% for all years.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

42



---



##### 



|(2) |  | Effective February 14, 2003, and pursuant to the terms of the senior
credit facility, the Company elected to have $25.0 million of the $35.0
million principal amount of the term note bear interest at a Eurodollar
rate. Effective February 3, 2003, the Company entered into an interest
rate cap arrangement to limit the maximum interest rate on the first $25.0 million of the Eurodollar portion of the principal to 6%.                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(3) |  | The senior term note is subject to mandatory prepayments of principal if
there is excess cash flow in a given year. Based upon projected cash flow,
the Company expects these mandatory prepayments to occur during the
years 2004, 2005, and 2006. This assumption is reflected in the table
above. If the prepayment conditions do not occur, the remaining four-year
principal repayment schedule will apply: $5.0
million in year 2004, $7.5 million in year 2005, $8.5 million in year
2006, and $9.0 million in year 2007.                                                                                                                                                                                                                                                                         
|   
|(4) |  | The payment of mezzanine note interest and principal includes $20.3
million in mezzanine note principal plus $0.9 million for Dr. Atefis
deferred compensation agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(5) |  | Interest expense on the
subordinated note during the five year term
(2004 to 2008) is six percent simple interest, paid by the issuance of
non-interest bearing paid-in-kind (PIK) notes. Interest amounts accrue to
principal during this period, increasing the principal of the subordinated
note. No interest will be paid on interest accrued under the subordinated
note. In years 2004 to 2008, the PIK interest on the subordinated note
will be approximately $2.4 million in each year. These amounts are
included in the principal payments in 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.

The Company has a maximum $11.5 million earnout payment obligation to the
former shareholders of AB Technologies arising from IITRIs acquisition of
their company. The earnout 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. Due to the pending dispute associated with this earnout
arrangement, payments will only occur after completion of the current
arbitration proceedings. The AB Technologies lawsuit is discussed in detail in
the Legal Proceedings (Item 3) section of Part I of this annual report.

The Companys minimum lease payment obligations under non-cancelable
operating leases for years ending 2004, 2005, 2006, 2007 and 2008, are $8.3 million,
$7.5 million, $5.4 million, $5.2 million and $5.2 million, respectively. The remaining
aggregate obligations on these leases thereafter are approximately
$7.5 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 liabilities which will impact the Companys cash flow relate
to:



| |  |  | Repurchase obligations under the KSOP which may be significant commencing in 2004;           
| | - |  | ---------------------------------------------------------------------------------------------
|
| |  |  | Obligations related to the holders put right associated with the Mezzanine Note warrants;   
|
| |  |  | Obligations related to the holders put right 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.                  

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 continue 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 to finance the
Transaction.

43



---



##### 



Additionally, the Companys business plan calls for it to continue to
acquire companies with complementary technologies. If the Company does not have
sufficient cash on hand to fund such acquisitions, it will be required to
obtain financing to do so. Such financing may not be available to us on favorable terms,
if at all.



Given the Companys significant obligations that become due in years 2007
through 2010, it expects that it will need to refinance a portion of its
indebtedness at least by fiscal year 2007. 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 investments in or
acquisitions of other companies, 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.


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-plus 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.

44



---



##### 



Goodwill and Intangible Assets

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

As of September 30, 2003, the Company has goodwill of approximately $65.5
million, which will be subject to the aforementioned annual impairment review.
In addition, in connection with the Transaction, the Company recorded
intangible assets of approximately $30.6 million, comprised primarily of
purchased contracts. The intangible assets have an estimated useful life of
three years and will be amortized using the straight-line method.



Contractual Obligations


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

Payments Due by Fiscal YearTotal
    
    2004
    
    2005 - 2007
    
    2008 - 2009
    
    2010 and After(Amounts in thousands)Contractual obligations:Long-term debt (1)
    
    $
    135,917
    
    
    $
    14,923
    
    
    $
    31,084
    
    
    $
    58,721
    
    
    $
    31,189Lease obligations
    
    
    38,976
    
    
    
    8,293
    
    
    
    18,035
    
    
    
    5,188
    
    
    
    7,460Total contractual obligations
    
    $
    174,893
    
    
    $
    23,216
    
    
    $
    49,119
    
    
    $
    63,909
    
    
    $
    38,649




---

|(1) |  | Includes interest payments.
|--- |  | ---------------------------

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
additional debt it incurred to finance the Transaction. The mezzanine note and
subordinated note 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 $25.0 million senior revolving credit facility and
$4.3 million of the Companys $29.3 million remaining balance on its senior
term note, however, bear interest at variable rates tied to the Eurodollar
rate. Such variable rates increase the risk that interest charges will increase
materially if market interest rates increase. The Company has reduced, in part,
the maximum total amount of variable interest rate risk by entering into an
interest rate cap agreement which caps at 6% the first $25.0 million of
principal borrowed under the term note effective until February 3, 2007. For a
description of the arrangement, refer to Discussion of Debt Structure in
Managements Discussion and Analysis of Financial Condition and Results of
Operations.

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

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

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



| |  |  | Repurchase obligations under the KSOP which may be significant commencing in 2004;            
| | - |  | ----------------------------------------------------------------------------------------------
|
| |  |  | 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.                   

45



---



##### 



Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements



|                                                                                         |                                                                                                                                                                                           |  |    |  | 
|---------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -- |  | 
|Consolidated Financial Statements of Alion Science and Technology Corporation            |                                                                                                                                                                                           |  |    | 
|                                                                                        
|Independent Auditors Report                                                             |                                                                                                                                                                                           |  |    | 
|                                                                                        
|Consolidated Financial Statements:                                                       |                                                                                                                                                                                           |  |    | 
|                                                                                        
|                                                                                         | Consolidated Balance Sheets as of September 30, 2003
and September 30, 2002                                                                                                               |  | 48
|                                                                                        
|                                                                                         | Consolidated
          Statements of Operations for the year ended September 30, 2003
          and for the period from October 10, 2001 (inception) through September 30,
          2002 |  | 49
|                                                                                        
|                                                                                         | Consolidated Statements of Shareholders Equity (Deficit)
for the year ended September 30, 2003 and for the period
from October 10, 2001 through September 30, 2002                       |  | 50
|                                                                                        
|                                                                                         | Consolidated Statements of Cash Flows for the year ended September 30, 2003
and for the period from October 10, 2001 through September 30, 2002                                           |  | 51
|                                                                                        
|                                                                                         | Notes to Consolidated Financial Statements                                                                                                                                                |  | 52
|                                                                                        
|Consolidated Financial Statement Schedule                                                |                                                                                                                                                                                           |  |    | 
|                                                                                        
|                                                                                         | Schedule II  Valuation and Qualifying Accounts                                                                                                                                           |  | 63
|                                                                                        
|Consolidated Financial Statements of the Selected Operations of IIT Research Corporation |                                                                                                                                                                                           |  |    | 
|                                                                                        
|Independent Auditors Report                                                             |                                                                                                                                                                                           |  |    | 
|                                                                                        
|Consolidated Financial Statements:                                                       |                                                                                                                                                                                           |  |    | 
|                                                                                        
|                                                                                         | Consolidated Balance Sheets as of September 30, 2002 and 2001                                                                                                                             |  | 65
|                                                                                        
|                                                                                         | Consolidated Statements of Income for the years ended
September 30, 2002, 2001 and 2000                                                                                                   |  | 66
|                                                                                        
|                                                                                         | Consolidated Statements of Changes in Owners Net Investment for the
years ended September 30, 2002, 2001 and 2000                                                                        |  | 67
|                                                                                        
|                                                                                         | Consolidated Statements of Cash Flows for the years ended September 30, 2002, 2001
and 2000                                                                                               |  | 68
|                                                                                        
|                                                                                         | Notes to Consolidated Financial Statements                                                                                                                                                |  | 69
|                                                                                        

46



---



##### 



Independent Auditors Report

The Board of Directors
Alion Science and Technology Corporation:

We have audited the consolidated financial statements of Alion
Science and Technology Corporation and subsidiary (the Company) as
listed in the accompanying index. These consolidated financial statements and financial statement
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule 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 Alion
Science and Technology Corporation and subsidiary as of September 30, 2003 and
2002 and the results of their operations and their cash flows for the year
ended September 30, 2003 and the period from October 10, 2001 (inception)
through September 30, 2002, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information
set forth therein.

/s/ KPMG LLP

Chicago, Illinois
December 15, 2003

47



---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
Consolidated Balance Sheets
(In thousands, except share information)

|                                               |                                                                                                                                                                                                        |                                                             |        |               |         |      |   |     |     |  
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------- | ------ | ------------- | ------- | ---- | - | --- | --- | -
|                                               |                                                                                                                                                                                                        |                                                             |        | September 30,
|                                               |                                                                                                                                                                                                        |                                                             |        |              
|                                               |                                                                                                                                                                                                        |                                                             |        | 2003          |         | 2002
|                                               |                                                                                                                                                                                                        |                                                             |        |               |         |     
|Current assets:                                |                                                                                                                                                                                                        |                                                             |        |               |         |      |   |    
|                                               | Cash                                                                                                                                                                                                   |                                                             | $      | 494           |         |      | $ | 6   |    
|                                               | Restricted cash                                                                                                                                                                                        |                                                             |        | 5             |         |      |   |    |    
|                                               | Accounts receivable, less allowance of $2,484 at September 30, 2003                                                                                                                                    |                                                             |        | 42,777        |         |      |   |    |    
|                                               | Stock subscriptions receivable                                                                                                                                                                         |                                                             |        | 1,246         |         |      |   |    |    
|                                               | Note receivable from Trust                                                                                                                                                                             |                                                             |        |              |         |      |   | 1   |    
|                                               | Prepaid expense                                                                                                                                                                                        |                                                             |        | 974           |         |      |   |    |    
|                                               | Other current assets                                                                                                                                                                                   |                                                             |        | 2,155         |         |      |   |    |    
|                                               |                                                                                                                                                                                                        |                                                             |        |               |         |      |   |    
|                                               |                                                                                                                                                                                                        | Total current assets                                        |        |               | 47,651  |      |   |     | 7   |  
|Fixed assets, net                              |                                                                                                                                                                                                        |                                                             | 8,696  |               |         |      |  |    
|Intangible assets, net                         |                                                                                                                                                                                                        |                                                             | 22,788 |               |         |      |  |    
|Goodwill                                       |                                                                                                                                                                                                        |                                                             | 65,522 |               |         |      |  |    
|Other                                          |                                                                                                                                                                                                        |                                                             | 97     |               |         |      |  |    
|                                               |                                                                                                                                                                                                        |                                                             |        |               |         |      |   |     |    
|                                               |                                                                                                                                                                                                        | Total assets                                                |        |               | 144,754 |      |   |     | 7   |  
|                                               |                                                                                                                                                                                                        |                                                             |        |               |         |      |   |     |    
|Current liabilities:                           |                                                                                                                                                                                                        |                                                             |        |               |         |      |   |    
|                                               | Note payable to bank                                                                                                                                                                                   |                                                             | $      |              |         |      | $ | 10  |    
|                                               | Note payable to officer                                                                                                                                                                                |                                                             |        |              |         |      |   | 1   |    
|                                               | Current portion of senior note payable                                                                                                                                                                 |                                                             |        | 5,000         |         |      |   |    |    
|                                               | Trade accounts payable and accrued liabilities                                                                                                                                                         |                                                             |        | 9,661         |         |      |   |    |    
|                                               | Accrued payroll and related liabilities                                                                                                                                                                |                                                             |        | 15,385        |         |      |   | 86  |    
|                                               | Advance payments                                                                                                                                                                                       |                                                             |        | 5             |         |      |   |    |    
|                                               | ESOP liabilities                                                                                                                                                                                       |                                                             |        | 320           |         |      |   |    |    
|                                               | Billings in excess of costs and estimated earnings on uncompleted contracts                                                                                                                            |                                                             |        | 409           |         |      |   |    |    
|                                               |                                                                                                                                                                                                        |                                                             |        |               |         |      |   |    
|                                               |                                                                                                                                                                                                        | Total current liabilities                                   |        |               | 30,780  |      |   |     | 97  |  
|Long-term debt                                 |                                                                                                                                                                                                        |                                                             | 2,928  |               |         |      |  |    
|Senior note payable, excluding current portion |                                                                                                                                                                                                        |                                                             | 22,903 |               |         |      |  |    
|Mezzanine note payable                         |                                                                                                                                                                                                        |                                                             | 17,636 |               |         |      |  |    
|Subordinated note payable                      |                                                                                                                                                                                                        |                                                             | 33,437 |               |         |      |  |    
|Agreement with officer                         |                                                                                                                                                                                                        |                                                             | 743    |               |         |      |  |    
|Accrued postretirement benefit obligation      |                                                                                                                                                                                                        |                                                             | 3,319  |               |         |      |  |    
|Deferred rent                                  |                                                                                                                                                                                                        |                                                             | 346    |               |         |      |  |    
|Redeemable common stock warrants               |                                                                                                                                                                                                        |                                                             | 14,762 |               |         |      |  |    
|                                               |                                                                                                                                                                                                        |                                                             |        |               |         |      |   |    
|                                               |                                                                                                                                                                                                        | Total liabilities                                           |        |               | 126,854 |      |   |     | 97  |  
|Shareholders equity, subject to redemption:   |                                                                                                                                                                                                        |                                                             |        |               |         |      |   |    
|                                               | Common stock (subject to redemption), $0.01 par value, 15,000,000 shares
authorized, 2,973,813 shares and 100 shares issued and outstanding at
September 30, 2003 and September 30, 2002, respectively |                                                             |        | 29            |         |      |   |    |    
|                                               | Additional paid-in capital                                                                                                                                                                             |                                                             |        | 30,578        |         |      |   | 1   |    
|                                               | Treasury stock, at cost                                                                                                                                                                                |                                                             |        |              |         |      |   |    |    
|                                               | Accumulated deficit                                                                                                                                                                                    |                                                             |        | (12,707       | )       |      |   | (91 | )  
|                                               |                                                                                                                                                                                                        |                                                             |        |               |         |      |   |    
|                                               |                                                                                                                                                                                                        | Total shareholders equity (deficit), subject to redemption |        |               | 17,900  |      |   |     | (90 | )
|                                               | Total liabilities and shareholders equity, subject to redemption                                                                                                                                      |                                                             | $      | 144,754       |         |      | $ | 7   |    
|                                               |                                                                                                                                                                                                        |                                                             |        |               |         |      |   |     |    

See accompanying notes to consolidated financial statements.

48



---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
Consolidated Statements of Operations
(In thousands, except share and per share information)

|                                                                       |                                             |                                    |           |                    |         |                    |    |                                      |     |  
|---------------------------------------------------------------------- | ------------------------------------------- | ---------------------------------- | --------- | ------------------ | ------- | ------------------ | -- | ------------------------------------ | --- | -
|                                                                       |                                             |                                    |           |                    |         |                    |    | Period from                         
|                                                                       |                                             |                                    |           |                    |         |                    |    | October 10, 2001
        (inception)
|                                                                       |                                             |                                    |           | Year Ended         |         | through           
|                                                                       |                                             |                                    |           | September 30, 2003 |         | September 30, 2002
|                                                                       |                                             |                                    |           |                    |         |                   
|Contract
          revenue                                             |                                             | $                                  | 165,917   |                    |         | $                  |   |                                     
|Direct
          contract expense                                      |                                             |                                    | 120,559   |                    |         |                    |   |                                     
|                                                                       |                                             |                                    |           |                    |         |                    |    |                                     
|                                                                       |                                             | Gross
          profit             |           |                    | 45,358  |                    |    |                                      |    |  
|                                                                       |                                             |                                    |           |                    |         |                    |    |                                     
|Operating
          expenses:                                          |                                             |                                    |           |                    |         |                    |    |                                     
|                                                                       | Indirect
          contract expense         |                                    |           | 8,685              |         |                    |    |                                     |    
|                                                                       | Research
          and development          |                                    |           | 177                |         |                    |    |                                     |    
|                                                                       | General
          and administrative        |                                    |           | 19,959             |         |                    |    | 91                                   |    
|                                                                       | Non-recurring
          transaction expense |                                    |           | 726                |         |                    |    |                                     |    
|                                                                       | Rental
          and occupancy expense      |                                    |           | 6,892              |         |                    |    |                                     |    
|                                                                       | Depreciation
          and amortization     |                                    |           | 9,553              |         |                    |    |                                     |    
|                                                                       | Bad debt expense (recovery)                 |                                    |           | (525               | )       |                    |    |                                     |    
|                                                                       |                                             |                                    |           |                    |         |                    |    |                                     
|Total
          operating expenses                                     |                                             |                                    | 45,467    |                    |         |                    | 91 |                                     
|                                                                       |                                             |                                    |           |                    |         |                    |    |                                     
|                                                                       |                                             | Operating
          loss           |           |                    | (109    | )                  |    |                                      | (91 | )
|Other
          income (expense):                                      |                                             |                                    |           |                    |         |                    |    |                                     
|                                                                       | Interest
          income                   |                                    |           | 21                 |         |                    |    |                                     |    
|                                                                       | Interest
          expense                  |                                    |           | (11,759            | )       |                    |    |                                     |    
|                                                                       | Other                                       |                                    |           | (769               | )       |                    |    |                                     |    
|                                                                       |                                             |                                    |           |                    |         |                    |    |                                     
|                                                                       |                                             | Loss
          before income taxes |           |                    | (12,616 | )                  |    |                                      | (91 | )
|                                                                       |                                             | Income
          tax expense       |           |                    |        |                    |    |                                      |    |  
|                                                                       |                                             |                                    |           |                    |         |                    |    |                                     
|                                                                       |                                             | Net
          loss                 |           | $                  | (12,616 | )                  |    | $                                    | (91 | )
|                                                                       |                                             |                                    |           |                    |         |                    |    |                                     
|Basic
          and diluted net loss per share                         |                                             | $                                  | (6.05     | )                  |         |                    |    |                                     
|                                                                       |                                             |                                    |           |                    |         |                    |    |                                     
|Basic
          and diluted weighted average common shares outstanding |                                             |                                    | 2,085,274 |                    |         |                    |    |                                     
|                                                                       |                                             |                                    |           |                    |         |                    |    |                                     

See accompanying notes to consolidated financial statements.

49



---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
Consolidated Statement of Shareholders Equity (Deficit)
(In thousands, except share information)

|                                                                              |  |        |           |        |  |          |    |          |  |            |        |             |  |       |        |   |  |   |     |   |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------------- |  | ------ | --------- | ------ |  | -------- | -- | -------- |  | ---------- | ------ | ----------- |  | ----- | ------ | - |  | - | --- | - |  | - | ------- | - |  | - | ------- | -
|                                                                              |  |        |           |        |  |          |    |          |  | Additional |        |             |  |       |        |   |  |   |     |   |  |   |         |   |  |  
|                                                                              |  | Common |           | Common |  | Paid-in- |    | Treasury |  | Treasury   |        | Accumulated |  |       |        |  
|                                                                              |  | Shares |           | Stock  |  | Capital  |    | Shares   |  | Stock      |        | Deficit     |  | Total
|                                                                              |  |        |           |        |  |          |    |          |  |            |        |             |  |      
|Balances at October 10, 2001 (inception)                                      |  |        |          |        |  | $        |   |          |  | $          |       |             |  |       |       |   |  | $ |    |   |  | $ |        |   |  | $ |        |  
|Issuance of common stock to
KSOP Trust at December 21, 2001                   |  |        | 100       |        |  |          |   |          |  |            | 1      |             |  |       |       |   |  |   |    |   |  |   |        |   |  |   | 1       |  
|Net loss for the period from inception through
September 30, 2002             |  |        |          |        |  |          |   |          |  |            |       |             |  |       |       |   |  |   |    |   |  |   | (91     | ) |  |   | (91     | )
|                                                                              |  |        |           |        |  |          |    |          |  |            |        |             |  |       |        |   |  |   |     |   |  |   |         |   |  |   |         |  
|Balances at September 30, 2002                                                |  |        | 100       |        |  | $        |   |          |  | $          | 1      |             |  |       |       |   |  | $ |    |   |  | $ | (91     | ) |  | $ | (90     | )
|Issuance of common stock to
KSOP Trust at December 20, 2002                   |  |        | 2,575,408 |        |  |          | 26 |          |  |            | 25,728 |             |  |       |       |   |  |   |    |   |  |   |        |   |  |   | 25,754  |  
|Issuance of common stock to
KSOP Trust at March 31 and May 31, 2003           |  |        | 161,582   |        |  |          | 1  |          |  |            | 1,735  |             |  |       |       |   |  |   |    |   |  |   |        |   |  |   | 1,736   |  
|Purchase of 5,248 shares of common
stock from KSOP Trust at June 25, 2003     |  |        | (5,248    | )      |  |          |   |          |  |            |       |             |  |       | 5,248  |   |  |   | (58 | ) |  |   |        |   |  |   | (58     | )
|Purchase of 2,696 shares of common
stock from KSOP Trust at July 9, 2003      |  |        | (2,696    | )      |  |          |   |          |  |            |       |             |  |       | 2,696  |   |  |   | (30 | ) |  |   |        |   |  |   | (30     | )
|Release of 7,944 shares of treasury stock
to KSOP Trust at September 30, 2003 |  |        | 7,944     |        |  |          |   |          |  |            | 28     |             |  |       | (7,944 | ) |  |   | 88  |   |  |   |        |   |  |   | 116     |  
|Issuance of common stock to
KSOP Trust at September 30, 2003                  |  |        | 236,723   |        |  |          | 2  |          |  |            | 3,086  |             |  |       |       |   |  |   |    |   |  |   |        |   |  |   | 3,088   |  
|Net loss for the year ended
September 30, 2003                                |  |        |          |        |  |          |   |          |  |            |       |             |  |       |       |   |  |   |    |   |  |   | (12,616 | ) |  |   | (12,616 | )
|                                                                              |  |        |           |        |  |          |    |          |  |            |        |             |  |       |        |   |  |   |     |   |  |   |         |   |  |   |         |  
|Balances at September 30, 2003                                                |  |        | 2,973,813 |        |  | $        | 29 |          |  | $          | 30,578 |             |  |       |       |   |  | $ |    |   |  | $ | (12,707 | ) |  | $ | 17,900  |  
|                                                                              |  |        |           |        |  |          |    |          |  |            |        |             |  |       |        |   |  |   |     |   |  |   |         |   |  |   |         |  

See accompanying notes to consolidated financial statements

50



---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
Consolidated Statements of Cash Flows
(In thousands)

|                                                                                          |                                                                                                       |   |                    |         |                    |   |                              |     |  
|----------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | - | ------------------ | ------- | ------------------ | - | ---------------------------- | --- | -
|                                                                                          |                                                                                                       |   |                    |         |                    |   | Period from                 
|                                                                                          |                                                                                                       |   |                    |         |                    |   | October 10, 2001 (inception)
|                                                                                          |                                                                                                       |   | Year Ended         |         | through           
|                                                                                          |                                                                                                       |   | September 30, 2003 |         | September 30, 2002
|                                                                                          |                                                                                                       |   |                    |         |                   
|Cash flows from operating activities                                                      |                                                                                                       |   |                    |         |                    |   |                              |    
|                                                                                          | Net loss                                                                                              |   | $                  | (12,616 | )                  |   | $                            | (91 | )
|Adjustments to reconcile net loss to net cash
provided by (used in) operating activities: |                                                                                                       |   |                    |         |                    |   |                              |    
|                                                                                          | Depreciation and amortization                                                                         |   |                    | 9,553   |                    |   |                              |    |  
|                                                                                          | Accretion of debt to face value                                                                       |   |                    | 1,024   |                    |   |                              |    |  
|                                                                                          | Amortization of debt issuance costs                                                                   |   |                    | 353     |                    |   |                              |    |  
|                                                                                          | Change in fair value of redeemable common stock warrants                                              |   |                    | 4,453   |                    |   |                              |    |  
|                                                                                          | (Gain) loss on disposal of assets                                                                     |   |                    | 7       |                    |   |                              |    |  
|                                                                                          | (Gain) loss on investments                                                                            |   |                    | (113    | )                  |   |                              |    |  
|                                                                                          | (Gain) loss on hedge                                                                                  |   |                    | 148     |                    |   |                              |     |  
|Changes in assets and liabilities, net of effect of acquisition:                          |                                                                                                       |   |                    |         |                    |   |                              |    
|                                                                                          | Accounts receivable, net                                                                              |   |                    | 4,571   |                    |   |                              |    |  
|                                                                                          | Other assets                                                                                          |   |                    | 793     |                    |   |                              | 86  |  
|                                                                                          | Trade accounts payable and accruals                                                                   |   |                    | 6,520   |                    |   |                              |    |  
|                                                                                          | Other liabilities                                                                                     |   |                    | (429    | )                  |   |                              |    |  
|                                                                                          |                                                                                                       |   |                    |         |                    |   |                              |    
|Net cash provided by (used in) operating activities                                       |                                                                                                       |   | 14,264             |         |                    |   | (5                           | )  
|Cash flows from investing activities:                                                     |                                                                                                       |   |                    |         |                    |   |                              |    
|                                                                                          | Cash paid for acquisition, net of cash acquired                                                       |   |                    | (59,944 | )                  |   |                              |    |  
|                                                                                          | Capital expenditures                                                                                  |   |                    | (1,329  | )                  |   |                              |    |  
|                                                                                          |                                                                                                       |   |                    |         |                    |   |                              |    
|Net cash used in investing activities                                                     |                                                                                                       |   | (61,273            | )       |                    |   |                             |    
|Cash flows from financing activities:                                                     |                                                                                                       |   |                    |         |                    |   |                              |    
|                                                                                          | Proceeds from senior note payable                                                                     |   |                    | 35,000  |                    |   |                              | 10  |  
|                                                                                          | Payment of debt issuance costs                                                                        |   |                    | (1,700  | )                  |   |                              |    |  
|                                                                                          | Repayment of senior note payable                                                                      |   |                    | (5,750  | )                  |   |                              |    |  
|                                                                                          | Proceeds from note due to officer                                                                     |   |                    |        |                    |   |                              | 1   |  
|                                                                                          | Repayments under IITRI revolving credit agreement                                                     |   |                    | (6,185  | )                  |   |                              |    |  
|                                                                                          | Purchase of interest rate cap agreement                                                               |   |                    | (245    | )                  |   |                              |    |  
|                                                                                          | Cash paid for Daedalic acquisition earn out                                                           |   |                    | (155    | )                  |   |                              |    |  
|                                                                                          | Stock redemption                                                                                      |   |                    | (88     | )                  |   |                              |    |  
|                                                                                          | Issuance of common stock to ESOP Trust                                                                |   |                    | 26,620  |                    |   |                              |    |  
|                                                                                          |                                                                                                       |   |                    |         |                    |   |                              |    
|Net cash provided by financing activities                                                 |                                                                                                       |   | 47,497             |         |                    |   | 11                           |    
|Net increase in cash                                                                      |                                                                                                       |   | 488                |         |                    |   | 6                            |    
|Cash at beginning of period                                                               |                                                                                                       |   | 6                  |         |                    |   |                             |    
|                                                                                          |                                                                                                       |   |                    |         |                    |   |                              |    
|Cash at end of period                                                                     |                                                                                                       | $ | 494                |         |                    | $ | 6                            |    
|                                                                                          |                                                                                                       |   |                    |         |                    |   |                              |    
|Supplemental disclosure of cash flow information:                                         |                                                                                                       |   |                    |         |                    |   |                              |    
|                                                                                          | Cash paid for interest                                                                                |   | $                  | 3,774   |                    |   | $                            |    |  
|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                  |   |                    | 2,828   |                    |   |                              |     |  
|                                                                                          |                                                                                                       |   |                    |         |                    |   |                              |    

See accompanying notes to consolidated financial statements.

51



---



##### 



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. 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 (on a fully diluted basis). The seller notes bear interest at an
      effective interest rate of 6.71% per annum. See notes 4 and 6;
|
| |  |  | $20,343 in mezzanine notes to IITRI, with detachable
      warrants representing 12% of the outstanding common stock of Alion (on a
      fully diluted basis). The mezzanine notes bear interest at 12% per annum.
      See notes 4 and 6;                                        
|
| |  |  | $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 will
be 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 will be 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 |  
|                         |  |   |         |  

52



---



##### 



(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 prior to the Transaction and the accounts of Alion and
  its wholly-owned subsidiary Human Factors Application, Inc. (HFA) subsequent
  to the Transaction. All significant intercompany accounts have been eliminated
  in consolidation.

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 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.

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-plus 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

53



---



##### 



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, 2003, the Companys tax
basis in its assets exceeds its book basis by approximately $11.4 million.

On December 21, 2002, the Companys subsidiary, HFA, was determined to be
a qualified subchapter S subsidiary. Accordingly, HFA will not be treated as a
separate corporation 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.

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 $9.0 million at September 30, 2003. 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, 2003 include $2.4 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. In addition, billed receivables at September 30, 2003
include $0.1 million of final bills that are not expected to be collected
within one year. 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.

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 believes that
no goodwill impairment exists as of September 30, 2003.

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.

54



---



##### 



Fair
Value of Financial Instruments

The fair
values of financial instruments are determined based on quoted market
prices and market interest rates as of the end of the reporting
period. The Companys financial instruments include restricted
cash, accounts and other receivables, accounts payable, accrued
liabilities, notes payable, long-term debt and redeemable common
stock warrants. The fair values of the Companys financial
instruments were not materially different from their carrying or
contract values at September 30, 2003.

Fiscal and Interim Periods

The Companys fiscal year ends on September 30. The Company operates on a
13-period fiscal year consisting of three, four-week periods in its first
interim period; three, four-week periods in its second interim period; four,
four-week periods in its third interim period; and the balance of the fiscal
year of approximately three, four-week periods in its fourth interim period.

(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 is designed and is 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.

55



---



##### 



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



|                                                                           |  |                    |        |  
|-------------------------------------------------------------------------- |  | ------------------ | ------ | -
|                                                                           |  | September 30, 2003
|                                                                           |  |                   
|                                                                           |  | (In thousands)    
|Accumulated postretirement benefit obligation:                             |  |                    |        |  
|Retirees                                                                   |  | $                  | 849    |  
|Fully eligible active plan participants                                    |  |                    | 717    |  
|Other active plan participants                                             |  |                    | 1,372  |  
|                                                                           |  |                    |        |  
|                                                                           |  | $                  | 2,938  |  
|                                                                           |  |                    |        |  
|Reconciliation of beginning and ending benefit obligation:                 |  |                    |        |  
|Benefit obligation at beginning of period                                  |  | $                  | 3,113  |  
|Service cost                                                               |  |                    | 74     |  
|Interest cost                                                              |  |                    | 156    |  
|Actuarial gain                                                             |  |                    | (381   | )
|Benefits paid                                                              |  |                    | (24    | )
|                                                                           |  |                    |        |  
|Benefit
obligation at September 30, 2003                                   |  | $                  | 2,938  |  
|                                                                           |  |                    |        |  
|Change in fair value of plan assets:                                       |  |                    |        |  
|Fair
value of plan assets at October 1, 2002 and September 30, 2003        |  |                    |       |  
|Funded status of the plan:                                                 |  |                    |        |  
|Obligation
at September 30, 2003                                           |  |                    | (2,938 | )
|Unrecognized net loss (gain)                                               |  |                    | (381   | )
|                                                                           |  |                    |        |  
|Accrued
postretirement benefits included in the
consolidated balance sheet |  | $                  | (3,319 | )
|                                                                           |  |                    |        |  

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

|              |                                          |   |      |     | 
|------------- | ---------------------------------------- | - | ---- | --- | 
|              |                                          |   | 2003
|              |                                          |   |     
|Service cost  |                                          | $ | 74   |    
|Interest cost |                                          |   | 156  |    
|              |                                          |   |      |    
|              | Net periodic postretirement benefit cost |   | $    | 230 | 
|              |                                          |   |      |    

Net
periodic postretirement benefit cost for the period ended
September 30, 2002 was zero.

The health care cost trend rates used to determine the accumulated
postretirement benefit obligation are 11.0% in fiscal year 2003, 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 $0.029 million in the service and interest cost components of the
net periodic postretirement benefit cost and $0.22 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 $0.026 million in the
service and interest cost components of the net periodic postretirement benefit
cost and $0.2 million in the

56



---



##### 



accumulated postretirement benefit obligation. The discount rate used to
measure the accumulated postretirement benefit obligation at September 30, 2003
was 6.25%.

(5) Earnings (Loss) Per Share

Pro
forma earnings (loss) per share has been computed as
though the 2,575,408 shares sold by the Company to the employee stock ownership
plan (ESOP) component of its Employee Ownership Savings and Investment Plan
(KSOP) on December 20, 2002 to fund the Transaction described in Note 1 were
outstanding for the entire period presented. Prior to the sale of
shares of common stock to the ESOP, the Companys capital structure consisted
of 100 shares of common stock issued and outstanding. Accordingly, historical
earnings per share information for periods prior to the Transaction has not
been presented as it is not indicative of the Companys capital structure.

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 then current market value
  per share, which was at $14.71 per share as of September 30,
  2003. Accordingly, all of the Companys equity is classified
as subject to redemption in the accompanying consolidated balance
sheets. The per share market value 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 then current market value of the common stock.

(7) Goodwill and Intangible Assets

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

As a result of the
  Transaction, the Company recorded goodwill of approximately $63.6 million,
  which is subject to the aforementioned annual impairment review. During fiscal
  year 2003, goodwill increased by $1.9 million as a result of recording
  additional obligations related to earnout arrangements. In addition, the Company
  recorded intangible assets of approximately $30.6 million, comprised primarily
  of purchased contracts. The intangible assets have an estimated useful life
  of three years and are being amortized using the straight-line method.

(8) Long-term Debt

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
facility consists of a $25.0 million revolving credit facility and a $35.0
million term loan. All principal obligations under the revolving credit
facility are to be repaid in full no later than December 20, 2007. The senior
credit facility is secured by a first priority, perfected security interest in
all of the Companys current and future tangible and intangible property. As of September
30, 2003, the Company had no amount borrowed under the revolving credit
facility.

57



---



##### 



The remaining principal repayments of (taking into account previous
repayments) $29.25 million under the term loan will be payable in quarterly
installments, yielding annual fiscal year repayments in the following amounts:

|                                  |  |                |       | 
|--------------------------------- |  | -------------- | ----- | 
|Fiscal Year Ending September 30,: |  | (In thousands)
|2004                              |  | $              | 5,000 | 
|2005                              |  | $              | 6,875 | 
|2006                              |  | $              | 8,250 | 
|2007                              |  | $              | 8,875 | 
|2008                              |  | $              | 250   | 

For the periods until the receipt of the compliance certificate and
audited financial statements for the fiscal year ended September 30, 2003, the
Companys borrowings under the senior credit facility will bear interest at
either of two floating rates: a per year rate equal to the Eurodollar rate plus
350 basis points, or the prime rate (base rate) plus 200 basis points. After the lenders receipt of
the Companys audited financial statements for the fiscal year ended September
30, 2003, the interest rate will be reset to equal either the Eurodollar rate or the prime rate
(base rate) plus a margin which will vary depending on the Companys
leverage ratio.

Effective February 14, 2003, the Company exercised its right to elect that
the term note will bear interest at a Eurodollar rate. This election does not
affect the interest rate applicable to amounts borrowed under the revolving
line of credit. As a result, interest under the term note was payable at the
prime rate (base rate) plus 200 basis points until February 14, 2003. Thereafter and until
the lenders receipt of the Companys audited financial statements for fiscal
year ending September 30, 2003, the term note bears 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 of its term note will not exceed 6%. Any interest the
Company pays on the first $25 million of principal in excess of 6% will be
calculated and reimbursed to the Company semiannually by the senior lender
pursuant to the cap agreement. This cap agreement expires February 3, 2007. The
cap agreement had a fair value of $88,000 as of September 30, 2003, which has
been recorded in the accompanying consolidated balance sheet.

On December 20, 2002, the
  Company paid $1.7 million to obtain a senior credit facility that includes a
  $35 million Senior Term Note and a $25 million revolving credit facility. The
  Company is using the effective interest method to accret the value of long-term
  debt, which was recorded as debt discount, to its face value. As of September 30, 2003, the Company had recognized
  $.353 million of interest expense related to this pre-payment.

On December 20, 2002, the Company issued to IITRI a mezzanine note
securities purchase agreement with a face value of approximately $20.3 million
(mezzanine note). The mezzanine note served as part of the consideration for
the Transaction. 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 credit
facility, but ranks senior to the subordinated note.

Also, 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 purchase price
for the Transaction. 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.

58



---



##### 



On December 20, 2002, the Company entered into a deferred compensation
agreement with Dr. Atefi its President, CEO and Chairman, as a condition to completing the Transaction. Under
the deferred compensation agreement, Dr Atefi is entitled to a
payment of
approximately $857,000 on December 20, 2008, plus 12% cash interest per year.

Under the terms of the Senior Credit Facility and Mezzanine Note, the
Company is subject to covenants including financial covenants with respect to
minimum fixed charge coverage, maximum total senior leverage, maximum total
leverage, maximum capital expenditures, minimum EBITDAE, as defined, and other
customary covenants. As of September 30, 2003, the Company was in compliance
with these financial covenants.

In summary, for the aforementioned debt agreements, the remaining annual
fiscal year repayments (at face amount before debt discount) are as
follows as of September 30, 2003 (in thousands):

|                                          |  |      |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  |       |     |  |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        | 
|----------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ----- | --- |  |  | - | ------ |  |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|Principal payments                        |  | 2004 |       | 2005 |  | 2006 |       | 2007 |  | 2008 |       | 2009 |  | 2010 |       | 2011 |  | Total
|                                          |  |      |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  |      
|Senior term note                          |  | $    | 5,000 |      |  | $    | 6,875 |      |  | $    | 8,250 |      |  | $    | 8,875 |      |  | $     | 250 |  |  |   |        |  |  |   |        |  |  |   |        |  |  | $ | 29,250 | 
|Mezzanine note and
agreement with officer |  |      |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  |       |     |  |  |   | 21,200 |  |  |   |        |  |  |   |        |  |  |   | 21,200 | 
|Subordinated note                         |  |      |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  |       |     |  |  |   |        |  |  |   | 19,950 |  |  |   | 19,950 |  |  |   | 39,900 | 
|                                          |  |      |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  |       |     |  |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        | 
|Total principal payments                  |  | $    | 5,000 |      |  | $    | 6,875 |      |  | $    | 8,250 |      |  | $    | 8,875 |      |  | $     | 250 |  |  | $ | 21,200 |  |  | $ | 19,950 |  |  | $ | 19,950 |  |  | $ | 90,350 | 
|                                          |  |      |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  |       |     |  |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        | 

(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. 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 $14.8 million as of September 30, 2003. 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, 2003, are as follows:

|                    |      |                |        |       | 
|------------------- | ---- | -------------- | ------ | ----- | 
|Fiscal Year Ending: |      | (In thousands)
|                    |      |               
|                    | 2004 |                | $      | 8,293 | 
|                    | 2005 |                | $      | 7,477 | 
|                    | 2006 |                | $      | 5,385 | 
|                    | 2007 |                | $      | 5,173 | 
|                    | 2008 |                | $      | 5,188 | 
|and thereafter      |      | $              | 7,460  |      
|                    |      |                |        |       | 
|                    |      | $              | 38,976 |      
|                    |      |                |        |      

Rent expense under operating leases was $8.2 million for the year ended
September 30, 2003.

**(11)   Fixed Assets**

Fixed assets at September 30 consisted of the
  following:

|                                               |                  |         | 2003           |   | 2002
|---------------------------------------------- | ---------------- | ------- | -------------- | - | ----
|                                               |                  |         |                |   |     
|                                               |                  |         | (in thousands)
|                                               |                  |         |                |   |     
|Buildings and building improvements            | $               |         |              
|Leasehold improvements                         | 626              |         |              
|Equipment and software                         | 9,784            |         |              
|                                               |                  |         |                |  
|                                               | Total cost       | 10,410  |                | 
|Less accumulated depreciation and amortization | 1,714            |         |              
|                                               |                  |         |                |  
|                                               | Net fixed assets | $ 8,696 |                | 
|                                               |                  |         |                |   |     

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

59



---



##### 



(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, 2003, the Company had 92,750 outstanding SARs with
an exercise price of $10.00 per share. All grants were effective December 23,
2002 except for 300 SARs issued in May 2003 and 300 issued in June 2003. The
Company recognized approximately $0.2 million in compensation expense through
September 30, 2003 related to this plan.

(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
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. On February 11, 2003, the Company issued 171,000 shares of
phantom stock to five executive officers of the Company. On November 11, 2003,
the Company issued 49,286 shares of phantom stock to executive officers and
senior management of the Company. The phantom stock awards vest according to
the following schedule:

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

As of September 30, 2003, the Company had 171,000 shares of phantom stock
outstanding with an exercise price of $10.00 per share. The Company recognized
approximately $0.4 million in compensation expense associated with this plan
during the year ended September 30, 2003.

(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
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 $42.1 million, or 98%, of accounts receivable at September 30,
2003. Contract revenues from agencies of the federal government
represented approximately 99% of total contract revenues during the
year ended September 30, 2003.

60



---



##### 



(15) Acquisition 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% 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 other 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 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. The consolidated balance sheet as of September 30, 2002 reflects
this level of activity.

The following unaudited pro forma summary information presents the results
of operations as if the acquisition had been completed at the beginning of the
periods presented and are not necessarily indicative of the results of
operations that would have been achieved had the acquisition been completed at
the beginning of the periods specified, nor are they necessarily indicative of
future operating results.

|                   |  |                    |         |                    |  |   |         |  
|------------------ |  | ------------------ | ------- | ------------------ |  | - | ------- | -
|                   |  | Fiscal Years Ended
|                   |  |                   
|                   |  | September 30, 2003 |         | September 30, 2002
|                   |  |                    |         |                   
|                   |  | (in
thousands)    
|Revenue            |  | $                  | 213,182 |                    |  | $ | 201,738 |  
|Net loss           |  | $                  | (20,748 | )                  |  | $ | (13,822 | )
|Net
loss per share |  |                    | (7.83   | )                  |  |   | (5.37   | )

(16) Related Party Transactions

In October 2002, the Company issued a promissory note to an officer for
$1,000. The Company loaned $1,000 to the Trust and received a promissory note.
The Trust purchased the initial 100 shares of common stock issued by the Company for
$1,000. Subsequently, the promissory note to an officer has been redeemed.

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.

(17) Commitments and Contingencies

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.

AB Technologies Lawsuit

On September 16, 2002, IITRI filed a lawsuit against Clyde Andrews and
William Bewley, former shareholders of AB Technologies, Inc., in the U.S.
District Court for the Eastern District of Virginia. IITRI acquired
substantially all of the assets of AB Technologies in February 2000.

The lawsuit sought to compel the defendants to submit disputed issues to
an independent accounting firm, in accordance with the terms of the asset
purchase agreement. The Company also sought declaratory judgment that it

61



---



##### 



is entitled to a downward adjustment to the purchase price and a finding
that it properly computed the earnout required by the asset purchase agreement.

Messrs. Andrews and Bewley filed a lawsuit against IITRI for breach of the
AB Technologies asset purchase agreement claiming at least $8.2 million in
damages. The Andrews-Bewley lawsuit was removed to federal court and
consolidated into IITRIs lawsuit. The federal court stayed the litigation and
ordered both parties to submit the dispute to the independent accounting firm
of Grant Thornton for arbitration. The consolidated federal action was
subsequently dismissed without prejudice. The arbitration hearing was held in October and
November 2003. Alion expects a decision before the end of 2003. Alion assumed
responsibility for and acquired all claims under both of these
lawsuits, and ensuing arbitration, as part
of its acquisition of IITRIs assets.

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

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 expense 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.

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

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

|                  |  |      |     |      |  |     |        |     |  |                |        |   |  |   |        |   |  |   |     |  
|----------------- |  | ---- | --- | ---- |  | --- | ------ | --- |  | -------------- | ------ | - |  | - | ------ | - |  | - | --- | -
|                  |  | 2003 |     | 2002
|                  |  |      |     |     
|                  |  | 1st  |     | 2nd  |  | 3rd |        | 4th |  | from inception
|Revenue           |  | $    |    |      |  | $   | 49,005 |     |  | $              | 65,134 |   |  | $ | 51,778 |   |  | $ |    |  
|Net income (loss) |  | $    | (41 | )    |  | $   | (3,075 | )   |  | $              | (2,693 | ) |  | $ | (6,807 | ) |  | $ | (91 | )

(19) Subsequent Events

Acquisition of Innovative Technology Solutions Corporation.

On October 31, 2003, Alion acquired 100% of all the outstanding shares of
ITSC for $4.0 million. The transaction is also 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.

On November 12, 2003, Alion repurchased, $0.75 million of mezzanine note
and all 19,327 of the associated warrants from an officer for the aggregate
purchase price of $1,034,020 as described in Note 16 above.

62



---



##### 



Consolidated Financial Statement Schedule
Schedule II  Valuation and Qualifying Accounts (in
thousands)

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



|(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                                                                                               

63



---



##### 



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. In connection with our audits of the consolidated financial
statements, we also have audited the consolidated financial statement schedule
listed in the accompanying Index to Financial Statements. These consolidated
financial statements and consolidated financial statement schedule are the
responsibility of Selected Operations of IIT Research Institute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 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. Also, in our opinion, the
related consolidated financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.

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

Chicago, Illinois
December 6, 2002 except as to note 13,
which is as of December 20, 2002

64



---



##### 



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                                                                          |                                                          |                                              | 51,735                                 |       |                |        | 57,764 |      
|                                                                                                              | Other receivables                                                                            |                                                          |                                              | 929                                    |       |                |        | 1,591  |      
|                                                                                                              |                                                                                              |                                                          |                                              |                                        |       |                |        |       
|                                                                                                              |                                                                                              |                                                          | 52,664                                       |                                        |       |                | 59,355 |       
|                                                                                                              |                                                                                              | Less allowance for doubtful accounts and contract losses |                                              |                                        | 3,613 |                |        |        | 3,260 |       
|                                                                                                              |                                                                                              |                                                          |                                              |                                        |       |                |        |       
|                                                                                                              |                                                                                              |                                                          | Net accounts receivable                      |                                        |       | 49,051         |        |        |       | 56,095 | 
|                                                                                                              |                                                                                              |                                                          |                                              |                                        |       |                |        |       
|                                                                                                              | Other current assets                                                                         |                                                          |                                              | 2,965                                  |       |                |        | 1,619  |      
|                                                                                                              |                                                                                              |                                                          |                                              |                                        |       |                |        |       
|                                                                                                              |                                                                                              |                                                          | Total current assets                         |                                        |       | 52,924         |        |        |       | 60,110 | 
|Other assets                                                                                                  |                                                                                              |                                                          | 853                                          |                                        |       |                | 853    |       
|Fixed assets, net                                                                                             |                                                                                              |                                                          | 8,388                                        |                                        |       |                | 5,835  |       
|Goodwill, less accumulated amortization                                                                       |                                                                                              |                                                          | 8,931                                        |                                        |       |                | 9,511  |       
|                                                                                                              |                                                                                              |                                                          |                                              |                                        |       |                |        |       
|                                                                                                              |                                                                                              |                                                          | 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                                                                       |                                                          |                                              | 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.

65



---



##### 



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    |      
|                         |                                                          |                            |         |                      |       |      |         |                |        |   |         |       
|                         |                                                          | $                          | 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.

66



---



##### 



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                                        |  | $              | 7,619  |  
|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 |  
|                                                                     |  |                |        |  

See accompanying notes to consolidated financial statements.

67



---



##### 



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.

68



---



##### 



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.

69



---



##### 



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-plus 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

70



---



##### 



SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE

Notes to Consolidated Financial
Statements - (Continued)

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. 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

71



---



##### 



SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE

Notes to Consolidated Financial
Statements - (Continued)

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.

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

72



---



##### 



SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE

Notes to Consolidated Financial Statements  (Continued)

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 $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

73



---



##### 



SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE

Notes to Consolidated Financial Statements  (Continued)

an exit or disposal plan. The provisions of this standard are effective for
disposal activities initiated after December 31, 2002.

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.

74



---



##### 



SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE

Notes to Consolidated Financial Statements  (Continued)

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

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.

75



---



##### 



SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE

Notes to Consolidated Financial Statements  (Continued)

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.

(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               |                                           | $ | 10,820         |        |      | $ | 3,330 |      
|Other notes payable, primarily to previous owners of
EMC and AB Tech |                                           |   | 1,207          |        |      |   | 1,654 |      
|                                                                     |                                           |   |                |        |      |   |       |      
|                                                                     | Total long-term debt                      |   |                | 12,027 |      |   |       | 4,984 | 
|Less current portion                                                 |                                           |   | 141            |        |      |   | 3,330 |      
|                                                                     |                                           |   |                |        |      |   |       |      
|                                                                     | Long-term debt, excluding current portion |   | $              | 11,886 |      |   | $     | 1,654 | 
|                                                                     |                                           |   |                |        |      |   |       |      

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 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.

76



---



##### 



SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE

Notes to Consolidated Financial
Statements - (Continued)

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 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.

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    |      |  |   | 900.00  |  
|Unrecognized prior service cost                                               |  |                | (156   | )    |  |   | (153.00 | )
|Unrecognized net loss (gain)                                                  |  |                | 5      |      |  |   | (82     | )
|                                                                              |  |                |        |      |  |   |         |  
|Accrued postretirement benefits recognized in the
consolidated balance sheets |  | $              | (1,520 | )    |  | $ | (1,345  | )
|                                                                              |  |                |        |      |  |   |         |  

77



---



##### 



SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE

Notes to Consolidated Financial Statements  (Continued)

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 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:

|                     |  |                |        | 
|-------------------- |  | -------------- | ------ | 
|                     |  | (In thousands)
|Fiscal years ending: |  |                |        | 
|2003                 |  | $              | 8,544  | 
|2004                 |  |                | 7,913  | 
|2005                 |  |                | 7,511  | 
|2006                 |  |                | 5,637  | 
|2007                 |  |                | 5,664  | 
|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.

78



---



##### 



SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE

Notes to Consolidated Financial
Statements - (Continued)

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 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
earnout. 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.

79



---



##### 



SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE

Notes to Consolidated Financial Statements  (Continued)

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.

(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.                                                                                                                                                                                                                    

80



---



##### 



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 last fiscal
quarter to which this report relates that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over
financial reporting.

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, 2003,
are set forth below (except for Mr. Aldridge who became a director in November
2003).

|                                     |  |     |    |          |  |                   |  |       |      |      |  |          |      |  |  | 
|------------------------------------ |  | --- | -- | -------- |  | ----------------- |  | ----- | ---- | ---- |  | -------- | ---- |  |  | 
|                                     |  |     |    |          |  |                   |  |       |      | Term |  | Director
|Name                                 |  | Age |    | Position |  | Expires           |  | Since
|                                     |  |     |    |          |  |                   |  |      
|Bahman Atefi                         |  |     | 50 |          |  | President, Chief  |  |       | 2005 |      |  |          | 2001 | 
|                                     |  |     |    |          |  | Executive Officer |  |       |      |      |  |          |      | 
|                                     |  |     |    |          |  | and Chairman      |  |       |      |      |  |          |      | 
|Leslie Armitage                      |  |     | 35 |          |  | Director          |  |       | 2004 |      |  |          | 2002 | 
|Lewis Collens                        |  |     | 65 |          |  | Director          |  |       | 2004 |      |  |          | 2002 | 
|Admiral (Ret.) Harold W. Gehman, Jr. |  |     | 60 |          |  | Director          |  |       | 2004 |      |  |          | 2002 | 
|Donald E. Goss                       |  |     | 72 |          |  | Director          |  |       | 2006 |      |  |          | 2002 | 
|Robert L. Growney                    |  |     | 60 |          |  | Director          |  |       | 2006 |      |  |          | 2002 | 
|General (Ret.) George A. Joulwan     |  |     | 63 |          |  | Director          |  |       | 2005 |      |  |          | 2002 | 
|General (Ret.) Michael E. Ryan       |  |     | 61 |          |  | Director          |  |       | 2005 |      |  |          | 2002 | 
|Edward C. Pete Aldridge            |  |     | 65 |          |  | Director          |  |       | 2006 |      |  |          | 2003 | 

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 2004. 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,

81



---



##### 



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.

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.

82



---



##### 



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 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.

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. 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.

Prior to this appointment, Mr. Aldridge served as 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.

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.

83



---



##### 



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 Committee                     |  | Donald Goss   |  | Leslie Armitage, Robert Growney              
|                                    |  |               |  |                                              
|Compensation Committee              |  | Lewis Collens |  | Pete Aldridge, Leslie Armitage,
Harold Gehman
|                                    |  |               |  |                                              
|Nominating and
Governance Committee |  | Bahman Atefi  |  | George Joulwan, Michael Ryan,
Harold Gehman  

The
Board of Directors is in the process of determining which members of
the Audit Committee are Audit Committee
financial experts as such term is defined in the rules and regulations under
the Securities Exchange Act of 1934, as amended.

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. Mr
Collens is the President.

Information Regarding the Executive Officers of the Registrant

The names, ages and positions of our executive officers as of September
30, 2003, and the dates from which these positions have been held are set forth
below.

|                   |  |     |    |        |  |                                                                            |  |              
|------------------ |  | --- | -- | ------ |  | -------------------------------------------------------------------------- |  | -------------
|Name               |  | Age |    | Office |  | Position Since                                                            
|                   |  |     |    |        |  |                                                                           
|Bahman Atefi       |  |     | 50 |        |  | Chief Executive Officer (1)                                                |  | December 2001
|                   |  |     |    |        |  |                                                                            |  |              
|Randy Crawford     |  |     | 53 |        |  | Sector Senior Vice
President and Sector
Manager - Spectrum
Engineering (1) |  | May 2002     
|                   |  |     |    |        |  |                                                                            |  |              
|Barry Watson       |  |     | 49 |        |  | Sector Senior Vice
President and Sector
Manager - Systems
Technology (1)   |  | May 2002     
|                   |  |     |    |        |  |                                                                            |  |              
|John (Jack) Hughes |  |     | 52 |        |  | Senior Vice President,
Chief Financial Officer
and Treasurer               |  | October 2002 
|                   |  |     |    |        |  |                                                                            |  |              
|Stacy Mendler      |  |     | 40 |        |  | Senior Vice President and
Chief Administrative
Officer                     |  | May 2002     
|                   |  |     |    |        |  |                                                                            |  |              
|Jon Emery          |  |     | 51 |        |  | 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

84



---



##### 



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.

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 1650 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.

Jon Emeryhas served as senior vice president, general counsel and
corporate secretary of Alion since January 2003. From December 1997 to July
2000, Mr. Emery served as senior vice president, general counsel and secretary
for Network Solutions, Inc., a publicly traded technology company, which was
acquired by VeriSign in 2000, and was responsible for managing a team of 30
individuals, overseeing an $8 million budget, and supervising 40 outside law
firms. From December 1986 to September 1997, Mr. Emery served as chief
corporate lawyer for Tambrands Inc., a Fortune 500 consumer products company,
and most recently as vice president, senior counsel and assistant secretary.
Prior to that, from September 1977 to September 1986, he worked for Sidley
Austin Brown & Wood, LLP (formerly Brown & Wood). Mr. Emery received a B.A. in
Economics from Trinity College in Connecticut and graduated Cum Laude with a
J.D. from Boston University School of Law. He is a member of the New York Bar
and the American Bar Association Section of Business Law. In September 2003,
Mr. Emery tendered his resignation as senior vice president, general counsel
and corporate secretary of Alion to become effective on January 30, 2004.

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. A copy of the Code is posted on the Companys
website. 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.

85



---



##### 



The Company is presently examining this 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. If the
Company determines that its current Code does not meet such requirements, the
Company expects to adopt a code of ethics applicable to Alions CEO and CFO
meeting such definitional requirements set forth in the rules and regulations
of the Securities and Exchange Commission.

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, 2003, 2002, and 2001, and also for Jack Hughes
and Jon Emery whom we hired in September 2002 and January 2003, respectively.
The Selected Operations of IITRI acquired 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                       |  |                     |      |              |  |       |         |                  |  |            |         |              |  | Other Annual |     | LTIP |  | All Other
|Principal Position             |  | Year                |      | Salary       |  | Bonus |         | Compensation (1) |  | Payouts(2) |         | Compensation
|                               |  |                     |      |              |  |       |         |                  |  |            |         |             
|Bahman Atefi                   |  |                     | 2003 |              |  |       | 387,115 |                  |  |            | 365,000 | (4)          |  |              |    |      |  |           |        | (3)       |  |  | 873,078 | (5),(21) 
|Chief Executive Officer        |  |                     | 2002 |              |  |       | 370,195 |                  |  |            | 350,000 |              |  |              |    |      |  |           |        | (3)       |  |  | 21,868  | (5)      
|                               |  |                     | 2001 |              |  |       | 350,012 |                  |  |            | 300,000 |              |  |              |    |      |  |           |        |           |  |  | 18,905  | (5)      
|Barry Watson                   |  |                     | 2003 |              |  |       | 255,860 |                  |  |            | 110,000 | (4)          |  |              |    |      |  |           |        | (6)       |  |  | 310,276 | (7),(21) 
|Systems Technology Sector      |  |                     | 2002 |              |  |       | 228,196 |                  |  |            | 100,000 |              |  |              |    |      |  |           |        | (6)       |  |  | 17,278  | (7)      
|Senior VP and Sector Manger    |  |                     | 2001 |              |  |       | 218,344 |                  |  |            | 70,000  |              |  |              |    |      |  |           |        |           |  |  | 37,021  | (7)      
|Randy Crawford                 |  |                     | 2003 |              |  |       | 245,475 |                  |  |            | 90,000  | (4)          |  |              |    |      |  |           |        | (8)       |  |  | 285,441 | (9),(21) 
|Spectrum Engineering Sector    |  |                     | 2002 |              |  |       | 218,144 |                  |  |            | 80,000  |              |  |              |    |      |  |           |        | (8)       |  |  | 23,697  | (9)      
|Senior VP and Sector Manger    |  |                     | 2001 |              |  |       | 204,248 |                  |  |            | 70,000  |              |  |              |    |      |  |           |        |           |  |  | 22,295  | (9)      
|Stacy Mendler                  |  |                     | 2003 |              |  |       | 196,238 |                  |  |            | 90,000  | (4)          |  |              |    |      |  |           |        | (10)      |  |  | 233,331 | (12),(21)
|Senior VP and Chief            |  |                     | 2002 |              |  |       | 176,244 |                  |  |            | 80,000  |              |  |              |    |      |  |           | 20,000 | (11),(10) |  |  | 12,224  | (12)     
|Administrative Officer         |  |                     | 2001 |              |  |       | 158,341 |                  |  |            | 65,000  |              |  |              |    |      |  |           | 70,000 | (13)      |  |  | 14,575  | (12)     
|Jon Emery(14)                  |  |                     | 2003 |              |  |       | 149,714 |                  |  |            |        | (4)          |  |              |    |      |  |           |        | (15)      |  |  |         |          
|Senior VP, General Counsel
and |  |                     | 2002 |              |  |       | N/A     |                  |  |            | N/A     |              |  |              | N/A |      |  |           | N/A    |           |  |  | N/A     |          
|Corporate Secretary            |  |                     | 2001 |              |  |       | N/A     |                  |  |            | N/A     |              |  |              | N/A |      |  |           | N/A    |           |  |  | N/A     |          
|Jack Hughes(16), (18)          |  |                     | 2003 |              |  |       | 220,677 |                  |  |            | 65,000  | (4)          |  |              |    |      |  |           |        | (17)      |  |  | 11,675  | (20)     
|Senior VP, Chief Financial     |  |                     | 2002 |              |  |       | 4,335   |                  |  |            | 35,000  | (19)         |  |              |    |      |  |           |        | (17)      |  |  | N/A     |          
|Officer and Treasurer          |  |                     | 2001 |              |  |       | N/A     |                  |  |            | N/A     |              |  |              | N/A |      |  |           | N/A    |           |  |  | N/A     |          



|(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 phantom stock.
In November 2003, Dr. Atefi was awarded 18,695 shares of phantom stock as
described more fully below.                                                                                                                                             

86



---



##### 





|(4)  |  | Bonus amounts for fiscal year 2003 were paid in December 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(5)  |  | 2003 includes company matching contribution of $11,000 under Alions
KSOP. Includes $857,000 vested under a deferred compensation with the
Company. See below, Deferred Compensation Arrangement for
Babman Atefi. Includes $648 in term life insurance premiums paid by Alion.
Includes $4,430 in club membership dues.

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.

2001 includes company matching contributions of $6,434 and $7,788 under
IITRIs 403(b) and 401(a) plans, respectively. Includes $702 in term life
insurance premiums paid by IITRI. Includes $3,981 in club membership dues.                                                                                                             
|    
|(6)  |  | In February 2003, Mr. Watson was awarded 34,000 shares of phantom stock.
In November 2003, Mr. Watson was awarded 6,798 shares of phantom stock as
described more fully below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    
|(7)  |  | 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.

2001 includes $22,644 in cash payout for unused vacation time. Includes
company matching contributions of $4,825 and $8,438 under IITRIs 403(b) and
401(a) plans, respectively. Includes $439 in term life insurance premiums
paid by IITRI. Includes $675 in club membership dues.      
|    
|(8)  |  | In February 2003, Mr. Crawford was awarded 33,000 shares of phantom
stock. In November 2003, Mr. Crawford was awarded 6,798 shares of phantom
stock as described more fully below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    
|(9)  |  | 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.

2001 includes $8,178 in cash payout for unused vacation time. Includes
company matching contributions of $4,604 and $9,102 under IITRIs 403(b) and
401(a) plans, respectively. Includes $411 in term life insurance premiums
paid by IITRI.                            
|    
|(10) |  | In February 2003, Ms. Mendler was awarded 28,500 shares of phantom stock.
In November 2003, Ms. Mendler was awarded 6,798 shares of phantom stock as
described more fully below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    
|(11) |  | Reflects payment received pursuant to an executive deferred compensation
plan, dated September 16, 1997, by and between IITRI and Ms. Mendler.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    
|(12) |  | 2003 includes company matching contribution of $3,001 under IITRIs
401(a). These contributions cover
the period October 1, 2002 to December 20, 2002, prior to the Transaction. Includes company matching contribution of $9,504 under Alions
KSOP. Includes $215,000 vested under a Retention Incentive Agreement. Includes $425 in term life insurance premiums paid by Alion.
Includes $400 in club membership dues.

2002 includes company matching contributions of $3,325 and $8,028 under
IITRIs 403(b) and 401(a) plans, respectively. Includes $371 in term life
insurance premiums paid by IITRI. Includes $500 for preparation of
employees taxes.

2001 includes $3,694 in cash payout for unused vacation time. Includes
company matching contributions of $3,173 and $7,088 under IITRIs 403(b) and
401(a) plans, respectively. Includes $319 in term life insurance premiums
paid by IITRI. Includes $300 in club membership dues.
|    
|(13) |  | Reflects payment received pursuant to an executive deferred compensation
plan, dated September 16, 1997, by and between IITRI and Ms. Mendler.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    
|(14) |  | Jon Emery was hired by Alion in January 2003, at an initial base salary
of $225,000. In September 2003, Mr. Emery tendered his resignation to
become effective January 30, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    
|(15) |  | Mr. Emery received an award of 1,000 SARS in February 2003 as described
more fully below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    
|(16) |  | Jack Hughes was appointed senior vice president, chief financial officer
and treasurer of Alion as of October 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    
|(17) |  | In February 2003, Mr. Hughes was awarded 10,000 shares of phantom stock.
In November 2003, Mr. Hughes was awarded 6,798 shares of phantom stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

87



---



##### 





|(18) |  | 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.                                                                                                                                                                                                                                                                                                                                     
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(19) |  | Represents a signing bonus paid to Mr. Hughes
      upon his execution of his employment agreement with IITRI.                                                                                                                                                                                                                                                                                                                                                                                          
|    
|(20) |  | 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.                                                                                                                                                                                                                                                                                                              
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(21) |  | Retention Incentive Agreements. In September
       2001, IITRI entered into and funded retention incentive agreements
      with Bahman Atefi, Stacy Mendler, Randy Crawford and Barry Watson for $550,000,
      $295,000, $270,000 and $215,000, respectively via a non-qualified deferred
      compensation agreement. Aliens acquistion if IITRIS
assets constituted
      a change in control of IITRI and these retention incentive awards vested fully
      upon closing of the Transaction.

Stock Appreciation Rights Plan

Our board of directors adopted an Alion Science and Technology Corporation
2002 Stock Appreciation Rights Plan in November 2002, which we refer to as the
SAR plan. The purpose of the plan is to attract, retain, reward and motivate
employees that are responsible for our continued growth and development and
future financial success.

The SAR plan has a term of 10 years, and provides that stock appreciation
rights, which we refer to as SAR awards, may be granted to directors,
officers and employees and/or consultants of Alion. The SAR awards granted
under this plan shall not exceed 10% of the shares of Alion common stock
outstanding from time to time on a fully diluted basis (assuming the exercise
of all outstanding options, warrants and rights (including, without limitation,
SARs), and assuming the conversion into stock of any outstanding securities
convertible into stock). The chief executive officer, with the approval of the
board of directors or its compensation committee, has the authority to grant
SAR awards under this plan as he deems appropriate.

Awards, when granted, will provide the grantee with the right to receive
payment upon exercise for 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. In effect, each award represents
the right to receive a payment based on the appreciation of a share of Alion
common stock over a fixed period of time. The SAR plan contains a provision
that prevents the grant of SAR awards to any employee who, by virtue of a SAR
award or otherwise, would be a disqualified person. For this purpose, a
disqualified person is generally someone who holds an aggregate of 10% or
more of Alion equity taking into account outstanding stock and the tested
persons synthetic equity. More specifically, each persons percentage
interest is a fraction,



| |  |  | the numerator of which is the sum of that persons ESOP
interest and synthetic equity, which is that persons stock options
or warrants or other rights to acquire Alion equity and any right of
that person under an Alion compensation arrangement, the benefit of
which is based on the value of Alion stock; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the denominator of which is the sum of all issued and
outstanding Alion stock and any synthetic equity of the tested
person (but only the tested person).                                                                                                                                                           

The plan further provides that any grant of SAR awards in violation of
these provisions  whether or not erroneous  will be void.

Awards may be exercised at any time after they are granted to the extent
the grantee has at least a partial vested interest in such award. Each award,
with the exception of those granted to a member of the board of directors,
becomes vested at the rate of 20% per year, beginning on the date of the grant.
Awards granted to Alion board members, other than Dr. Atefi, vest on a schedule
coincident with their term as a board member. SAR awards granted to Dr. Atefi,
who is a member of the board, but also president and chief executive officer of
Alion, vest at a rate of 20% per year.

In the event that a participant exercises a grant before the grant is 100%
vested, the participant will retain the rights to both the vested unexercised
awards and the unvested awards as long as the remaining unvested awards are
still subject to a vesting schedule. All awards must be exercised within 60
days of 100% vesting. If a recipients vested awards are not exercised within
this time-frame, the recipient will forfeit the right to the vested and
unexercised award.

If a grantee dies before an award becomes fully vested, one-third of the
unvested portion of the award shall automatically become fully vested and shall
be deemed to have been exercised immediately prior to the employees

88



---



##### 



death. For grantees whose exercise is deemed prior to death, the price
shall be at the appraised value per share established by the most recent
valuation preceding the employees death, less the appraised value on the grant
date.

As of September 30, 2003, the Company has awarded an aggregate of [96,950]
SARs. Payments due and owing under these SAR awards are intended to be made in
one lump sum following the next semi-annual valuation of Alion stock after the
date of exercise, but they may be delayed for a period not to exceed five years
after the date of the exercise. If payment is delayed beyond 90 days after the
semi-annual valuation following the date of exercise, interest will accrue from
the date of such valuation. Interest will be calculated at the prime rate as
announced in the Wall Street Journal on the date of exercise. In making the
determination about payments owing under these SAR awards, the plan
administrator will examine Alions available cash and anticipated cash needs.
In general, we expect that Alion will consider the payment obligations
resulting from SAR exercises at the same time as the ESOP repurchase
obligations and will make payment determinations in a uniform and
non-discriminatory manner.

Our board of directors, who serves as the fiduciary for the SAR plan, may
amend or terminate the SAR plan at any time.

The following table sets forth information regarding grants of SARs, to
the Named Executive Officers pursuant to the SAR Plan. No grants of options
have been made to any Named Executive Officer. This table does not
include warrants purchased from the Company described elsewhere in
this Annual Report. The only Named
Executive Officers who held warrants to purchase Alion common stock
at September 30, 2003 were Dr. Atefi (22,062 shares) and
Mr. Emery (19,327 shares). The Company repurchased all of
Mr. Emerys warrants on November 10, 2003.

|                                             |  |              |       |                    |  |             |   |            |  |                   |  |        |  |   |                 |  |  |  |  | 
|-------------------------------------------- |  | ------------ | ----- | ------------------ |  | ----------- | - | ---------- |  | ----------------- |  | ------ |  | - | --------------- |  |  |  |  | 
|SAR Grants in Last Fiscal Year (in dollars)*
|Individual Grants                           
|                                            
|                                             |  |              |       |                    |  | Percent of  |   |            |  |                   |  |        |  |   |                 |  |  | 
|                                             |  | No. of       |       | SARs granted       |  | Exercise
or |   | Expiration |  | Grant date       
|Name                                         |  | SARs granted |       | to employees in FY |  | base price  |   | date       |  | present value (1)
|                                             |  |              |       |                    |  |             |   |            |  |                  
|Bahman Atefi (2)                             |  |              |       |                    |  |             |   |            |  |                   |  |        |  |   |                 |  |  |  |  | 
|Barry Watson (2)                             |  |              |       |                    |  |             |   |            |  |                   |  |        |  |   |                 |  |  |  |  | 
|Randy Crawford (2)                           |  |              |       |                    |  |             |   |            |  |                   |  |        |  |   |                 |  |  |  |  | 
|Stacy Mendler (2)                            |  |              |       |                    |  |             |   |            |  |                   |  |        |  |   |                 |  |  |  |  | 
|Jon Emery                                    |  |              | 1,000 |                    |  |             | 1 | %          |  | $10.00/SAR        |  | Feb-08 |  | $ | 5,640 - $20,600 | 
|Jack Hughes (2)                              |  |              |       |                    |  |             |   |            |  |                   |  |        |  |   |                 |  |  |  |  | 

* 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) |  | 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 price
volatility, and expected SAR life. There is no assurance that these
assumptions will prove to be true in the future. The actual value, if
any, that may be realized by each individual will depend upon the
market price of Alions common stock on the date of
exercise.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | No SAR awards as of
September 30, 2003                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   

89



---



##### 



The following table sets forth information regarding the exercise of SARs
during Fiscal 2003 to the named executive Officers and held by them at
September 30, 2003.

|                                                                                                            |  |             |  |                |  |                           |  |                          
|----------------------------------------------------------------------------------------------------------- |  | ----------- |  | -------------- |  | ------------------------- |  | -------------------------
|Aggregated SAR Exercises
        in Last Fiscal Year and Fiscal Year End / SAR Values
        (in dollars)*
|                                                                                                           
|                                                                                                            |  |             |  |                |  | Number of securities      |  | Value of unexercised     
|                                                                                                            |  |             |  |                |  | underlying unexercised    |  | in-the-money             
|                                                                                                            |  | Shares      |  |                |  | options/SARs at fiscal    |  | options/SARs at fiscal   
|                                                                                                            |  | acquired on |  |                |  | year end (number)         |  | year end (dollars)       
|Name                                                                                                        |  | exercise    |  | Value realized |  | Exercisable/Unexercisable |  | Exercisable/Unexercisable
|                                                                                                            |  |             |  |                |  |                           |  |                          
|Bahman Atefi (2)                                                                                            |  |             |  |                |  |                           |  |                          
|Barry Watson (2)                                                                                            |  |             |  |                |  |                           |  |                          
|Randy Crawford (2)                                                                                          |  |             |  |                |  |                           |  |                          
|Stacy Mendler (2)                                                                                           |  |             |  |                |  |                           |  |                          
|Jon Emery                                                                                                   |  | 0           |  | $0.00          |  | 0/1000                    |  | $0/$4,710                
|Jack Hughes (2)                                                                                             |  |             |  |                |  |                           |  |                          

* 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) |  | The exercise price of the
      SAR is $10.00/share. As of September 30, 2003 the value of Alion common
      stock is $14.71 per share.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | No SAR awards as of September 30,
2003.                                                                                                 

Phantom Stock Plan

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 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 incentive
compensation would be provided to Alions senior management, and that this
additional incentive compensation would take the form of awards of phantom
stock.

The terms of Alions phantom stock plan were approved by the compensation
committee of Alions board of directors in February 2003. 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.
The phantom stock plan was adopted by the full board in February 2003. The
purpose of the plan is to retain our key management employees and to provide
them with a proprietary interest in our company.

Phantom stock refers to hypothetical shares of Alion common stock. Each
recipient of phantom stock receives a one-time award of a specified number of
shares of phantom stock. 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 within a certain specified
number of days 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.

90



---



##### 



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.



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

91



---



##### 



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

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

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.                                                                                                                 

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. 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. Payments from
the exercise of phantom stock may be rolled over into any non-qualified
deferred compensation plan available to the employee. 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.

Subject to adjustment as set forth in the plan, the number of shares of
our common stock used for reference purposes with respect to grants of phantom
stock was not to exceed 173,000. As of February 14, 2003 we issued an aggregate
of 171,000 shares of phantom stock. As of November 11, 2003, the plan was
amended to expand the number of shares of our common stock used for reference
purposes with respect to grants of phantom stock to not more than 232,600. On
November 11, 2003, the compensation committee issued an aggregate of 49,286
shares of phantom stock.

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

The plan also prevents the grant of phantom stock to any employee who
would be a disqualified person as long as we maintain the ESOP. For this
purpose, a disqualified person is generally someone who holds an aggregate of
10 percent or more of Alion equity taking into account outstanding stock and
the tested persons synthetic equity. The plan further provides that any
grant of phantom stock in violation of these provisions  whether or not
erroneous  will be void.

92



---



##### 



The following table sets forth information regarding phantom stock granted
to the Named Executive Officers pursuant to the Phantom Stock Plan.

Long-Term Incentive Plan* Awards in Last Fiscal Year

|               |  |                |        |                          |  |               |  | 
|-------------- |  | -------------- | ------ | ------------------------ |  | ------------- |  | 
|               |  | Number of      |        | Performance or          
|               |  | shares, units, |        | other period until      
|Name           |  | or rights (1)  |        | maturation or payout (2)
|               |  |                |        |                         
|Bahman Atefi   |  |                | 65,500 |                          |  | February 2008
|               |  |                | 18,695 |                          |  | November 2008
|Barry Watson   |  |                | 34,000 |                          |  | February 2008
|               |  |                | 6,798  |                          |  | November 2008
|Randy Crawford |  |                | 33,000 |                          |  | February 2008
|               |  |                | 6,798  |                          |  | November 2008
|Stacy Mendler  |  |                | 28,500 |                          |  | February 2008
|               |  |                | 6,798  |                          |  | November 2008
|Jack Hughes    |  |                | 10,000 |                          |  | February 2008
|               |  |                | 6,798  |                          |  | November 2008



|* |  | Refers to the Alion Science and Technology Corporation 2003 Phantom
Stock Plan (see above, Phantom Stock Plan for information regarding
the terms of the Phantom Stock Plan).
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(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 anniversary from the grant date, or approximately February
2008 and November 2008, respectively.  See vesting schedules on page
93 above.
|   

Employment Agreements

Alion has entered into employment agreements with Bahman Atefi, Barry
Watson, Randy Crawford, John Hughes, and Stacy Mendler, 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 $410,000 for fiscal year 2004 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

93



---



##### 



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 systems
technology sector senior vice president and sector manager 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 $260,000 for the fiscal year
2004 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.

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.

94



---



##### 



Under his employment agreement, Mr. Crawford will serve as spectrum
engineering sector senior vice president and sector manager 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 $250,000 for fiscal
year 2004 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 $250,000 for fiscal year 2004 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 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;

95



---



##### 





| |  |  | 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 her employment agreement, Ms. Mendler will serve as senior vice
president for Alion for a term of 60 months, commencing on December 20, 2002
and ending December 20, 2007. She will receive a base annual
salary of $220,000 for fiscal year 2004
and will be eligible for a performance-based annual incentive bonus. Ms.
Mendler is also eligible to participate in Alions deferred compensation plan,
stock appreciation rights plan, and phantom stock plan. Under the terms of her
employment agreement, Ms. Mendler will be given an allowance for a company car.
Ms. Mendler may terminate her employment agreement with 30 days notice. If she
does so, however, she will forfeit any incentive payments which might otherwise
have been due her. Alion may terminate Ms. Mendlers employment agreement for
cause, which includes, amongst others, fraud, theft or embezzlement, reckless,
willful or criminal misconduct, or gross negligence, in Ms. Mendlers
performance of her duties. Alion may also terminate Ms. Mendlers employment
without cause, although if Alion does so, it will have to make a lump sum
severance payment to Ms. Mendler equal to the greater of



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

Under her employment agreement, Ms. Mendler is entitled to terminate her
employment and receive the same lump sum severance payment described above, if
she terminates his employment for any of the following reasons within 24 months
following a change of control event:



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

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

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 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.

96



---



##### 



Deferred Compensation Plans

We have implemented a deferred compensation plan pursuant to which certain
members of management and other highly compensated employees may defer some
portion of their compensation. We have also implemented a director deferred
compensation plan pursuant to which the directors may defer some portion of
their compensation.

Under the plans, a director or officer may defer a portion of his or her
compensation by making an irrevocable election to do so and submitting it to
us. After submission of an election form, we withhold the specified percentage
of compensation for payment at some future date as specified by that director
or officer. We then make payment of the deferred compensation to the director
or officer, beginning on that future date, in one lump sum or in ten
substantially equal annual installments as specified on the election form. Full
or partial payment may be made prior to this date in certain limited
circumstances as specified in the plans. A director or officer may, at any
time, receive payment of his or her deferred compensation subject to a 10%
deduction penalty. Under the director-deferred compensation plan, a director
may defer up to 50% of his or her compensation each fiscal year as well as up
to 100% of payments the director is entitled to receive under our SAR plan.
Under the executive officer-deferred compensation plan, an officer may defer up
to 50% of his or her annual base salary each fiscal year as well as up to 100%
of his or her annual bonus or other payments the officer is entitled to receive
under our SAR plan or phantom stock plan. Generally, a director or officer may
only change the percentage of compensation he or she is deferring during the
open enrollment period.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of September 30,
2003, 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 of |  | Percentage
|Name of Beneficial Owner                               |  | Title of Class |  | Beneficial Ownership |           | of Class (1)        
|                                                       |  |                |  |                      |           |                     
|Five Percent Security Holders:                         |  |                |  |                      |           |                      |  |            |      |  |  | 
|IITRI(2)                                               |  | Common stock   |  |                      | 1,585,339 | (3)                  |  |            | 34.4 | 
|Directors(4)and Executive Officers:                    |  |                |  |                      |           |                      |  |            |      |  |  | 
|Bahman Atefi                                           |  | Common stock   |  |                      | 85,740    | (5)                  |  |            | 2.9  | 
|Jack Hughes                                            |  | Common stock   |  |                      | 3,586     | (6)                  |  |            | *    | 
|Barry Watson                                           |  | Common stock   |  |                      | 50,523    | (7)                  |  |            | 1.7  | 
|Randy Crawford                                         |  | Common stock   |  |                      | 46,376    | (8)                  |  |            | 1.6  | 
|Stacy Mendler                                          |  | Common stock   |  |                      | 69,007    | (9)                  |  |            | 2.3  | 
|Jon Emery                                              |  | Common stock   |  |                      | 32,121    | (10)                 |  |            | 1.1  | 
|All Directors and Officers as a
Group (6 Persons(11)): |  | Common Stock   |  |                      | 287,353   | (12)                 |  |            | 9.6  | 



---

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

97



---



##### 





|(1)  |  | Applicable percentages based on
2,973,813 shares outstanding on September
30, 2003, and also includes shares of Common Stock subject to warrants
that may be exercised within 60 days of September 30, 2003. Such shares
are deemed to be outstanding for the purposes of computing the percentage
ownership of the individual or entity holding the shares, but are not
deemed outstanding for purposes of computing the percentage of any other
person shown in the table. This table is based upon information in the
Companys possession and believed to be accurate. Unless indicated in the
footnotes to this table and subject to community property laws where
applicable, the Company believes that each of the shareholders named in
this table has sole voting and investment power with respect to the shares
indicated as beneficially owned.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(2)  |  | IITRIs address is 10 W. 35th St., Chicago, IL 60616.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    
|(3)  |  | The number of shares deemed to be beneficially held by IITRI represents
currently exercisable warrants held by IITRI 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 63,678 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 3,586 shares of Alions common stock
pursuant to the KSOP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    
|(7)  |  | Includes interests to purchase 50,523 shares of Alions common stock
pursuant to the KSOP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    
|(8)  |  | Includes interests to purchase 46,376 shares of Alions common stock
pursuant to the KSOP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    
|(9)  |  | Includes interests to purchase 69,007 shares of Alions common stock
pursuant to the KSOP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    
|(10) |  | Includes warrants to purchase 19,327 shares of Alions common stock, and
also includes interests to purchase 12,794 shares of Alions common stock
pursuant to the KSOP. On November 12, 2003, Alion purchased the warrants
from Mr. Emery.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    
|    
|(11) |  | Includes Jon Emery. On September 30, 2003, Mr. Emery resigned as Senior
Vice President, General Counsel, and Corporate Secretary of Alion to
become effective January 30, 2004. On November 12, 2003, Alion purchased
from Mr. Emery his warrants to purchase Alion stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    
|    
|(12) |  | Includes 245,964 shares of KSOP interests beneficially owned by the Named
Executive Officers as of September 30, 2003, warrants to purchase 22,062
shares of common stock held by Dr. Atefi, and warrants to purchase 19,237
shares of common stock held by Jon Emery on September 30, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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

In October 2002, the Company issued a promissory note to an officer for
$1,000. The Company loaned $1,000 to the Trust and received a promissory note.
The Trust then purchased the initial 100 shares of common stock of the Company for
$1,000. Subsequently, the promissory note to that officer was redeemed.

IITRI sold and Jon Emery 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

98



---



##### 



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.

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.

Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Pursuant to SEC Release No. 33-8183 (as corrected by Release No.
33-8183A), the disclosure requirements of this Item 14 are not effective until
the filing of the Annual Report on Form 10-K for the first fiscal year ending
after September 30, 2003.

99



---



##### 



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:

a) Financial Statements

|                                                                                         |                                                                                                                                                                    
|---------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Consolidated Financial Statements of Alion Science and Technology Corporation           
|                                                                                        
|Independent Auditors Report                                                            
|                                                                                        
|Consolidated Financial Statements:                                                      
|                                                                                         | Consolidated Balance Sheets as of September 30, 2003
and September 30, 2002                                                                                        
|                                                                                         | Consolidated Statements of Operations for the year ended
September 30, 2003 and for the period from October 10, 2001
through September 30, 2002                    
|                                                                                         | Consolidated Statements of Shareholders Equity (Deficit)
for the year ended September 30, 2003 and for the period
from October 10, 2001 through September 30, 2002
|                                                                                         | Consolidated Statements of Cash Flows for the year ended September 30,
2003
and for the period from October 10, 2001 through September 30, 2002                    
|                                                                                         | Notes to Consolidated Financial Statements                                                                                                                         
|                                                                                        
|Consolidated Financial Statement Schedule                                               
|                                                                                        
|                                                                                         | Schedule II  Valuation and Qualifying Accounts                                                                                                                    
|                                                                                        
|Consolidated Financial Statements of the Selected Operations of IIT Research
Corporation
|                                                                                        
|Independent Auditors Report                                                            
|                                                                                        
|Consolidated Financial Statements:                                                      
|                                                                                         | Consolidated Balance Sheets as of September 30, 2002 and 2001                                                                                                      
|                                                                                         | Consolidated Statements of Income for the years ended
September 30, 2002, 2001 and 2000                                                                            
|                                                                                         | Consolidated Statements of Changes in Owners Net Investment for the
years ended September 30, 2002, 2001 and 2000                                                 
|                                                                                         | Consolidated Statements of Cash Flows for the years ended September 30,
2002, 2001
and 2000                                                                        
|                                                                                         | Notes to Consolidated Financial Statements                                                                                                                         

100



---



##### 



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

|        |  |                                                                                                                                                                                                                                                                                                                                               
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                               
|No.     |  | Description                                                                                                                                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                               
|3.1     |  | Second Amended and Restated
        Certificate of Incorporation of Beagle Holdings, Inc.(3)                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                               
|3.2     |  | Amended and Restated By-laws
        of Alion Science and Technology Corporation.(1)                                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                               
|4.1     |  | Amended and Restated Alion
        Science and Technology Corporation Employee Ownership, Savings and Investment
        Plan.(2)                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                               
|4.2     |  | First Amendment to The Alion
        Science and Technology Corporation Employee Ownership, Savings and Investment
        Plan.(4)                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                               
|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)                                                                                                                                                                                                          
|       
|       
|        |  |                                                                                                                                                                                                                                                                                                                                               
|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.                                                                                                                                                                                                                                          
|       
|        |  |                                                                                                                                                                                                                                                                                                                                               
|       
|21      |  | Subsidiaries of Alion Science
        and Technology Corporation: (i) Human Factors Applications, Inc., incorporated
        in the Commonwealth of Pennsylvania, and (ii) Innovative Technology Solutions
        Corporation, incorporated in the State of New Mexico, are wholly-owned
        by Alion Science and Technology Corporation.
|       
|        |  |                                                                                                                                                                                                                                                                                                                                               
|       
|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.                                                                                                                                            

101



---



##### 



|        |  |                                                                                                                                                                                               
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                               
|No.     |  | Description                                                                                                                                                                                   
|        |  |                                                                                                                                                                                               
|31.2    |  | Certification of Chief Financial Officer of Alion Science and Technology
Corporation pursuant to 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended.                 
|        |  |                                                                                                                                                                                               
|32.1    |  | Certification of Chief Executive Officer of Alion Science and Technology
Corporation, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|        |  |                                                                                                                                                                                               
|32.2    |  | Certification of Chief Financial Officer of Alion Science and Technology
Corporation, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.

(1)  Incorporated by reference to the corresponding exhibit previously filed as
an exhibit to the Companys Post-Effective Amendment No. 2 to the Registration
Statement on Form S1 filed with the Securities and Exchange Commission on
December 9, 2002 (File no. 950133-2-4018).

(2)  Incorporated by reference to the corresponding exhibit previously filed as
an exhibit to the Companys Pre-Effective Amendment No. 3 to the Registration
Statement on Form S1 filed with the Securities and Exchange Commission on
October 7, 2002 (File no. 950133-2-3343).

(3)  Incorporated by reference to the corresponding exhibit previously filed as
an exhibit to the Companys Pre-Effective Amendment No. 2 to the Registration
Statement on Form S1 filed with the Securities and Exchange Commission on
September 17, 2002 (File no. 950133-2-3224).

(4)  Incorporated by reference to the corresponding exhibit previously filed as
an exhibit to the Companys Post-Effective Amendment No. 3 to the Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on
March 24, 2003 (File no. 950133-3-862).

(5)  Incorporated by reference to the corresponding exhibit previously filed as
an exhibit to the Companys quarterly report on Form 10-Q for the quarterly
period ended July 4, 2003, filed with the Securities and Exchange Commission on
August 15, 2003.

(c) Reports on Form 8-K:

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

The Company filed a Report on Form 8K on May 23, 2003 with respect to
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits and
Item 9. Regulation FD Disclosure (Required by Item 12. Results of Operations
and Financial Condition) as a result of a press release issued by the Company
announcing the financial results for the second 12-week interim period ended
March 14, 2003 and the 24-week period ended March 14, 2003.

The Company filed a Report on Form 8K on September 11, 2003 with respect
to Item 12. Results of Operations and Financial Condition as a result of a
press release issued by the Company announcing the financial results for its
fiscal third quarter ended July 4, 2003.

102



---



##### 



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)
|                        |  |                                                       |  |                                               
|                       
|Date: December 24, 2003 |  |                                                       |  |                                               
|                       
|                        |  |                                                       |  |                                               
|                        |  | By:                                                   |  | /s/ Bahman Atefi                              
|                        |  |                                                       |  | Bahman Atefi                                  
|                        |  |                                                       |  | Chairman, Chief
Executive Officer and Director

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 Atefi                                     |  | Chairman, Chief Executive              |  | December 24, 2003
|Bahman Atefi                                         |  | Officer and Director                   |  |                  
|                                                     |  |                                        |  |                  
|/s/  John M. Hughes                                  |  | Chief Financial Officer                |  | December 24, 2003
|John M. Jack
        Hughes                        |  | (Principal Financial Officer)          |  |                  
|                                                     |  |                                        |  |                  
|/s/  Gary Amstutz                                    |  | Senior Vice President and              |  | December 24, 2003
|Gary Amstutz                                         |  | Executive Director of Finance          |  |                  
|                                                     |  | (Principal Accounting
        Officer) |  |                  
|                                                     |  |                                        |  |                  
|/s/  Leslie Armitage                                 |  |                                        |  |                  
|Leslie Armitage                                      |  | Director                               |  | December 24, 2003
|                                                     |  |                                        |  |                  
|/s/  Lewis Collens                                   |  |                                        |  |                  
|Lewis Collens                                        |  | Director                               |  | December 24, 2003
|                                                     |  |                                        |  |                  
|/s/ 
          Harold W. Gehman, Jr.                 |  |                                        |  |                  
|Admiral (Ret.) Harold
        W.
        Gehman, Jr. |  | Director                               |  | December 24, 2003
|                                                     |  |                                        |  |                  
|/s/ 
          Donald E. Goss                        |  |                                        |  |                  
|Donald E. Goss                                       |  | Director                               |  | December 24, 2003
|                                                     |  |                                        |  |                  
|/s/  Robert L.
        Growney                       |  |                                        |  |                  
|Robert L. Growney                                    |  | Director                               |  | December 24, 2003
|                                                     |  |                                        |  |                  
|/s/  George A.
        Joulwan                       |  |                                        |  |                  
|General (Ret.) George
        A. Joulwan             |  | Director                               |  | December 24, 2003
|                                                     |  |                                        |  |                  
|/s/  Michael E.
        Ryan                         |  |                                        |  |                  
|General (Ret.) Michael
        E. Ryan               |  | Director                               |  | December 24, 2003
|                                                     |  |                                        |  |                  
|/s/  Edward C.
        Aldridge, Jr.                 |  |                                        |  |                  
|Edward C. Aldridge, Jr.                              |  | Director                               |  | December 24, 2003

103



---



##### 



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.

104



---



##### 



EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                                                                                                                               
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                               
|No.     |  | Description                                                                                                                                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                               
|3.1     |  | Second Amended and Restated
        Certificate of Incorporation of Beagle Holdings, Inc.(3)                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                               
|3.2     |  | Amended and Restated By-laws
        of Alion Science and Technology Corporation.(1)                                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                               
|4.1     |  | Amended and Restated Alion
        Science and Technology Corporation Employee Ownership, Savings and Investment
        Plan.(2)                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                               
|4.2     |  | First Amendment to The Alion
        Science and Technology Corporation Employee Ownership, Savings and Investment
        Plan.(4)                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                               
|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)                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                               
|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 Phantom Stock Plan.                                                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                               
|21      |  | Subsidiaries of Alion Science
        and Technology Corporation: (i) Human Factors Applications, Inc., incorporated
        in the Commonwealth of Pennsylvania, and (ii) Innovative Technology Solutions
        Corporation, incorporated in the State of New Mexico, are wholly-owned
        by Alion Science and Technology Corporation.
|        |  |                                                                                                                                                                                                                                                                                                                                               
|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.                                                                                                                                            

105



---



##### 



|        |  |                                                                                                                                                                                               
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                               
|No.     |  | Description                                                                                                                                                                                   
|        |  |                                                                                                                                                                                               
|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.

106