10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004.

COMMISSION FILE NUMBER 333–89756

Alion Science and Technology Corporation

(Exact Name of Registrant as Specified in Its Charter)

DELAWARE
(State or Other Jurisdiction of
Incorporation of Organization) 54–2061691
(I.R.S. Employer
Identification No.)

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

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

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

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

Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b–2 of the Exchange Act).
Yes / / No /X/

The number of shares outstanding of Alion Science and Technology Corporation
common stock as of June 30, 2004, was:

Common Stock      3,224,027

ALION SCIENCE AND TECHNOLOGY CORPORATION
FORM 10-Q INDEX
FOR THE QUARTER ENDED JUNE 30, 2004

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets	3
Consolidated Statements of Operations	4
Consolidated Statements of Operations and Pro Forma Consolidated Statement of Operations	5
Consolidated Statements of Cash Flows	6
Notes to Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition And Results of Operations	16
Item 3. Quantitative and Qualitative Disclosures About Market Risk	38
Item 4. Controls and Procedures	38
PART II – OTHER INFORMATION	39
Item 1. Legal Proceedings	39
Item 2. Changes in Securities and Use of Proceeds	40
Item 3. Defaults Upon Senior Securities	40
Item 4. Submission of Matters to a Vote of Security Holders	40
Item 5. Other Information	41
Item 6. Exhibits and Reports on Form 8-K	42

2

ALION SCIENCE AND TECHNOLOGY CORPORATION
Consolidated Balance Sheets
As of June 30, 2004 (Unaudited) and September 30, 2003
(In thousands, except share information)

	June 30,			September 30,
	2004			2003
Assets
Current assets:
Cash	$	11		$	494
Restricted cash		—			5
Accounts receivable, less allowance of $3,231 at June 30, 2004 and $2,484 at September 30, 2003		64,682			42,777
Stock subscriptions receivable		—			1,246
Receivable from Trust		16			—
Prepaid expense		2,019			974
Other current assets		1,922			987
Total current assets		68,650			46,483
Fixed assets, net		10,787			8,696
Intangible assets, net		16,349			22,788
Goodwill		81,748			65,522
Other		2,108			97
Deferred compensation assets		1,688			1,362
Total assets	$	181,330			144,948
Liabilities and Shareholder’s Equity, Subject to Redemption
Current liabilities:
Note payable to bank	$	500		$	—
Current portion of senior note payable		—			5,000
Acquisition obligations		5,965			2,928
Trade accounts payable and accrued liabilities		19,964			9,661
Accrued payroll and related liabilities		15,597			14,217
Advance payments		—			5
ESOP liabilities		1,005			320
Current portion of lease obligations		685			—
Billings in excess of costs and estimated earnings on uncompleted contracts		1,213			409
Total current liabilities		44,929			32,540
Senior note payable, excluding current portion		46,746			22,903
Mezzanine note payable		17,374			17,636
Subordinated note payable		34,038			33,437
Agreements with officers		1,509			743
Deferred compensation liability		1,684			1,362
Accrued post-retirement benefit obligation		3,454			3,319
Non current portion of lease obligations		3,391			346
Redeemable common stock warrants		16,779			14,762
Total liabilities		169,904			127,048
Shareholder’s equity, subject to redemption:
Common stock (subject to redemption), $0.01 par value, 15,000,000 shares authorized, 3,224,769 shares and 2,973,813 shares issued and 3,224,027 and 2,973,813 shares outstanding at June 30, 2004 and September 30, 2003, respectively		32			29
Additional paid-in capital		34,645			30,578
Treasury stock, at cost (743 shares)		(12	)		—
Accumulated deficit		(23,239	)		(12,707	)
Total shareholder’s equity, subject to redemption		11,426			17,900
Total liabilities and shareholder’s equity, subject to redemption	$	181,330		$	144,948

See accompanying notes to consolidated financial statements.

3

ALION SCIENCE AND TECHNOLOGY CORPORATION
Consolidated Statements of Operations
Three Months Ended June 30, 2004, Sixteen-Week Period Ended July 4, 2003
Nine Months Ended June 30, 2004 and the Forty-Week Period Ended July 4, 2003
(In thousands, except share information)
(Unaudited)

	Three Months			Sixteen-Week			Nine Months			Forty-Week Period
	Ended			Period Ended			Ended			Ended
	June 30, 2004			July 4, 2003			June 30, 2004			July 4, 2003
Contract revenue	$	69,808		$	65,134		$	193,111		$	114,139
Direct contract expense		50,819			47,459			139,310			83,490
Gross profit		18,989			17,675			53,801			30,649
Operating expenses:
Indirect contract expense		4,829			3,588			13,483			6,436
Research and development		65			50			243			69
General and administrative		6,834			8,046			21,099			13,355
Non-recurring transaction expense		—			174			—			726
Rental and occupancy expense		3,329			2,541			8,337			4,634
Depreciation and amortization		3,518			3,797			9,889			6,616
Bad debt expense (recovery)		180			(700	)		314			(545	)
Total operating expenses		18,755			17,496			53,365			31,291
Operating income (loss)		234			179			436			(642	)
Other income (expense):
Interest income		9			9			18			12
Interest expense		(2,456	)		(2,603	)		(9,420	)		(4,826	)
Other		(588	)		(278	)		(1,564	)		(353	)
Loss before income taxes		(2,801	)		(2,693	)		(10,530	)		(5,809	)
Income tax expense		(4	)		—			(4	)		—
Net loss	$	(2,805	)	$	(2,693	)	$	(10,534	)	$	(5,809	)
Basic and diluted loss per share	$	(0.87	)	$	(1.00	)	$	(3.47	)
Basic and diluted weighted average common shares outstanding		3,224,704			2,693,056			3,038,148

See accompanying notes to consolidated financial statements.

4

ALION SCIENCE AND TECHNOLOGY CORPORATION
Consolidated Statements of Operations
Three Months Ended June 30, 2004, Sixteen-Week Period Ended July 4, 2003 and
Nine Months Ended June 30, 2004 and
Pro Forma Consolidated Statement of Operations for the Forty-Week Period Ended July 4, 2003
(In thousands, except share information)
(Unaudited)

										Pro Forma
	Three Months			Sixteen-Week			Nine Months			Forty-Week
	Ended			Period Ended			Ended			Period Ended
	June 30, 2004			July 4, 2003			June 30, 2004			July 4, 2003
Contract revenue	$	69,808		$	65,134		$	193,111		$	161,404
Direct contract expenses		50,819			47,459			139,310			118,145
Gross profit		18,989			17,675			53,801			43,259
Operating expenses:
Indirect contract expense		4,829			3,588			13,483			9,004
Research and development		65			50			243			105
General and administrative		6,834			8,046			21,099			18,240
Non-recurring transaction costs		—			174			—			6,562
Rental and occupancy expense		3,329			2,541			8,337			6,835
Depreciation and amortization		3,518			3,797			9,889			9,499
Bad debt expense (recovery)		180			(700	)		314			(425	)
Total operating expenses		18,755			17,496			53,365			49,820
Operating income (loss)		234			179			436			(6,561	)
Other income (expense):
Interest income		9			9			18			34
Interest expense		(2,456	)		(2,603	)		(9,420	)		(6,980	)
Other		(588	)		(278	)		(1,564	)		(374	)
Loss before income taxes		(2,801	)		(2,693	)		(10,530	)		(13,881	)
Income tax expense		(4	)		—			(4	)		(27	)
Net loss	$	(2,805	)	$	(2,693	)	$	(10,534	)	$	(13,908	)
Basic and diluted loss per share	$	(0.87	)	$	(1.00	)	$	(3.47	)
Basic and diluted weighted average common shares outstanding		3,224,704			2,693,056			3,038,148
Pro forma basic and diluted loss per share											(5.30	)
Pro forma basic and diluted weighted average common shares outstanding											2,622,527

See accompanying notes to consolidated financial statements.

5

ALION SCIENCE AND TECHNOLOGY CORPORATION
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 2004
and Forty-Week Period Ended July 4, 2003
(In thousands, except share information)
(Unaudited)

	Nine Months			Forty-Week Period
	Ended			Ended
	June 30, 2004			July 4, 2003
Cash flows from operating activities:
Net loss	$	(10,534	)	$	(5,809	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		9,889			6,616
Accretion of debt to face value		1,105			718
Amortization of debt issuance costs		310			247
Decrease in value of interest rate cap agreement		50			—
Change in fair value of redeemable common stock warrants		2,018			(266	)
(Gain) Loss on investments		(36	)		(71	)
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable, net		(10,978	)		8,822
Other assets		(2,529	)		798
Trade accounts payable and accruals		5,385			1,121
Other liabilities		2,674			(822	)
Net cash provided by (used in) operating activities		(2,646	)		11,354
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired		(17,715	)		(59,944	)
Capital expenditures		(2,786	)		(998	)
Purchase of non-marketable securities		(1,333	)		—
Net cash used in investing activities		(21,834	)		(60,942	)
Cash flows from financing activities:
Proceeds from senior note payable		—			35,000
Payment of debt issuance costs		—			(1,700	)
Repayment of senior note payable		(4,817	)		(1,850	)
Repayment of mezzanine note payable		(750	)		—
Proceeds from agreement with officer		750			—
Repayments of ITSC revolving credit agreement		(375	)		—
Repayments under IITRI revolving credit agreement		—			(6,185	)
Borrowings under revolving credit facility		23,850			—
Purchase of interest rate cap agreement		—			(245	)
Payment of acquisition obligations		(18	)		(155	)
Purchase of 50,780 shares of common stock from ESOP Trust		(748	)		—
Stock redemption		—			(58	)
Payment of stock subscription for common stock issued to ESOP Trust		6,105			26,489
Net cash provided by financing activities		23,997			51,296
Net increase (decrease) in cash		(483	)		1,708
Cash at beginning of period		494			6
Cash at end of period	$	11		$	1,714
Supplemental disclosure of cash flow information:
Cash paid for interest	$	3,570		$	2,564
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
Issuance of 29,637 shares of common stock to ESOP Trust for amount due to ESOP Trust		—			296
Common stock issued to ESOP Trust in satisfaction of employer contribution liability		—			1,001
Bank debt assumed in connection with the acquisition of selected operations of IITRI		—			6,185
IITRI transaction costs assumed in connection with the acquisition of selected operations of IITRI		—			783
Additional non-cash consideration paid in connection with acquisition of selected operations of IITRI		—			1,798
Deferred compensation arrangement with officer		—			857

See accompanying notes to consolidated financial statements.

6

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 (UNAUDITED)

1. Description and Formation of the Business

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

     Alion, a for-profit S Corporation, was formed in October 2001 for the purpose of purchasing substantially all of the assets and certain of the liabilities of IIT Research Institute (IITRI), a not-for-profit membership corporation affiliated with and controlled by the Illinois Institute of Technology. Prior to the acquisition of substantially all of the assets and liabilities of IITRI (the Transaction), the Company’s activities had been organizational in nature.

     On December 20, 2002, Alion acquired substantially all of the assets and liabilities of IITRI (Business), excluding the assets and liabilities of IITRI’s Life Sciences Operation, for aggregate total proceeds of $127.3 million consisting of (in thousands):

• $58,571 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 6 and 8;

• $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 6 and 8;

• $2,300 in transaction costs less the $1,517 referenced above;

• $6,185 in assumed IITRI debt due to its bank; and

• $1,520 in additional amounts due to IITRI for purchase price adjustments related to the Life Sciences Operation.

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

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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

2. Basis of Presentation

     The accompanying unaudited consolidated financial statements include the accounts of Alion and its wholly owned subsidiaries Human Factors Applications, Inc. (HFA), Innovative Technology Solutions Corporation (ITSC), and Identix Public Sector, Incorporated (“IPS”) and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial information. Certain information and note disclosures normally included in the annual financial statements, prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to those rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2004. For further information, refer to the consolidated financial statements and notes thereto included in the Post Effective Amendment No. 4 to the Company’s registration statement on Form S-1 (No. 333-89756) filed with the SEC on January 22, 2004.

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

3. Summary of Significant Accounting Policies

     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 subsidiaries subsequent to the Transaction. All significant intercompany accounts have been eliminated in consolidation.

Fiscal, Quarter and Interim Periods

     The Company’s fiscal year ends on September 30. Beginning with the fiscal year ending September 30, 2004, the Company began operating based on a three-month quarter, four-quarter fiscal year. For the fiscal year ended September 30, 2003, the Company operated on a thirteen-period fiscal year that consisted of three, four-week periods in its first interim period; three, four-week periods in its second interim period; four, four-week periods in its third interim period; and the balance of the fiscal year of approximately three, four-week periods in its fourth interim period. For the three months ended June 30, 2004, there were 64 available work days (based on a standard work week of Monday through Friday and

8

excluding designated holidays recognized by Alion) as compared to 78 available workdays for the sixteen-week period ended July 4, 2003. On a fiscal year-to-date basis, through the nine months ended June 30, 2004, there were 192 available workdays as compared to 194 available workdays for the forty-week period ended July 4, 2003. Accordingly, comparisons between the three-month quarter ended June 30, 2004 and the sixteen-week period ended July 4, 2003 and comparisons between the nine months ended June 30, 2004 and the forty-week period ended July 4, 2003 will need to consider the differing lengths of time.

Reclassifications

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

Recently Issued Accounting Pronouncements

     On January 12, 2004, the Financial Accounting Standards Board (FASB) issued Staff Position No. FAS 106-1 “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (FSP 106-1). FSP 106-1 permits employers that sponsor postretirement benefit plans to defer accounting for any effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 that was signed into law on December 8, 2003. FSP 106-1 was superseded by FSP FAS 106-2 which is effective beginning July 1, 2004.

     In accordance with FSP 106-1 and FSP 106-2, neither the accumulated post-retirement benefit obligation nor the net periodic postretirement benefit costs reflected in the accompanying financial statements reflects the effect of the Medicare Prescription Drug Improvement and Modernization Act of 2003 on Alion’s plan. Authoritative guidance, when issued, could require the Company to change previously reported information.

4. Earnings (Loss) Per Share

     Basic and diluted loss per share is computed by dividing net loss by the weighted average number of common shares outstanding. For the pro forma forty-week period ended July 4, 2003, pro forma loss per share has been computed as though the 2,575,408 shares of common stock sold by the Company to the employee stock ownership plan (ESOP) component of the Alion Science and Technology Corporation 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 ongoing capital structure.

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

5. Goodwill and Intangible Assets

     The Company accounts for goodwill and other intangible assets in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, which requires, 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 statement of operations excludes historical goodwill amortization expense.

     During the fiscal year ended September 30, 2003, the Company recorded goodwill of approximately $65.5 million, which is subject to the aforementioned annual impairment review. During the nine months ended June 30, 2004, goodwill increased by approximately $16.2 million primarily as a result

9

of recording additional obligations of $6.5 million related to earnout arrangements for historical acquisitions and approximately $9.8 million for the acquisitions described in Note 10.

     In addition, the Company recorded intangible assets of approximately $30.6 million during fiscal year 2003, comprised primarily of contracts purchased from IITRI. For the acquisitions described in Note 10, as of June 30, 2004, the Company recorded intangible assets of approximately $1.5 million for purchased contracts. For the acquisitions described in Note 10, the Company’s allocation of purchase price is preliminary and subject to adjustment. The intangible assets have an estimated useful life of one to three years and are being amortized using the straight-line method. Amortization expense was approximately $7.9 million during the nine months ended June 30, 2004. Amortization expense is estimated to be approximately $10.7 million, $2.4 million, and $0.2 million for fiscal years ending September 30, 2005, 2006, and 2007, respectively.

6. 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 approximately $16.8 million as of June 30, 2004. Changes in the estimated fair value of the Warrants are recorded as interest expense in the accompanying consolidated statements of operations.

7. Shareholder’s Equity, Subject to Redemption

     The Company’s outstanding 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 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 $16.56 per share as of June 30, 2004. 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 to the Company their shares distributed from participant accounts 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.

8. Long-term Debt

     To fund the Transaction described in Note 1, the Company entered into various debt agreements as described below. As described in Note 14, on August 2, 2004, the Company entered into a new Senior Credit Facility. The impact of the new facility on the repayment obligations of the original debt agreements is described in Note 14.

Senior Credit Agreement

     On December 20, 2002, the Company executed a Senior Credit Agreement among LaSalle Bank National Association, US Bank, National Cooperative Bank, Orix Financial Services, Inc. and BB&T Bank to refinance and replace IITRI’s prior credit arrangements and to finance, in part, the Transaction. The Senior Credit Agreement consists of a $35.0 million Senior Term Note and a $25.0 million revolving credit facility. All principal obligations under the Senior Credit Agreement are to be repaid in full no later than December 20, 2007. The Senior Credit Agreement is secured by a first priority, perfected security interest in all of the Company’s current and future tangible and intangible property. On December 20, 2002, the

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Company paid $1.7 million to obtain this facility which was recorded as debt discount. The Company is using the effective interest method to accrete the value of long-term debt to its face value. For the nine months ended June 30, 2004, the Company recognized approximately $0.3 million of interest expense related to accretion of this discount.

     The revolving credit facility bears interest at the LaSalle Bank prime rate plus 200 basis points, which equaled 6.0% as of June 30, 2004. As of June 30, 2004, the Company had approximately $23.8 million borrowed under the revolving credit facility.

     As of June 30, 2004 and prior to the impact of the new credit facility described in Note 14, the remaining principal repayments (adjusted for prepayments made through such date) of $24.4 million under the Senior Term Note are payable in quarterly installments, yielding remaining fiscal year repayments in the following amounts:

Fiscal Year Ending September 30,	(In thousands)
2004	$	2,500
2005	$	6,875
2006	$	8,250
2007	$	6,808

     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 Agreement were to bear interest at either of two floating rates: a per year rate equal to the Eurodollar rate plus 350 basis points, or LaSalle’s prime rate (base rate) plus 200 basis points.

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

     The Company entered into an interest rate cap agreement effective as of February 3, 2003 with one of its senior lenders. Under this agreement, the Company’s maximum effective rate of interest payable on the first $25 million of principal under its term note is not to exceed 6%. Any interest the Company pays on the first $25 million of principal in excess of 6% will be reimbursed to the Company semiannually by the senior lender pursuant to the cap agreement. This cap agreement expires February 3, 2007. As of June 30, 2004, the cap agreement had a fair value of approximately $0.047 million.

11

Mezzanine Note

     On December 20, 2002, the Company issued to IITRI a Mezzanine Note securities purchase agreement (Mezzanine Note) with a face value of approximately $20.3 million. The Mezzanine Note served as part of the consideration for the Transaction. 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.

     Under the terms of the Senior Credit Agreement and Mezzanine Note, the Company is subject to covenants including financial covenants with respect to minimum fixed charge coverage, maximum total senior leverage, maximum total leverage, maximum capital expenditures, minimum EBITDAE, as defined, and other customary covenants. As of June 30, 2004, the Company was in compliance with these financial covenants.

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 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 (paid-in-kind notes or PIK notes) maturing at the same time as the Subordinated Note. The issuance of the PIK notes will have the effect of deferring the underlying cash interest expense on the Subordinated Note, but because the PIK notes will not themselves bear interest, they will not have the effect of compounding any interest on these interest payment obligations. Commencing December 2008, the Subordinated Note will bear interest at 16% per year payable quarterly in cash through the time of repayment in full of the Subordinated Note. Principal on the Subordinated Note will be payable in equal installments of $19.95 million in December 2009 and December 2010; the PIK notes are also due in equal installments of $7.2 million on these same dates.

Other Notes and Agreements

     On December 20, 2002, the Company entered into a deferred compensation agreement with Dr. Bahman 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.

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

     On February 11, 2004, the Company borrowed $750,000 from an officer of the Company. In exchange, on June 7, 2004, the Company issued a promissory note in the principal amount of $750,000 to the officer. The promissory note bears interest at a rate of 15% per year, payable quarterly. The annual interest period was effective beginning February 11, 2004. The Company is required to pay the outstanding principal amount of the promissory note in a lump sum on March 31, 2009. The promissory note is subordinate to the Senior Credit Agreement and the Mezzanine Note.

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

	Principal Payments (in thousands)
	2004		2005		2006		2007		2008		2009		2010		2011		Total
Senior Term Note	$	2,500	$	6,875	$	8,250	$	6,808									$	24,433
Mezzanine Note, Promissory Note, and Agreement with Officer											$	21,200					$	21,200
Subordinated Note													$	19,950	$	19,950	$	39,900
Subordinated Paid in Kind Note													$	7,182	$	7,182	$	14,364
Total Principal Payments	$	2,500	$	6,875	$	8,250	$	6,808	$	—	$	21,200	$	27,132	$	27,132	$	99,897

9. Segment Information and Customer Concentration

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

     For the nine months ended June 30, 2004, revenues from services provided to various agencies of the U.S. Government represented $188.7 million or approximately 98% of revenues, and $158.5 million or approximately 98% of revenues for the forty-week period ended July 4, 2003. Contract receivables from agencies of the U.S. Government represented approximately $64.3 million, or 95% of accounts receivable at June 30, 2004 and $38.0 million, or 92%, at July 4, 2003.

     During the nine months ended June 30, 2004, there were no sales by Alion to any customers within a single country (except for the United States) where the sales accounted for 10% or more of total revenue. The Company treats sales to U.S. Government customers as sales within the United States regardless of where the services are performed. Substantially all of the Company’s assets were located within the United States during the nine months ended June 30, 2004.

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

     On October 31, 2003, Alion acquired 100% of the outstanding shares of Innovative Technologies Solutions Corporation (ITSC) for $4.0 million. The transaction is subject to an earnout provision not-to-exceed $2.5 million. ITSC is a New Mexico corporation with approximately 53 employees, the majority of whom are located in New Mexico. ITSC provided nuclear safety and analysis services to the U.S. Department of Energy (DOE) as well as to the commercial nuclear power industry. While the allocation of purchase price is preliminary, as of June 30, 2004, the Company has recorded approximately $3.6 million of goodwill and approximately $0.1 million of intangible assets.

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

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intercompany payables. Subsequent payments totaling approximately $1.7 million for intercompany payables were made in the three successive months following the closing. Per the agreement, a contingent payment of $0.5 million was placed in escrow and may be due from the Company in the future. The payment is contingent on the Company having the opportunity to compete or bid for services on certain government solicitations. While the allocation of purchase price is preliminary, as of June 30, 2004, the Company has recorded approximately $5.7 million of goodwill and approximately $1.4 million of intangible assets. Founded in 1980, IPS is based in Fairfax, Virginia and provides program and acquisition management, integrated logistics support, and foreign military support primarily to U.S. Navy customers. IPS, formerly ANADAC, was a wholly-owned subsidiary of Identix Incorporated.

     The table below sets out the proforma effects of the IPS acquisition on the Company’s revenue, net income and earnings per share as though the IPS acquisition had taken place on first day of each period presented. These pro forma adjustments are in addition to the pro forma effects of the Alion acquisition of the Selected Operations of IITRI included in the year-to-date numbers below for the 2003 fiscal year.

	Three Months Ended June 30, 2004								Sixteen Weeks Ended July 4, 2003
	Alion			IPS		Pro forma			Alion			IPS		Pro forma
Pro forma revenue	$	69,808		$	—	$	69,808		$	65,134		$	9,403	$	74,537
Pro forma net income (loss)	$	(2,805	)	$	—	$	(2,805	)	$	(2,693	)	$	318	$	(2,375	)
Weighted average shares outstanding		3,224,704			3,224,704		3,224,704			2,693,056			2,693,056		2,693,056
Earnings per share	$	(0.87	)	$	—	$	(0.87	)	$	(1.00	)	$	0.12	$	(0.88	)

	Nine Months Ended June 30, 2004									Forty Weeks Ended July 4, 2003
	Alion			IPS			Pro forma			Alion			IPS		Pro forma
Pro forma revenue	$	193,111		$	11,217		$	204,328		$	161,404		$	29,397	$	190,801
Pro forma net income (loss)	$	(10,534	)	$	(21	)	$	(10,555	)	$	(13,908	)	$	65	$	(13,843	)
Weighted average shares outstanding		3,038,148			3,038,148			3,038,148			2,622,527			2,622,527		2,622,527
Earnings per share	$	(3.47	)	$	(0.01	)	$	(3.47	)	$	(5.30	)	$	0.02	$	(5.28	)

11. Commitments and Contingencies

     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. 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.

     On January 20, 2004, the arbitrator issued a decision awarding Messrs. Andrews and Bewley a purchase price adjustment of approximately $0.7 million. The arbitrator’s decision reclassified certain overhead expenses as general and administrative expenses which were capped by the asset purchase agreement. That decision increased earn out payments due Messrs. Andrews and Bewley by approximately $3.5 million for the period from the acquisition date through September 30, 2002. The Company was also required to recognize a liability of approximately $0.3 million for potential payments to employees who worked in the business units subject to this earn out from the acquisition date through September 30, 2002.

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     Through June 30, 2004, the Company recognized approximately $4.9 million in earn out obligations due Messrs. Andrews and Bewley for the fiscal year ended September 30, 2003 and for the nine-month period ended June 30, 2004. Additionally, the Company recognized approximately $0.4 million for potential payments to employees who worked in the business units subject to this earn out.

     As of June 30, 2004, the Company had paid approximately $4.2 million, excluding interest, to Messrs. Andrews and Bewley for earn outs and purchase price adjustments. The Company expects to pay Messrs. Andrews and Bewley approximately $3.3 million, excluding interest, in the quarter ending September 30, 2004, for their earn out related to fiscal year ended September 30, 2003.

12. IITRI Acquisition and Pro Forma Information

     On December 20, 2002, Alion acquired substantially all of the assets and certain of the liabilities of IITRI, excluding the assets and liabilities of IITRI’s Life Sciences Operation, for approximately $127.3 million as described in Note 1. In connection with the acquisition, the Company formed the KSOP, which has an ESOP component. The ESOP trustee, State Street Bank and Trust Company, used the proceeds from the ESOP aggregating approximately $25.8 million to acquire approximately 2.58 million shares or 100% of the Company’s outstanding common stock. The Company used the funds from the sale of common stock to the ESOP and proceeds from the debt instruments described in Note 8, to fund the Transaction. The acquisition was accounted for using the purchase method. The acquisition occurred on the last day of the Company’s first interim period in fiscal year 2003, and accordingly, the accompanying consolidated statements of operations exclude the results of operations of the acquired business prior to the acquisition. The purchase price has been allocated to the acquired assets and assumed liabilities based on their estimated fair values at the date of acquisition. Prior to the Transaction, the Company’s activities had been organizational in nature.

     The pro forma consolidated statement of operations for the forty-week period ended July 4, 2003 has been prepared by giving effect to the following transactions as if those transactions had been consummated on October 1, 2002:

• The incurrence of debt with detachable warrants to purchase common stock as described in Notes 6 and 8;

• The consummation of the Transaction, accounted for using the purchase method; and

• The purchase of common stock by the ESOP.

     For the forty-week period ended July 4, 2003, the pro forma consolidated statement of operations includes pro forma adjustments to reverse historical amortization expense related to pre-Transaction goodwill, to record the amortization of identifiable intangible assets, to record interest expense on debt issued to finance the Transaction, to record the amortization of debt issuance costs, and to record the accretion of debt to face value to reflect the discount for the estimated fair value of warrants issued.

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

13. Related Party Transaction

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

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14. Subsequent Event

     On August 2, 2004, Alion entered into a new Senior Credit Facility administered by Credit Suisse First Boston consisting of a Senior Secured Term B Loan in the amount of $100.0 million. The new Senior Credit Facility also provides for an uncommitted Incremental Term Loan “accordion” facility in the amount of $50.0 million. Alion used the initial draw of the new Senior Secured Term B Loan at the closing date to retire Alion’s outstanding senior term loan and revolving credit facility in the approximate amount of $48.2 million including principal and accrued and unpaid interest and to pay certain transaction fees associated with the refinancing in the approximate amount of $2.8 million. Alion intends to use part of the remainder of the Senior Secured Term B Loan to retire the Company’s existing Mezzanine Note in the approximate principal amount of $19.6 million, pay accrued and unpaid interest and any prepayment premium the Company may incur at the time under its Mezzanine Note and pay related fees and expenses. Alion is permitted to use any remaining portion of the Senior Secured Term B Loan to finance permitted acquisitions. Alion intends to use that portion of the remaining Senior Secured Revolving Credit Facility for the Company’s working capital needs and other general corporate purposes, including to finance permitted acquisitions. Alion is permitted to use any proceeds it might receive in the future from the currently uncommitted Incremental Term Loan Facility to finance permitted acquisitions and to make certain put right payments required under the Company’s Mezzanine Warrant, if the put rights are exercised, and for any other purpose permitted by Incremental Term Loans if and when they are funded.

     The following table reflects the Company’s contractual debt obligations as of June 30, 2004 and the impact of the aforementioned Senior Credit Facility entered into on August 2, 2004. As a result, approximately $29.5 million of debt previously classified as current has been reclassified as long-term in the accompanying Consolidated Balance Sheet as of June 30, 2004.

	Principal Repayments (in thousands)
	2004			2005		2006		2007		2008		2009		2010		2011		TOTAL
Senior Secured Term B Loan	$	—		$	500	$	500	$	500	$	500	$	48,000	$	—	$	—	$	50,000
Mezzanine Note	$	—		$	—	$	—	$	—	$	19,593	$	—	$	—	$	—	$	19,593
Seller Subordinated Note	$	—		$	—	$	—	$	—	$	—	$	—	$	19,950	$	19,950	$	39,900
Subordinated Paid in Kind Note	$	—		$	—	$	—	$	—	$	—	$	—	$	7,182	$	7,182	$	14,364
Sub-total	$	—		$	500	$	500	$	500	$	20,093	$	48,000	$	27,132	$	27,132	$	123,857
Note Payable to bank	$	23,850		$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	23,850
Senior Note Payable	$	23,396		$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	23,396
Proceeds of Senior Secured Term B Loan	$	(47,246	)	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	(47,246	)
Total principal payments	$	—		$	500	$	500	$	500	$	20,093	$	48,000	$	27,132	$	27,132	$	123,857

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

     The factors that could cause actual results to differ materially from those anticipated include, but are not limited to, the following: changes to the ERISA laws related to the Company’s Employee Ownership, Savings and Investment Plan; changes to the tax laws relating to the treatment and deductibility of goodwill, the Company’s subchapter S status, or any change in the Company’s effective tax rate; additional costs associated with compliance with the Sarbanes-Oxley Act of 2002, including any changes in the SEC’s rules, and other corporate governance requirements; failure of government customers to exercise options under contracts; funding decisions relating to U.S. Government projects; government contract procurement (such as bid protest) and termination risks; competitive factors such as pricing pressures and/or competition to hire and retain employees; the results of current and/or future legal proceedings and government agency proceedings which may arise out of our operations (including our contracts with government agencies) and the attendant risks of fines, liabilities, penalties, suspension and/or debarment; undertaking acquisitions that could increase our costs or liabilities or be disruptive; failure to adequately integrate acquired businesses; material changes in laws or regulations applicable to the Company’s businesses; as well as other risk factors discussed in the Company’s registration statement on Form S-1 filed with the SEC on January 22, 2004.

     Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s view only as of August 13, 2004. The Company undertakes no obligation to update any of the forward-looking statements made herein, whether as a result of new information, future events, changes in expectations or otherwise. This discussion addresses only our continuing operations.

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Critical Accounting Estimates and Policies

     Our significant accounting policies are described in Note 3 to the consolidated financial statements included in Post-Effective Amendment No. 4 to the Company’s registration statement on Form S-1 (No. 333-89756) filed with the SEC on January 22, 2004.

     Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, which potentially result in materially different results under different assumptions and conditions. Application of these policies is a critical element in the portrayal of our financial condition and results of operations. The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these quarterly and interim period consolidated financial statements requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. Actual results may differ from these estimates under different assumptions or conditions.

     Our critical accounting policies are set forth below:

Revenue Recognition, Cost Estimation and Payment

     We recognize revenue when persuasive evidence of an arrangement exists, services have been rendered, the contract price is fixed or determinable, and collectibility is reasonably assured. We have a standard internal process that we use to determine whether all required criteria for revenue recognition have been met. This standard internal process includes a monthly review of contract revenues and expenses by several levels of management. This review covers, among other matters, progress against schedule, project staffing and levels of effort, risks and issues, subcontract management, incurred and estimated costs, and disposition of prior action items. This monthly internal review is designed to determine whether the overall progress on a contract is consistent with the effort expended and revenue recognized to date.

     Our revenues consist primarily of payments for the work of our employees, and to a lesser extent, related costs for materials and subcontract efforts under contracts with our customers. Cost of services consists primarily of compensation expenses for program personnel, the fringe benefits associated with this compensation, and other direct expenses incurred to complete programs, including cost of materials and subcontract efforts.

     The Company’s revenue results from contract research and other services under a variety of contracts, some of which provide for reimbursement of cost plus fees and others of which are fixed-price or time-and-material type contracts. Absent evidence to the contrary, we recognize revenues as follows:

     Revenue on cost-reimbursement contracts is recognized as costs are incurred and include an estimate of applicable 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.

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

     Contract costs on federal government contracts, including indirect costs, are subject to audit by the federal government and adjustment pursuant to negotiations between the Company and government representatives. All of the Company’s federal government contract indirect costs have been audited and 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 has submitted its fiscal year 2002 indirect cost submission to its cognizant government audit agency; this submission is undergoing the audit process at this time. The Company submitted its fiscal year 2003 indirect cost submission on March 30, 2004.

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

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

     For the nine months ended June 30, 2004, we derived approximately 60%, 25% and 15% of our revenues from cost-plus, time-and-material and fixed-price contracts, respectively.

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

     The majority of our revenue is earned under contracts with various departments and agencies, or prime contractors, of the federal government. Certain revenues and payments we receive are based on provisional billings and payments that are subject to adjustment under audit. Federal government agencies and departments have the right to challenge our cost estimates and allocations with respect to government contracts. Also, contracts with such agencies are subject to audit and possible adjustment to account for unallowable costs under cost-type contracts or other regulatory requirements that affect both cost-type and fixed-price contracts.

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

	Nine months			Forty-Week Period
	Ended			Ended
	June 30, 2004			July 4, 2003
Department of Defense		92.1	%		93.6	%
Federal Civilian Agencies		5.7	%		4.6	%
Commercial / State / Local		2.2	%		1.8	%
Total		100.0	%		100.0	%

Goodwill and Identifiable 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 accordance with the provisions of SFAS No. 142, the Company no longer amortizes goodwill, however goodwill is to be reviewed at least annually for impairment. The Company has elected to perform the annual review at the end of each fiscal year. In addition, the Company will assess the impairment of goodwill and identifiable intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important to possibly trigger an impairment review consist of:

• Significant underperformance relative to expected historical or projected future operating results;

• Significant changes in the manner of use of the acquired assets or the strategy for the overall business;

• Significant negative industry or economic trends; and

• Significant decline in Alion’s stock price for a sustained period.

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

     As of June 30, 2004, the Company has goodwill of approximately $81.7 million, which will be subject to the aforementioned annual impairment review. As of June 30, 2004, the Company has recorded approximately $32.1 million of intangible assets comprised primarily of the value assigned to purchased contracts. The intangible assets have an estimated useful life of one to three years and are amortized using the straight-line method. As of June 30, 2004, the value of the intangible assets is $16.3 million.

Comparisons of Results of Operations

     The Company’s fiscal year ends on September 30. Beginning with the fiscal year ending September 30, 2004, the Company began operating based on a three-month quarter, four-quarter fiscal year whereas for the fiscal year ended September 30, 2003 the Company operated on a thirteen-period fiscal year that consisted of three, four-week periods in its first interim period; three, four-week periods in its second interim period; four, four-week periods in its third interim period; and the balance of the fiscal year of approximately three, four-week periods in its fourth interim period. For the three months ended June 30, 2004, there were 64 available work days (based on a standard work week of Monday through Friday and excluding designated holidays recognized by Alion) as compared to 78 available workdays for the sixteen-week period ended July 4, 2003. On a fiscal year-to-date basis, through the nine months ended June 30, 2004 there were 192 available workdays as compared to 194 available workdays for the forty-week period

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ended July 4, 2003. Accordingly, comparisons between the nine months and quarter ended June 30, 2004 and the forty and sixteen-week periods ended July 4, 2003 will need to take into account the differing lengths of time.

     As described in the notes to the accompanying consolidated financial statements, Alion completed the acquisition of substantially all of the assets and certain of the liabilities of IIT Research Institute on December 20, 2002, the last day of the Company’s first interim period for the fiscal year ended September 30, 2003. The following discussion and analysis of results of operations relates to the results of operations for the three and nine months ended June 30, 2004 and for the sixteen-week and pro forma forty-week periods ended July 4, 2003, as if the IITRI acquisition had been consummated on the first day of the interim period, October 1, 2002.

Results of Operations

Three Months Ended June 30, 2004 Compared to Sixteen-Week Period Ended July 4, 2003

     For purposes of comparability, the table below reflects the approximate impact of the following events and circumstances as they relate to the financial performance of Alion for the three months ended June 30, 2004 compared to the sixteen-week period ended July 4, 2003. The discussion of the results of operations will include references to the selected financial information shown in the table below in conjunction with the consolidated financial statements of Alion provided elsewhere in this document. The selected financial information provided in the table is based on estimates from Alion management.

• For the three months ended June 30, 2004 there were 64 available workdays (based on a standard five-day work week of Monday through Friday and excluding designated holidays recognized by Alion) as compared to 78 for the sixteen-week period ended July 4, 2003.

• Alion completed the acquisition of Integrated Technology Solutions Corporation (ITSC) on October 31, 2003. ITSC is a New Mexico corporation that had approximately 53 employees, the majority of whom were located in New Mexico. ITSC provided nuclear safety and analysis services to the U.S. Department of Energy (DOE) as well as to the commercial nuclear power industry.

• Alion completed the acquisition of Identix Public Sector, Inc. (IPS) on February 13, 2004. IPS is based in Fairfax, Virginia and provides program and acquisition management, integrated logistics support, and foreign military support primarily to U.S. Navy customers. IPS was a wholly-owned subsidiary of Identix Incorporated.

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	Three Months Ended June 30, 2004													Sixteen Week Period Ended July 4, 2003
											Consolidated
									Acquired		Operations of									Consolidated
	Consolidated								Operations		Alion less the			Consolidated			Fourteen			Operations of
	Operations of			ITSC			IPS		(ITSC and		Acquired			Operations of			Work Day			Alion “as
	Alion			Operation*			Operation*		IPS)		Operations			Alion			adjustment			Adjusted”
Total revenue	$	69,808		$	2,789		$	7,807	$	10,596	$	59,212		$	65,134		$	(11,843	)	$	53,291
Material and subcontract revenue		17,781			948			4,929		5,877		11,904			13,277			(2,414	)		10,863
Total direct contract expenses		50,819			2,170			6,518		8,688		42,131			47,459			(8,629	)		38,830
Major components of direct contract expense
Direct labor cost		30,939			1,187			1,706		2,893		28,047			31,730			(5,769	)		25,961
Other direct cost (ODC)		2,616			63			27		90		2,527			2,839			(516	)		2,323
Material and subcontract (M&S) cost		17,264			920			4,786		5,706		11,558			12,890			(2,344	)		10,546
Gross profit		18,989			619			1,289		1,908		17,081			17,675			(3,214	)		14,461
Total operating expense		18,755			698			904		1,602		17,153			17,496			(3,181	)		14,315
Major components of operating expense
Indirect personnel and facilities		8,158			408			334		742		7,416			6,129			(1,114	)		5,015
Non-recurring expense		0			0			0		0		0			174			(32	)		142
General and administrative		6,834			224			455		679		6,155			8,046			(1,463	)		6,583
Depreciation and amortization		3,518			66			116		182		3,336			3,797			(690	)		3,107
Income (loss) from operations		234			(79	)		385		306		(72	)		179			(33	)		146
Other income and expense		(3,036	)		0			0		0		(3,036	)		(2,872	)		522			(2,350	)
Income tax benefit / (expense)		(4	)		0			0		0		(4	)		0			0			0
Net income (loss) from operations		(2,805	)		(79	)		385		306		(3,111	)		(2,693	)		490			(2,203	)

*The operations of the acquired entities, ITSC and IPS, have been fully integrated within Alion on a consolidated basis. The financial information attributed to these entities are the estimates of management.

     Revenues. Revenues increased $4.7 million, or 7.2%, to $69.8 million for the three months ended June 30, 2004, from $65.1 million for the sixteen-week period ended July 4, 2003. The fourteen day increase in the number of available work days for the sixteen-week period ended July 4, 2003 resulted in approximately $11.8 million of the $65.1 million of revenue. On an adjusted basis, the revenue for the sixteen-week period ended July 4, 2003 is approximately $53.3 million. On this adjusted basis, revenue increased approximately $16.5 million, or 31.0%, to $69.8 million for the three months ended June 30, 2004, from $53.3 million (adjusted) for the sixteen-week period ended July 4, 2003. The $16.5 million adjusted increase is attributable to the following:

•	Revenue generated by the activities of the acquired operations	$	10.6 million
•	Revenue generated by work performed under existing contracts that were in existence during the prior year	$	5.9 million
	Total:	$	16.5 million

     For the three months ended June 30, 2004, our performance of additional work under contracts that were in existence during the prior year includes an increase in our services under the Modeling and Simulation Information Analysis Center contract (MSIAC) to the Department of Defense of approximately $2.6 million, an increase in our decommissioning and demilitarization support services to the U.S. Army’s Newport Chemical Agent Disposal Facility (NECDF), under a subcontract to Parsons Infrastructure and Technology Group, Inc. that accounted for approximately $1.7 million of increased revenue, while our support to the Department of Defense Joint Spectrum Center (JSC) accounted for approximately $0.6 million of increased revenue. On the balance of our contracts, revenue increased approximately $1.0 million for the three months ended June 30, 2004 as compared to the sixteen-week period ended July 4, 2003.

     As a component of revenue, material and subcontract (M&S) revenue increased approximately $4.5 million, or 33.8%, to $17.8 million for the three months ended June 30, 2004 from $13.3 million for the sixteen-week period ended July 4, 2003. The fourteen day increase in the number of available work days for the sixteen-week period ended July 4, 2003 resulted in approximately $2.4 million of the $13.3

21

million of M&S revenue. On an adjusted basis, the M&S revenue for the sixteen-week period ended July 4, 2003 is approximately $10.9 million. On this adjusted basis, the M&S revenue increased approximately $6.9 million, or 63.3%, to $17.8 million for the three months ended June 30, 2004, from $10.9 million (adjusted) for the sixteen-week period ended July 4, 2003. The $6.9 million increase is attributable to the following:

•	M&S revenue generated by the activities of the acquired operations	$5.9 million
•	M&S revenue generated by work performed under existing contracts that were in existence during the prior year	$1.0 million
	Total:	$6.9 million

     M&S revenues vary in both dollar amount and schedule, which are dependent on the requirements of the contracts.

     Direct Contract Expenses. Direct contract expenses increased $3.3 million, or 7.0%, to $50.8 million for the three months ended June 30, 2004, from $47.5 million for the sixteen-week period ended July 4, 2003. The fourteen day increase in the number of available work days for the sixteen-week period ended July 4, 2003 resulted in approximately $8.6 million of the $47.5 million of direct contract expense. On an adjusted basis, the direct contract expense for the sixteen-week period ended July 4, 2003 is approximately $38.8 million. On this adjusted basis, direct contract expense increased approximately $12.0 million, or 30.9%, to $50.8 million for the three months ended June 30, 2004, from $38.8 million (adjusted) for the sixteen-week period ended July 4, 2003. The $12.0 million adjusted increase is attributable to the following:

•	Direct contract expense generated by the activities of the acquired operations	$8.7 million
•	Direct contract expense generated by work performed under existing contracts that were in existence during the prior year	$3.3 million
	Total:	$12.0 million

     As a component of direct contract expenses, direct labor costs for the three months ended June 30, 2004 decreased by $0.8 million or 2.5% to approximately $30.9 million for the three months ended June 30, 2004 from $31.7 million for the sixteen-week period ended July 4, 2003. The fourteen day increase in the number of available work days for the sixteen-week period ended July 4, 2003 resulted in approximately $5.8 million of the $31.7 million of direct labor costs. On an adjusted basis, the direct labor cost for the sixteen-week period ended July 4, 2003 is approximately $26.0 million. On this adjusted basis, direct labor cost increased approximately $5.0 million, or 19.2%, to $30.9 million for the three months ended June 30, 2004, from $26.0 million (adjusted) for the sixteen-week period ended July 4, 2003. The $5.0 million adjusted increase is attributable to the following:

•	Direct labor cost generated by the activities of the acquired operations	$2.9 million
•	Direct labor cost generated by work performed under existing contracts that were in existence during the prior year	$2.1 million
	Total:	$5.0 million

     As a component of direct contract expense, other direct costs (ODC’s) decreased by $0.2 million or 7.1% to approximately $2.6 million for the quarter ended June 30, 2004 from approximately $2.8 million for the sixteen-week period ended July 4, 2003. The fourteen day increase in the number of available work days for the sixteen-week period ended July 4, 2003 resulted in approximately $0.5 million of the $2.8 million of ODC costs. On an adjusted basis, the ODC cost for the sixteen-week period ended July 4, 2003 is approximately $2.3 million. On this adjusted basis, ODC’s increased approximately $0.3 million, or

22

13.0%, to $2.6 million for the three months ended June 30, 2004, from $2.3 million (adjusted) for the sixteen-week period ended July 4, 2003. The $0.3 million adjusted increase is attributable to the following:

•	ODC’s generated by the activities of the acquired operations	$0.1 million
•	ODC’s generated by work performed under existing contracts that were in existence during the prior year	$0.2 million
	Total:	$0.3 million

     As a component of direct contract expense, material and subcontract (M&S) cost increased approximately $4.4 million, or 34.1%, to $17.3 million for the three months ended June 30, 2004, compared to $12.9 million for the sixteen-week period ended July 4, 2003. The fourteen day increase in the number of available work days for the sixteen-week period ended July 4, 2003 resulted in approximately $2.3 million of the $12.9 million of M&S cost. On an adjusted basis, the M&S cost for the sixteen-week period ended July 4, 2003 is approximately $10.6 million. On this adjusted basis, M&S cost increased approximately $6.8 million, or 64.7%, to $17.3 million for the three months ended June 30, 2004, from $10.5 million (adjusted) for the sixteen-week period ended July 4, 2003. The $6.8 million adjusted increase is attributable to the following:

•	M&S cost generated by the activities of the acquired operations	$5.7 million
•	M&S cost generated by work performed under existing contracts that were in existence during the prior year	$1.1 million
	Total:	$6.8 million

     On an adjusted basis, as a percentage of revenue, direct contract expenses were 72.8% for the three months ended June 30, 2004 and for the sixteen-week period ended July 4, 2003.

     Gross Profit. Gross profit increased $1.3 million, or 7.3%, to $19.0 million for the three months ended June 30, 2004, from $17.7 million for the sixteen-week period ended July 4, 2003. The fourteen day increase in the number of available work days for the sixteen-week period ended July 4, 2003 resulted in approximately $3.2 million of the $17.7 million of gross profit. On an adjusted basis, the gross profit for the sixteen-week period ended July 4, 2003 is approximately $14.5 million. On this adjusted basis, gross profit increased approximately $4.5 million, or 31.0%, to $19.0 million for the three months ended June 30, 2004, from $14.5 million (adjusted) for the sixteen-week period ended July 4, 2003. The $4.5 million adjusted increase is attributable to the following:

•	Gross profit generated by the activities of the acquired operations	$1.9 million
•	Gross profit generated by work performed under existing contracts that were in existence during the prior year	$2.6 million
	Total:	$4.5 million

     On an adjusted basis, gross profit as a percentage of revenue increased to 27.2% for the three months ended June 30, 2004, from 27.1% (adjusted) for the sixteen-week period ended July 4, 2003.

     Operating Expenses. Operating expenses increased $1.3 million, or 7.4% to $18.8 million for the three months ended June 30, 2004, from $17.5 million for the sixteen-week period ended July 4, 2003. The fourteen day increase in the number of available work days for the sixteen-week period ended July 4, 2003 resulted in approximately $3.2 million of the $17.5 million of operating expense. On an adjusted basis, the operating expense for the sixteen-week period ended July 4, 2003 is approximately $14.3 million. On this adjusted basis, operating expense increased approximately $4.5 million, or 31.4%, to $18.8 million for the three months ended June 30, 2004, from $14.3 million (adjusted) for the sixteen-week period ended July 4, 2003. The $4.5 million adjusted increase is attributable to the following:

23

•	Operating expense incurred by the activities of the acquired operations	$1.6 million
•	Operating expense incurred for the infrastructure needs in support of revenue growth of existing operations	$2.9 million
	Total:	$4.5 million

     Operating expenses, net of depreciation and amortization and non-recurring transaction-related expenses (e.g., third-party legal, accounting, finance, etc., incurred in connection with the purchase of assets from IITRI) increased approximately $1.7 million, or 12.6%, to $15.2 million for the three months ended June 30, 2004, from $13.5 million for the sixteen-week period ended July 4, 2003. The fourteen day increase in the number of available work days for the sixteen-week period ended July 4, 2003 resulted in approximately $2.6 million of the $13.5 million of net operating expense. On an adjusted basis, the net operating expense for the sixteen-week period ended July 4, 2003 is approximately $10.9 million. On this adjusted basis, operating expense increased approximately $4.1 million, or 37.6%, to $15.2 million for the three months ended June 30, 2004, from $10.9 million (adjusted) for the sixteen-week period ended July 4, 2003. The $4.1 million adjusted increase is attributable to the following:

•	Net operating expense incurred by the activities of the acquired operations	$1.6 million
•	Net operating expense incurred for the infrastructure needs in support of revenue growth of existing operations	$2.5 million
	Total:	$4.1 million

     As a major component of operating expenses, overhead expenses for indirect personnel and facilities costs related to rental and occupancy expenses increased approximately $2.0 million, or 32.8%, to $8.1 million for the three months ended June 30, 2004, from $6.1 million for the sixteen-week period ended July 4, 2003. The fourteen day increase in the number of available work days for the sixteen-week period ended July 4, 2003 resulted in approximately $1.1 million of the $6.1 million of indirect personnel and facility expense. On an adjusted basis, the indirect personnel and facility for the sixteen-week period ended July 4, 2003 is approximately $5.0 million. On this adjusted basis, indirect personnel and facility increased approximately $3.1 million, or 62.0%, to $8.1 million for the three months ended June 30, 2004, from $5.0 million (adjusted) for the sixteen-week period ended July 4, 2003. The $3.1 million adjusted increase is attributable to the following:

•	Indirect personnel and facility expense incurred by the activities of the acquired operations	$0.7 million
•	Indirect personnel and facility expense incurred to support the growth of existing operations	$2.4 million
	Total:	$3.1 million

     As a second major component of our operating expenses, general and administrative (G&A) expense decreased approximately $1.2 million, or 15.0%, to $6.8 million for the three months ended June 30, 2004, compared to $8.0 million for the sixteen-week period ended July 4, 2003. The fourteen day increase in the number of available work days for the sixteen-week period ended July 4, 2003 resulted in approximately $1.4 million of the $8.0 million of G&A expense. On an adjusted basis, G&A expense for the sixteen-week period ended July 4, 2003 is approximately $6.6 million. On this adjusted basis, G&A expense increased approximately $0.2 million, or 3.0%, to $6.8 million for the three months ended June 30, 2004, from $6.6 million (adjusted) for the sixteen-week period ended July 4, 2003. The $0.2 million adjusted increase is attributable to the following:

24

•	G&A expense incurred by the activities of the acquired operations	$0.7 million
•	A decrease in G&A expense incurred in support of the existing operations	($0.5) million
	Total:	$0.2 million

     On an adjusted basis, as a percentage of revenues, general and administrative expenses decreased to 9.8% for the three months ended June 30, 2004, compared to 12.4% for the sixteen-week period ended July 4, 2003.

     Bad debt expense increased $0.9 million to $0.2 million for the three months ended June 30, 2004 as compared to a recovery of $0.7 million for the sixteen-week period ended July 4, 2003. During the sixteen week period ended July 4, 2003, approximately $0.5 million of the recovery was due to the favorable resolution of a contractual dispute. For the three months ended June 30, 2004, the $0.2 million in bad debt expense equates to approximately 0.3% of revenue.

     Depreciation and Amortization. Depreciation and amortization expense decreased approximately $0.3 million, or 7.9%, to $3.5 million for the three months ended June 30, 2004, as compared to $3.8 million for the sixteen-week period ended July 4, 2003. The fourteen day increase in the number of available work days for the sixteen-week period ended July 4, 2003 resulted in approximately $0.7 million of the $3.8 million of depreciation and amortization expense. On an adjusted basis, depreciation and amortization expense for the sixteen-week period ended July 4, 2003 is approximately $3.1 million. On this adjusted basis, depreciation and amortization expense increased approximately $0.4 million, or 13.0%, to $3.5 million for the three months ended June 30, 2004, from $3.1 million (adjusted) for the sixteen-week period ended July 4, 2003. The $0.4 million adjusted increase is attributable to the following:

•	Depreciation and amortization expense related to the activities of the acquired operations	$0.2 million
•	Depreciation and amortization expense related to the existing operations	$0.2 million
	Total:	$0.4 million

     On an unadjusted basis for the three-month and sixteen-week period, approximately $2.7 million and $3.4 million, respectively, of total depreciation and amortization expense of $3.5 million and $3.8 million, respectively, was incurred associated with the intangible asset value assigned to purchased customer contracts of IITRI. Also, for each respective three-month or sixteen-week period, approximately $0.1 million of depreciation expense was incurred associated with the fair market value assigned to the purchased assets of IITRI.

     Income (Loss) from Operations. For the three months ended June 30, 2004, income from operations was $0.2 million compared to a $0.2 million operating income for the sixteen-week period ended July 4, 2003.

     The fourteen day increase in the number of available work days for the sixteen-week period ended July 4, 2003 resulted in approximately $0.1 million of the $0.2 million of income from operations. On an adjusted basis, income from operations for the sixteen-week period ended July 4, 2003 is approximately $0.1 million. On this adjusted basis, income from operations increased approximately $0.1 million, to $0.2 million for the three months ended June 30, 2004, from $0.1 million (adjusted) for the sixteen-week period ended July 4, 2003. The $0.1 million adjusted increase is attributable to the following:

25

•	Operating income generated from the activities of the acquired operations	$0.3 million
•	Operating (loss) generated from the existing operations	($0.2) million
	Total:	$0.1 million

     Other Income and Expense. Other expenses increased approximately $0.1 million, or 3.4%, to $3.0 million for the three months ended June 30, 2004 as compared to $2.9 million for the sixteen-week period ended July 4, 2003. The fourteen day increase in the number of available work days for the sixteen-week period ended July 4, 2003 resulted in approximately $0.5 million of the $2.9 million of other expense. On an adjusted basis, other expense for the sixteen-week period ended July 4, 2003 is approximately $2.4 million. On this adjusted basis, other expense increased approximately $0.6 million, to $3.0 million for the three months ended June 30, 2004, from $2.4 million (adjusted) for the sixteen-week period ended July 4, 2003. The $0.6 million adjusted increase is attributable to the following:

•	Interest expense on the balance drawn under the revolving credit facility resulting from the cash paid for the ITSC and IPS acquisitions and cash paid for earnout obligations under existing agreements.	$0.3 million
•	Interest expense associated with the increase in warrant repurchase liability related to the increase in share value of Alion stock.	$0.1 million
•	Interest expense associated with the increase in deferred compensation expense related to Alion’s stock appreciation rights and phantom stock plans.	$0.2 million
	Total:	$0.6 million

     Income Tax (Expense) Benefit. Although HFA became a qualified subchapter S subsidiary as of December 20, 2002 and is no longer treated as a separate entity for federal income tax purposes, some states do not recognize this tax election. Some states do not recognize Alion’s S-corporation status. As a result, the Company recorded approximately $0.004 million in state income tax expense for quarter ended June 30, 2004. The Company recorded no income tax expense for the sixteen-week period ended July 4, 2003.

     Net Loss. The net loss increased approximately $0.1 million, or 3.7%, to $2.8 million for the three months ended June 30, 2004 as compared to $2.7 million for the sixteen-week period ended July 4, 2003. The fourteen day increase in the number of available work days for the sixteen-week period ended July 4, 2003 resulted in approximately $0.5 million of the $2.7 million loss. On an adjusted basis, the loss for the sixteen-week period ended July 4, 2003 is approximately $2.2 million. On this adjusted basis, the loss increased approximately $0.6 million, or 27.2%, to $2.8 million for the three months ended June 30, 2004, from $2.2 million (adjusted) for the sixteen-week period ended July 4, 2003. The $0.6 million adjusted increase is attributable to the following:

•	Income generated by the activities of the acquired operations	$0.3 million
•	(Loss) generated by existing operations	($0.9) million
	Total:	($0.6) million

     The net loss was due to the factors discussed above.

Nine months Ended June 30, 2004 Compared to the Pro Forma Forty-Week Period Ended July 4, 2003

     For purposes of comparability, the table below reflects the approximate impact of the following events and circumstances as they relate to the financial performance of Alion for the nine months ended

26

June 30, 2004 compared to the pro forma forty-week period ended July 4, 2003. As discussed in Note 12, the pro forma information gives effect to certain transactions, including the acquisition of the Selected Operations of IITRI, as if such transactions had been consummated on October 1, 2002. The discussion of the results of operations will include references to the selected financial information shown in the table below in conjunction with consolidated financial statements of Alion provided elsewhere in this document. The selected financial information provided in the table are based on estimates from Alion management.

• For the nine months ended June 30, 2004 there were 192 available workdays (based on a standard five-day work week of Monday through Friday and excluding designated holidays recognized by Alion) as compared to 194 for the forty-week period ended July 4, 2003.

• Alion completed the acquisition of Integrated Technology Solutions Corporation (ITSC) on October 31, 2003. 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.

• Alion completed the acquisition of Identix Public Sector, Inc. (IPS) on February 13, 2004. IPS is based in Fairfax, Virginia and provides program and acquisition management, integrated logistics support, and foreign military support primarily to U.S. Navy customers. IPS was a wholly-owned subsidiary of Identix Incorporated.

	Nine Months Ended June 30, 2004													Pro Forma Forty Week-Period Ended July 4, 2003
											Consolidated
									Acquired		Operations of									Consolidated
	Consolidated								Operations		Alion less the			Consolidated			Two Work			Operations of
	Operations of			ITSC			IPS		(ITSC		Acquired			Operations of			Day			Alion “as
	Alion			Operation*			Operation*		and IPS)		Operations			Alion			adjustment			Adjusted”
Total revenue	$	193,111		$	6,945		$	10,772	$	17,717	$	175,394		$	161,404		$	(1,690	)	$	159,714
Material and subcontract revenue		45,475			2,234			6,442		8,676		36,799			34,044			(356	)		33,688
Total direct contract expenses		139,310			5,384			8,867		14,251		125,059			118,145			(1,237	)		116,908
Major components of direct contract expense
Direct labor cost		88,129			3,057			2,584		5,641		82,488			79,387			(831	)		78,556
Other direct cost (ODC)		7,029			157			29		187		6,843			5,705			(60	)		5,646
Material and subcontract (M&S) cost		44,151			2,169			6,254		8,423		35,728			33,053			(346	)		32,707
Gross profit		53,801			1,561			1,905		3,466		50,335			43,259			(453	)		42,806
Total operating expense		53,365			1,801			1,224		3,025		50,340			49,820			(522	)		49,298
Major components of operating expense
Indirect personnel and facilities		21,820			1,184			458		1,642		20,178			15,839			(166	)		15,673
Non-recurring expense		0			0			0		0		0			6,562			(69	)		6,493
General and administrative		21,099			551			650		1,201		19,898			18,240			(191	)		18,049
Depreciation and amortization		9,889			66			116		182		9,707			9,499			(99	)		9,400
Income (loss) from operations		436			(240	)		681		441		(5	)		(6,561	)		69			(6,492	)
Other income and expense		(10,966	)		0			0		0		(10,966	)		(7,320	)		77			(7,243	)
Income tax benefit / (expense)		(4	)		0			0		0		(4	)		(27	)		0			(27	)
Net income (loss) from operations		(10,534	)		(240	)		681		442		(10,976	)		(13,908	)		146			(13,762	)

* The operations of the acquired entities, ITSC and IPS, have been fully integrated within Alion on a consolidated basis. The selected financial information attributed to these entities are the estimates of management.

     Revenues. Revenues increased $31.7 million, or 19.6%, to $193.1 million for the nine months ended June 30, 2004, from $161.4 million for the forty weeks ended July 4, 2003. The two day increase in the number of available work days for the forty-week period ended July 4, 2003 resulted in approximately $1.7 million of the $161.4 million of revenue. On an adjusted basis, the revenue for the forty-week period ended July 4, 2003 is approximately $159.7 million. On this adjusted basis, revenue increased approximately $33.4 million, or 20.9%, to $193.1 million for the nine months ended June 30, 2004, from $159.7 million (adjusted) for the forty-week period ended July 4, 2003. The $33.4 million adjusted increase is attributable to the following:

27

•	Revenue generated by the activities of acquired operations	$17.7 million
•	Revenue generated by work performed under existing contracts that were in existence during the prior year	$15.7 million
	Total:	$33.4 million

     For the nine months ended June 30, 2004, our performance of additional work under contracts that were in existence during the prior year includes an increase in our services under the Modeling and Simulation Information Analysis Center contract (MSIAC) to the Department of Defense of approximately $8.9 million, an increase in our decommissioning and demilitarization support services to the U.S. Army’s Newport Chemical Agent Disposal Facility (NECDF), under a subcontract to Parsons Infrastructure and Technology Group, Inc. that accounted for approximately $3.9 million of increased revenue, while our support to the Department of Defense Joint Spectrum Center (JSC) accounted for approximately $2.6 million of increased revenue. On the balance of our contracts, revenue increased approximately $0.3 million for the nine months ended June 30, 2004 as compared to the forty-week period ended July 4, 2003.

     As a component of revenue, M&S revenue increased approximately $11.5 million, or 33.8%, to $45.5 million for the nine months ended June 30, 2004 from $34.0 million for the forty-week period ended July 4, 2003. The two day increase in the number of available work days for the forty-week period ended July 4, 2003 resulted in approximately $0.3 million of the $34.0 million of M&S revenue. On an adjusted basis, the revenue for the forty-week period ended July 4, 2003 is approximately $33.7 million. On this adjusted basis, the M&S revenue increased approximately $11.8 million, or 35.0%, to $45.5 million for the nine months ended June 30, 2004, from $33.7 million (adjusted) for the forty-week period ended July 4, 2003. The $11.8 million adjusted increase is attributable to the following:

•	M&S revenue generated by the activities of the acquired operations	$8.7 million
•	M&S revenue generated by work performed under existing contracts that were in existence during the prior year	$3.1 million
	Total:	$11.8 million

     M&S revenues vary in both dollar amount and schedule, which are dependent on the requirements of the contracts.

     Direct Contract Expenses. Direct contract expenses increased $21.2 million, or 18.0%, to $139.3 million for the nine months ended June 30, 2004, from $118.1 million for the forty week period ended July 4, 2003. The two day increase in the number of available work days for the forty-week period ended July 4, 2003 resulted in approximately $1.2 million of the $118.1 million of direct contract expense. On an adjusted basis, the direct contract expense for the forty-week period ended July 4, 2003 is approximately $116.9 million. On this adjusted basis, direct contract expense increased approximately $22.4 million, or 19.2%, to $139.3 million for the nine months ended June 30, 2004, from $116.9 million (adjusted) for the forty-week period ended July 4, 2003. The $22.4 million adjusted increase is attributable to the following:

•	Direct contract expense generated by the activities of the acquired operations	$14.3 million
•	Direct contract expense generated by work performed under existing contracts that were in existence during the prior year	$8.1 million
	Total:	$22.4 million

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     As a component of direct contract expenses, direct labor costs for the nine months ended June 30, 2004 increased by $8.7 million, or 11.0%, to $88.1 million from $79.4 million for the forty-week period ended July 4, 2003. The two day increase in the number of available work days for the forty-week period ended July 4, 2003 resulted in approximately $0.8 million of the $79.4 million of direct labor costs. On an adjusted basis, the direct labor cost for the forty-week period ended July 4, 2003 is approximately $78.6 million. On this adjusted basis, direct labor cost increased approximately $9.5 million, or 12.1%, to $88.1 million for the nine months ended June 30, 2004, from $78.6 million (adjusted) for the forty-week period ended July 4, 2003. The $9.5 million adjusted increase is attributable to the following:

•	Direct labor cost generated by the activities of the acquired operations	$5.7 million
•	Direct labor cost generated by work performed under existing contracts that were in existence during the prior year	$3.8 million
	Total:	$9.5 million

     As a component of direct contract expense, other direct costs (ODC) increased by $1.3 million, or 22.8%, to $7.0 million for the nine months ended June 30, 2004 when compared to $5.7 million for the forty week period ended July 4, 2003. The two day increase in the number of available work days for the forty-week period ended July 4, 2003 resulted in approximately $0.1 million of the $5.7 million of ODC costs. On an adjusted basis, the ODC cost for the forty-week period ended July 4, 2003 is approximately $5.6 million. On this adjusted basis, ODC’s increased approximately $1.4 million, or 25.0%, to $7.0 million for the nine months ended June 30, 2004, from $5.6 million (adjusted) for the forty-week period ended July 4, 2003. The $1.4 million adjusted increase is attributable to the following:

•	ODC’s generated by the activities of the acquired operations	$0.2 million
•	ODC’s generated by work performed under existing contracts that were in existence during the prior year	$1.2 million
	Total:	$1.4 million

     As a component of direct contract expense, material and subcontract (M&S) cost increased approximately $11.1 million, or 33.5%, to $44.2 million for the nine months ended June 30, 2004, compared to $33.1 million for the forty-week period ended July 4, 2003. The two day increase in the number of available work days for the forty-week period ended July 4, 2003 resulted in approximately $0.3 million of the $33.1 million of M&S cost. On an adjusted basis, the M&S cost for the forty-week period ended July 4, 2003 is approximately $32.8 million. On this adjusted basis, M&S cost increased approximately $11.5 million, or 35.2%, to $44.2 million for the nine months ended June 30, 2004, from $32.7 million (adjusted) for the forty-week period ended July 4, 2003. The $11.5 million adjusted increase is attributable to the following:

•	M&S cost generated by the activities of the acquired operations	$8.4 million
•	M&S cost generated by work performed under existing contracts that were in existence during the prior year	$3.1 million
	Total:	$11.5 million

     On an adjusted basis, as a percentage of revenue, direct contract expenses decreased to 72.1% for the nine months ended June 30, 2004 from 73.2% for the forty-week period ended July 4, 2003.

     Gross Profit. Gross profit increased $10.5 million, or 24.3%, to $53.8 million for the nine months ended June 30, 2004, from $43.3 million for the forty-week period ended July 4, 2003. The two day increase in the number of available work days for the forty-week period ended July 4, 2003 resulted in approximately $0.5 million of the $43.3 million of gross profit. On an adjusted basis, the gross profit for the forty-week period ended July 4, 2003 is approximately $42.8 million. On this adjusted basis, gross

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profit increased approximately $11.0 million, or 25.7%, to $53.8 million for the nine months ended June 30, 2004, from $42.8 million (adjusted) for the forty-week period ended July 4, 2003. The $11.0 million adjusted increase is attributable to the following:

•	Gross profit generated by the activities of the acquired operations	$3.5 million
•	Gross profit generated by work performed under existing contracts that were in existence during the prior year	$7.5 million
	Total:	$11.0 million

     On an adjusted basis, gross profit as a percentage of revenue increased to 27.9% for the nine months ended June 30, 2004, from 26.8% (adjusted) for the forty-week period ended July 4, 2003.

     Operating Expenses. Operating expenses increased $3.6 million, or 7.2% to $53.4 million for the nine months ended June 30, 2004, from $49.8 million for the forty week period ended July 4, 2003. However, for the forty-week period ended July 4, 2003, there was approximately $6.6 million in non-recurring, transaction-related expense. There were no such costs incurred for the nine months ended June 30, 2004. As such, the adjusted increase in operating expense was approximately $10.2 million ($3.6 million plus $6.6 million). Furthermore, the two day increase in the number of available work days for the forty-week period ended July 4, 2003 resulted in approximately $0.5 million of the $49.8 million of operating expense. On an adjusted basis, the operating expense for the forty-week period ended July 4, 2003 is approximately $42.7 million. On this adjusted basis, operating expense increased approximately $10.7 million, or 25.1%, to $53.4 million for the nine months ended June 30, 2004, from $42.7 million for the forty-week period ended July 4, 2003. The $10.7 million adjusted increase is attributable to the following:

•	Operating expense incurred by the activities of the acquired operations	$3.0 million
•	Operating expense incurred for the infrastructure needs in support of revenue growth of existing operations	$7.7 million
	Total:	$10.7 million

     Operating expenses, net of depreciation, amortization, and non-recurring transaction-related expense increased approximately $9.7 million, or 28.7%, to $43.5 million for the nine months ended June 30, 2004, from $33.8 million for the forty week period ended July 4, 2003. The two day increase in the number of available work days for the forty-week period ended July 4, 2003 resulted in approximately $0.4 million of the $33.8 million of net operating expense. On an adjusted basis, the net operating expense for the forty-week period ended July 4, 2003 is approximately $33.4 million. On this adjusted basis, operating expense increased approximately $10.1 million, or 30.2%, to $43.5 million for the nine months ended June 30, 2004, from $33.4 million (adjusted) for the forty-week period ended July 4, 2003. The $10.1 million adjusted increase is attributable to the following:

•	Net operating expense incurred by the activities of the acquired operations	$2.8 million
•	Net operating expense incurred for the infrastructure needs in support of revenue growth of existing operations	$7.3 million
	Total:	$10.1 million

     As a major component of our operating expenses, overhead expenses for indirect personnel and facilities costs related to rental and occupancy expenses increased approximately $6.0 million, or 38.0%, to $21.8 million for the nine months ended June 30, 2004, from $15.8 million for the forty-week period ended July 4, 2003. The two day increase in the number of available work days for the forty-week period ended July 4, 2003 resulted in approximately $0.2 million of the $15.8 million of indirect personnel and facility expense. On an adjusted basis, the indirect personnel and facility for the forty-week period ended July 4,

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2003 is approximately $15.6 million. On this adjusted basis, indirect personnel and facility increased approximately $6.2 million, or 39.7%, to $21.8 million for the nine months ended June 30, 2004, from $15.6 million (adjusted) for the forty-week period ended July 4, 2003. The $6.2 million adjusted increase is attributable to the following:

•	Indirect personnel and facility expense incurred by the activities of the acquired operations	$1.6 million
•	Indirect personnel and facility expense incurred to support the growth of existing operations	$4.6 million
	Total:	$6.2 million

     As a second major component of our operating expenses, general and administrative (G&A) expense increased approximately $2.9 million, or 15.9%, to $21.1 million for the nine months ended June 30, 2004, compared to $18.2 million for the forty week period ended July 4, 2003. The two day increase in the number of available work days for the forty-week period ended July 4, 2003 resulted in approximately $0.2 million of the $18.2 million of G&A expense. On an adjusted basis, G&A expense for the forty-week period ended July 4, 2003 is approximately $18.0 million. On this adjusted basis, G&A expense increased approximately $3.1 million, or 17.2%, to $21.1 million for the nine months ended June 30, 2004, from $18.0 million (adjusted) for the forty-week period ended July 4, 2003. The $3.1 million adjusted increase is attributable to the following:

•	G&A expense incurred by the activities of the acquired operations	$1.2 million
•	Legal expense incurred in support of the AB Technologies arbitration proceedings	$0.5 million
•	Incremental audit-related expense	$0.2 million
•	G&A expense incurred to support the growth of the existing operations	$1.2 million
	Total:	$3.1 million

     On an adjusted basis, as a percentage of revenues, general and administrative expenses decreased to 10.9% for the nine months ended June 30, 2004, compared to 11.3% for the forty-week period ended July 4, 2003.

     Bad debt expense increased $0.8 million to $0.3 million for the nine months ended June 30, 2004 as compared to a credit of $0.7 million for the forty-week period ended July 4, 2003. During the forty- week period ended July 4, 2003, approximately $0.5 million of the credit was due to the favorable resolution of a contractual dispute. For the nine months ended June 30, 2004, the $0.3 million in bad debt expense equates to approximately 0.2% of revenue.

     Depreciation and Amortization. Depreciation and amortization expense increased approximately $0.4 million, or 4.2%, to $9.9 million for the nine months ended June 30, 2004, as compared to $9.5 million for the forty week period ended July 4, 2003. The two day increase in the number of available work days for the forty-week period ended July 4, 2003 resulted in approximately $0.1 million of the $9.5 million of depreciation and amortization expense. On an adjusted basis, depreciation and amortization expense for the forty-week period ended July 4, 2003 is approximately $9.4 million. On this adjusted basis, depreciation and amortization expense increased approximately $0.5 million, or 5.3%, to $9.9 million for the nine months ended June 30, 2004, from $9.4 million (adjusted) for the forty-week period ended July 4, 2003. The $0.5 million adjusted increase is attributable to the following:

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•	Amortization expense associated with the value assigned to the purchased contracts of acquired operations $0.2 million
•	Depreciation and amortization expense associated with the capital expenditures and intangible assets of the existing operations $0.3 million
	Total: $0.5 million

     For the nine-month and forty-week period, approximately $7.8 million and $5.5 million, respectively, of total amortization expense was incurred associated with the intangible asset value assigned to purchase customer contracts of IITRI. Also, for each respective nine-month or forty week period, approximately $0.4 million of depreciation expense was incurred associated with the fair value assigned to the purchased fixed assets of IITRI.

     Income (Loss) from Operations. For the nine months ended June 30, 2004, income from operations was $0.4 million compared with $6.6 million operating loss for the forty-week period ended July 4, 2003. The two day increase in the number of available work days for the forty-week period ended July 4, 2003 represented approximately $0.1 million of the $6.6 million of loss from operations. On an adjusted basis, loss from operations for the forty-week period ended July 4, 2003 is approximately $6.5 million. On this adjusted basis, income from operations increased approximately $6.9 million, to income of $0.4 million for the nine months ended June 30, 2004, from a loss of $6.5 million (adjusted) for the forty-week period ended July 4, 2003. The $6.9 million adjusted increase is attributable to the following:

•	Operating income generated from the activities of the acquired operations	$0.4 million
•	Operating income generated from the existing operations	$6.5 million
	Total:	$6.9 million

     Other Income and Expense. Other expenses increased approximately $3.7 million, or 50.7%, to $11.0 million for the nine months ended June 30, 2004 as compared to $7.3 million for the forty-week period ended July 4, 2003. The two day increase in the number of available work days for the forty-week period ended July 4, 2003 represented approximately $0.1 million of the $7.3 million of other expense. On an adjusted basis, other expense for the forty-week period ended July 4, 2003 is approximately $7.2 million. On this adjusted basis, other expense increased approximately $3.8 million, to $11.0 million for the nine months ended June 30, 2004, from $7.2 million (adjusted) for the forty-week period ended July 4, 2003. The $3.8 million adjusted increase is attributable to the following:

•	Interest expense on the balance drawn under the revolving credit facility resulting from the cash paid for the ITSC and IPS acquisitions and cash paid for earnout obligations under existing agreements.	$0.3 million
•	Interest expense associated with the increase in warrant repurchase liability related to the increase in share value of Alion stock.	$0.9 million
•	Interest expense associated with the increase in deferred compensation expense related to Alion’s stock appreciation rights and phantom stock plans.	$1.1 million
•	Interest expense associated with the accretion of the debt discount on the Mezzanine Note and Subordinated Note.	$1.4 million
•	Various other expenses.	$0.1 million
	Total:	$3.8 million

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     Income Tax (Expense) Benefit. Although HFA became a qualified subchapter S subsidiary as of December 20, 2002 and is no longer treated as a separate entity for federal income tax purposes, some states do not recognize this tax election. In addition, some states do not recognize Alion’s S-corporation status. As a result, the Company recorded approximately $0.004 million in state income tax expense for the nine months ended June 30, 2004. HFA was a taxable entity from October 1 through December 20, 2002. As a result, the Company recorded approximately $0.005 million for state income taxes and $0.022 million for federal income taxes for the forty-week period ended July 4, 2003.

     Net Loss. The net loss decreased approximately $3.4 million, or 24.5%, to $10.5 million for the nine months ended June 30, 2004 as compared to $13.9 million for the forty-week period ended July 4, 2003. The two day increase in the number of available work days for the forty-week period ended July 4, 2003 resulted in approximately $0.1 million of the $13.9 million loss. On an adjusted basis, the loss for the forty-week period ended July 4, 2003 is approximately $13.8 million. On this adjusted basis, the loss decreased approximately $3.3 million, or 23.9%, to $10.5 million for the nine months ended June 30, 2004, from $13.8 million for the forty-week period ended July 4, 2003. The $3.3 million adjusted decrease is attributable to the following:

•	Income generated by the activities of the acquired operations	$0.4 million
•	Income generated by existing operations	$2.9 million
	Total:	$3.3 million

Recent Accounting Pronouncements.

     On January 12, 2004, the Financial Accounting Standards Board (FASB) issued Staff Position No. FAS 106-1 “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (FSP 106-1). FSP 106-1 permits employers that sponsor postretirement benefit plans to defer accounting for any effects of the Medicare Prescription Drug Improvement and Modernization Act of 2003 that was signed into law on December 8, 2003. FSP 106-1 was superseded by FSP FAS 106-2 which is effective beginning July 1, 2004.

     In accordance with FSP 106-1 and FSP 106-2, neither the accumulated postretirement benefit obligation nor the net periodic postretirement benefit costs reflected in the accompanying financial statements reflects the effect of the Medicare Prescription Drug Improvement and Modernization Act of 2003 on Alion’s plan. Authoritative guidance, when issued, could require the Company to change previously reported information.

Liquidity and Capital Resources.

     Historically, primary sources of liquidity of the business we acquired on December 20, 2002 have been cash provided by operations and revolving credit and term-loan facilities. We intend to fund our operations primarily through the cash provided by operations and drawdowns from our revolving credit facility.

     The following discussion relates to the cash flow of Alion for the nine months ended June 30, 2004 as compared to the cash flow of Alion for the twenty-eight week period ended July 4, 2003 plus the cash flows of the operating activities of the business acquired on December 20, 2002 for the twelve-week period ended December 20, 2002.

     Net cash used in operating activities was $2.6 million for the nine months ended June 30, 2004, a decrease of $14.2 million from the $11.4 million provided by operating activities for the forty-week period ended July 4, 2003. The primary reason for this $14.2 million decrease in cash provided by operations results from the increase in approximately $11.0 million of accounts receivable associated primarily with the integration of the invoicing and cash collection processes of the ITSC and IPS operations.

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     Net cash used in investing activities was $21.8 million for the nine months ended June 30, 2004, and $60.9 million for the forty-week period ended July 4, 2003. Approximately $17.7 million of the $21.8 million of cash used during the nine months ended June 30, 2004 was for the acquisition and purchase of ITSC and IPS. During the forty-week period ended July 4, 2003, the cash Alion paid for the selected operations of IITRI was $58.6 million, of which $25.8 million was generated from the sale of Alion common stock to the ESOP Trust, and $32.1 million was from net borrowings under the Senior Term Note.

     Net cash provided by financing activities was $24.0 million for the nine months ended June 30, 2004, compared to cash provided by financing activities of $51.3 million for the forty-week period ended July 4, 2003. For the nine months ended June 30, 2004, net cash provided by financing activities was primarily the result of increased borrowings under Alion’s revolving credit facility. For the nine months ended June 30, 2004, the balance drawn under the revolving credit was approximately $23.8 million primarily used to fund the acquisitions of ITSC and IPS. For the forty-week period ended July 4, 2003, there was zero balance on the revolving credit facility. During the forty-week period ended July 4, 2003, the additional financing required to complete the purchase of the selected operations of IITRI included a $35.0 million Senior Term Note, a $20.3 million Mezzanine Note (with warrants), a $39.9 million Subordinated Note (with warrants), and the sale of $25.8 million of common stock to the ESOP Trust.

Discussion of Debt Structure

On August 2, 2004, the Company entered into a new Senior Credit Facility administered by Credit Suisse First Boston consisting of a $30 million revolving credit facility, a Senior Secured Term B Loan for $100.0 million, and a $50 million uncommitted Incremental Term Loan “accordion” facility. The total value of the Senior Credit Facility is $180.0 million.

At the closing date, the Company used $50 million of the new Senior Secured Term B Loan to retire its outstanding senior term note and revolving credit facility under the Senior Credit Agreement with LaSalle Bank National Association. The Company paid approximately $48.2 million in principal and accrued and unpaid interest and approximately $2.8 million in transaction fees associated with the refinancing.

The Company intends to use part of the remainder of the Senior Secured Term B Loan to retire its existing Mezzanine Note in the approximate principal amount of $19.6 million, to pay accrued and unpaid interest and any prepayment premium the Company may incur at the time under its Mezzanine Note, and to pay related fees and expenses. The Company is permitted to use any remaining portion of the Senior Secured Term B Loan to finance permitted acquisitions. The Company intends to use the new revolving credit facility to meet working capital needs and other general corporate purposes, including financing permitted acquisitions.

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

The Company must repay all principal obligations under the Senior Credit Facility no later than August 5, 2009. The Senior Credit Agreement is secured by a first priority, perfected security interest in all of the Company’s current and future tangible and intangible property. The Company may prepay its borrowings under the senior term note 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 permitted debt or equity issuances or asset sales.

The Term B Loan and the revolving line of credit under the senior credit facility bear interest at either of two floating rates both of which vary according to the Company’s leverage ratio: an annual rate equal to the Eurodollar rate plus 200 to 275 basis points, or the Credit Suisse First Boston prime rate plus 100 to 175 basis points. Leverage ratio is the ratio of total funded debt, excluding the Subordinated Note (described below), to

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earnings before interest, taxes, depreciation, amortization, ESOP repurchase obligations and non-cash compensation expenses. Under the terms of the Senior Credit Facility, the Company is subject to covenants including financial covenants with respect to the interest coverage ratio and maximum leverage ratio.

Revolving Credit
and Term Loan	Category I	Category II	Category III	Category IV
Leverage Ratio	Greater than or equal to 3.0 to 1.0	Greater than or equal to 2.5 to 1.0 but less than 3.0 to 1.0	Greater than or equal to 2.0 to 1.0 but less than 2.5 to 1.0	Less than 2.0 to 1.0
Prime Rate Margin	175 basis points	150 basis points	125 basis points	100 basis points
Eurodollar Margin	275 basis points	250 basis points	225 basis points	200 basis points
Commitment Fee (on unused balance)	50 basis points	50 basis points	50 basis points	50 basis points

The table below sets for the Company’s anticipated minimum annual debt repayments based on the retirement of the existing Mezzanine Note from proceeds of the Senior Credit Facility.

	Principal Repayments (in thousands)
	2004			2005		2006		2007		2008		2009		2010		2011		TOTAL
Senior Secured Term B Loan	$	—		$	750	$	750	$	750	$	750	$	72,000	$	—	$	—	$	75,000
Seller Subordinated Note	$	—		$	—	$	—	$	—	$	—	$	—	$	19,950	$	19,950	$	39,900
Subordinated Paid in Kind Note	$	—		$	—	$	—	$	—	$	—	$	—	$	7,182	$	7,182	$	14,364
Sub-total	$	—		$	750	$	750	$	750	$	750	$	72,000	$	27,132	$	27,132	$	129,264
Note Payable to bank	$	23,850		$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	23,850
Senior Note Payable	$	23,396		$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	23,396
Proceeds of Senior Secured Term B Loan	$	(47,246	)	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	(47,246	)
Total principal payments	$	—		$	750	$	750	$	750	$	750	$	72,000	$	27,132	$	27,132	$	129,264

     On December 20, 2002, the Company issued a Mezzanine Note to IITRI with a face value of approximately $20.3 million, as part of the consideration for the IITRI acquisition. The Mezzanine Note is junior to the senior credit facility, but ranks senior to the Subordinated Note. If not retired using the proceeds of the Senior Credit Facility as discussed above, the Company must pay the

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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. The Mezzanine Note contains financial covenants similar to those contained in the Senior Credit Agreement, but on less onerous terms mutually agreed upon by the Company, IITRI and the senior lenders.

     Also on December 20, 2002, the Company issued the Subordinated Note to IITRI, with a face value of $39.9 million, as part of the consideration for the IITRI acquisition. The Subordinated Note bears interest at a rate of 6% per year through December 2008, payable quarterly by the issuance of non-interest bearing notes, called paid-in-kind or (PIK) notes, which mature at the same time as the Subordinated Note. Issuance of the PIK notes 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. The Subordinated Note includes covenants customary for deeply subordinated obligations, such as the timely payment of principal and interest.

     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, 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 warrant holders 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.

     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

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

     On February 11, 2004, the Company borrowed $750,000 from an officer of the Company. In exchange, on June 7, 2004, the Company issued the officer a promissory note with interest at a rate of 15% per annum until March 31, 2009. The annual interest period was effective beginning February 11, 2004. The agreement essentially replaces a note, which is described above, for the same sum previously issued to another officer of the Company, the termination of whose employment relationship resulted in repurchase of the note. The agreement with the officer is subordinate to the Senior Credit Agreement and the Mezzanine Note referenced above.

     The Company has a maximum earnout payment obligation of $11.5 million 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. 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.

     On January 20, 2004, the arbitrator issued a decision awarding Messrs. Andrews and Bewley a purchase price adjustment of approximately $0.7 million. The arbitrator’s decision reclassified certain overhead expenses as general and administrative expenses which were capped by the asset purchase agreement. That decision increased earn out payments due Messrs. Andrews and Bewley by approximately $3.5 million for the period from the acquisition date through September 30, 2002. The Company was also required to recognize a liability of approximately $0.3 million for potential payments to employees who worked in the business units subject to this earn out for their earn out related to fiscal year ended September 30, 2004.

     Through June 30, 2004, the Company recognized approximately $4.9 million, excluding interest, in earnout obligations due Messrs. Andrews and Bewley and approximately $0.4 million for potential payments to employees who worked in the business units subject to this earn out. As of June 30, 2004, the Company had paid approximately $4.5 million, excluding interest, to Messrs. Andrews and Bewley for earn outs and purchase price adjustments. The Company expects to pay Messrs. Andrews and Bewley approximately $3.3 million, excluding interest, in the quarter ending September 30, 2004.

     The Company’s remaining minimum lease payment obligations under non-cancelable operating leases for the full fiscal years ending 2004, 2005, 2006, 2007, 2008 and 2009 are $2.9 million, $10.9 million, $10.6 million, $10.6 million, $10.5 million and $10.1 million, respectively. The remaining aggregate obligations on these leases thereafter are approximately $11.5 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 rights associated with the Mezzanine Note warrants;

• Obligations related to the holder’s put rights associated with the Subordinated Note warrants;

• Obligations relating to our stock appreciation rights and phantom stock programs; and

• Obligations relating to deferred compensation programs for senior managers.

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     To date, the Company has spent the following amounts to repurchase shares of its common stock from the ESOP Trust to satisfy obligations to terminated employees. Shares repurchased prior to June 2004 were sold to the ESOP Trust.

	Number of Shares		Total Value
Date	Repurchased	Share Price	Repurchased
June 2003	5,248	$11.13	$58,412
July 2003	2,696	$11.13	$30,000
December 2003	50,031	$14.71	$735,956
June 2004	743	$16.56	$12,297

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

     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 2009 through 2011, it expects that it will need to refinance a portion of its indebtedness at least by fiscal year 2008. The Company’s cash from operations will be insufficient to satisfy all of its obligations and it cannot be certain that it will be able to refinance on terms that will be favorable to the Company, if at all. Moreover, if the Company’s plans or assumptions change, if its assumptions prove inaccurate, if it consummates 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.

ITEM 3. 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 IITRI, ITSC, and IPS acquisitions. 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 $1.2 million of the Company’s $24.4 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 senior 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.

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     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 relates 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.

ITEM 4. CONTROLS AND PROCEDURES

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

(b) Internal Control Over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 15d–15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     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 alleged 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;

• 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;

39

• 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.

     On May 12, 2004, the defendants agreed to settle this case by paying Alion a royalty on any sales of the technology or of any derivative technology, and on any services performed that relate to the technology. Defendants also agreed to mark all of their products that are based on the technology with a logo that indicates the product is based on Alion’s intellectual property. The defendants further agreed to make full and periodic reports of their sales activities to Alion and to submit to an audit upon demand. Also, defendants agreed to, and in fact did, issue a written and signed repudiation of defamatory statements towards Alion’s technology.

     Other than the foregoing action, the Company is not involved in any material legal proceeding other than routine legal proceedings occurring in the ordinary course of business.

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

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

     In May 2004, the Company raised approximately $2.5 million in cash through a private placement of its common stock. The Company sold 97,483 shares to the ESOP Trust at $14.71 per share and 72,556 shares at $16.56 per share. The Company issued an additional 130,947 shares to the ESOP Trust, at an average price per share of $16.56, as a contribution to the KSOP Plan. The shares of stock were offered pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     None.

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

     None.

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ITEM 5. OTHER INFORMATION

     None.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibit
No.	Description
3.1	Second Amended and Restated Certificate of Incorporation of Beagle Holdings, Inc.(1)
3.2	Amended and Restated By-laws of Alion Science and Technology Corporation.(2)
4.1	Amended and Restated Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan.(3)
4.2	First Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan.(4)
4.3	Second Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan.(5)
4.4	Third Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan. (5)
4.5	Fourth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan. (5)
4.6	Fifth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan. (6)
4.7	Sixth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan. (6)
4.8	Seventh Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan. (6)
4.9	Eighth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan. (6)
4.10	Ninth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan.
10.33	Third Amendment to the Credit Agreement by and among LaSalle Bank National Association as agent, various lenders and Alion Science and Technology Corporation.
10.34	Addendum to Employment Agreement between Alion Science and Technology Corporation and James Fontana.
10.35	Second Amendment to the Alion Science and Technology Corporation Phantom Stock Plan.
31.1	Certification of Chief Executive Officer of Alion Science and Technology Corporation pursuant to Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
31.2	Certification of Chief Financial Officer of Alion Science and Technology Corporation

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	pursuant to 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
32.1	Certification of Chief Executive Officer of Alion Science and Technology Corporation, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer of Alion Science and Technology Corporation, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)	Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Pre-Effective Amendment No. 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)
(2)	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).
(3)	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).
(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 (File no. 950133-03-002960).
(6)	Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on April 28, 2004 (File no. 950133-04-001602).

(b) Reports on Form 8-K:

During the quarter, the Company did not file a Report on Form 8-K.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ALION SCIENCE AND TECHNOLOGY CORPORATION

Date: August 13, 2004	By: /s/ John M. Hughes
	Name: John M. Hughes
	Title: Chief Financial Officer
	(Principal Financial and Accounting Officer
	and Duly Authorized Officer)

44

EXHIBIT INDEX

Exhibit
No.	Description
3.1	Second Amended and Restated Certificate of Incorporation of Beagle Holdings, Inc.(1)
3.2	Amended and Restated By-laws of Alion Science and Technology Corporation.(2)
4.1	Amended and Restated Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan.(3)
4.2	First Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan.(4)
4.3	Second Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan.(5)
4.4	Third Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan. (5)
4.5	Fourth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan. (5)
4.6	Fifth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan. (6)
4.7	Sixth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan. (6)
4.8	Seventh Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan. (6)
4.9	Eighth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan. (6)
4.10	Ninth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan.
10.33	Third Amendment to the Credit Agreement by and among LaSalle Bank National Association as agent, various lenders and Alion Science and Technology Corporation.
10.34	Addendum to Employment Agreement between Alion Science and Technology Corporation and James Fontana.
10.35	Second Amendment to the Alion Science and Technology Corporation Phantom Stock Plan.
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.

45

31.2	Certification of Chief Financial Officer of Alion Science and Technology Corporation pursuant to 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
32.1	Certification of Chief Executive Officer of Alion Science and Technology Corporation, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer of Alion Science and Technology Corporation, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)	Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Pre-Effective Amendment No. 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).
(2)	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).
(3)	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).
(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 (File no. 950133-03-002960).
(6)	Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on April 28, 2004 (File no. 950133-04-001602).

46

EX-10.33

EXHIBIT 10.33

AMENDMENT NO. 3
to
CREDIT AGREEMENT

          THIS AMENDMENT NO. 3 TO CREDIT AGREEMENT (the “Amendment”) is made as of May 28, 2004 by and among ALION SCIENCE AND TECHNOLOGY CORPORATION (the “Borrower”), the institutions listed on the signature pages hereof (the “Lenders”), and LASALLE BANK NATIONAL ASSOCIATION, in its individual capacity as a Lender and in its capacity as contractual representative (the “Administrative Agent”) under that certain Credit Agreement dated as of December 20, 2002 by and among the Borrower, the institutions from time to time parties thereto as lenders, and the Administrative Agent (as amended by an Amendment No. 1 dated as of February 6, 2004, and by an Amendment No. 2 dated as of March 31, 2004, and as further amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”). Defined terms used herein and not otherwise defined herein shall have the meaning given to them in the Credit Agreement.

WITNESSETH

                WHEREAS, the Borrower, the Lenders, and the Administrative Agent are parties to the Credit Agreement; and

                WHEREAS, the Borrower has requested that the Administrative Agent and the Request Lenders amend the Credit Agreement and grant a consent, in each case, on the terms and conditions set forth herein; and

                WHEREAS, the Borrower, the Request Lenders, and the Administrative Agent have agreed to amend the Credit Agreement and grant the consent, in each case, on the terms and conditions set forth herein;

                NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto have agreed to the following amendments to the Credit Agreement:

                1. Amendments to the Credit Agreement. Effective as of February 11, 2004, notwithstanding that certain Amendment No. 2, dated as of March 31, 2004, by and among the Borrower, the Lenders and the Administrative Agent, and subject to the satisfaction of the conditions precedent set forth in Section 4 below, the Credit Agreement is hereby amended as follows:

1.1. Section 1.01 of the Credit Agreement is hereby amended by adding the following term to such Section in proper alphabetical order:

	“Amstutz Note” means that certain note due 2009, issued by the Borrower in the aggregate principal amount of $750,000.00 and purchased by Gary Amstutz, as amended, supplemented or modified in accordance with Section 7.3(BB) hereof.
1.2.	Section 1.01 of the Credit Agreement is hereby amended by deleting the defined term “Subordinated Notes” thereof in its entirety and replacing it with the following:
	“Subordinated Notes” means, collectively, the Senior Subordinated Notes, the Junior Subordinated Notes and the Amstutz Note.
1.3.	Section 1.01 of the Credit Agreement is hereby amended by deleting the defined term “Transaction Documents” thereof in its entirety and replacing it with the following:
	“Transaction Documents” means the Loan Documents and the documents executed and delivered, or adopted, by the Borrower or any of its Subsidiaries or the ESOT Trustee or the ESOP Fiduciary in connection with the IITRI Acquisition, the ESOT Transaction and the issuance of the Senior Subordinated Notes, the Junior Subordinated Notes and, from and after February 11, 2004 as executed on such date, the Amstutz Note, including, without limitation, the Asset Purchase Agreement, the Seller Warrants, the Rights Agreement, the ESOT Transaction Documents, the Senior Subordinated Notes, the Junior Subordinated Notes, the Securities Purchase Agreements, and, from and after February 11, 2004 as executed on such date, the Amstutz Note, but excluding the ESOP Plan Documents.
1.4.	Section 7.3(F) is amended by adding the following subclause (viii) to such Section:
	(viii) Restricted payments that constitute mandatory payments of interest due on the Amstutz Note, unless such payments are prohibited by the terms of such Indebtedness (or any subordination agreement applicable thereto);
1.5.	Section 7.3(F) is amended by deleting the last paragraph thereof in its entirety and replacing it with the following:
	provided, however, that in no event shall any Restricted Payments (other than (1) to the Borrower, (2) as permitted by clause (ii) above, and (3) Restricted Payments resulting from distributions by the ESOT to participants in the ESOP pursuant to the ESOP Plan Documents (x) subsequent to the termination by participants in the ESOP of employment with the Borrower or any Controlled Group member or (y) as required by Section 401(a)(28) of the Code or any substantially similar Requirement of Law, and (4) Restricted Payments resulting from contributions to the ESOT as required under the ESOP Plan Documents) be declared or made if either a Default or an Unmatured Default shall have occurred and be continuing at the date of declaration or payment thereof or would result therefrom; provided, further, that in no event shall any Restricted

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Payment be permitted under clauses (v) and (viii) above unless the Borrower shall have delivered to the Administrative Agent a compliance certificate in substantially the form of Exhibit H hereto for the most recently completed fiscal quarter calculated giving effect to such Restricted Payment as of the last day of such prior fiscal quarter and certifying that the Borrower is in compliance with the financial covenants in Section 7.4 as of the last day of such prior fiscal quarter.

                2. Consent. Effective as of the date of this Amendment and subject to the satisfaction of the conditions precedent set forth in Section 4 below, the Request Lenders hereby consent to permit the Borrower to suspend its efforts to enter into Collection Account Agreements with respect to each deposit account described in Attachment B attached hereto.

                3. Conditions of Effectiveness. The effectiveness of this Amendment is subject to the conditions precedent that the Administrative Agent shall have received the following:

(a)	duly executed originals of this Amendment from each of the Borrower, the Request Lenders and the Administrative Agent;
(b)	duly executed originals of a Reaffirmation in the form of Attachment A attached hereto from each of the Borrower’s Subsidiaries identified thereon;
(c)	duly executed copy of the Amstutz Note and duly executed original of that certain Subordination Agreement, executed as of February 11, 2004, by and between Gary Amstutz and the Administrative Agent;
(d)	duly executed original opinion of Baker & McKenzie, as counsel to the Borrower, addressed to the Borrower and to the Administrative Agent and the Lenders;
(e)	duly executed copy of an amendment to the Senior Subordinated Securities Purchase Agreement consenting to the issuance of the Amstutz Note;
(f)	such other documents, instruments and agreements as the Administrative Agent may reasonably request.

                4. Representations and Warranties of the Borrower.

(a)

The Borrower hereby represents and warrants that this Amendment, the attached Reaffirmation and the Credit Agreement, as previously executed and as amended hereby, constitute legal, valid and binding obligations of the Borrower and its Subsidiaries parties thereto and are enforceable against the Borrower and its Subsidiaries parties thereto in accordance with their terms (except as enforceability may be limited by bankruptcy, insolvency, or similar laws affecting the enforcement of creditors’ rights generally).

(b)

Upon the effectiveness of this Amendment and after giving effect hereto, (i) the Borrower hereby reaffirms all covenants, representations and warranties made in the Credit Agreement as amended hereby, and agrees that all such covenants, representations and warranties shall be true and correct as of the effective date of this Amendment (unless such representation and warranty is made as of a specific

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date, in which case such representation and warranty shall be true and correct as of such date) and (ii) no Default or Unmatured Default has occurred and is continuing.

                5. References to the Credit Agreement.

(a)	Upon the effectiveness of Section 1 hereof, on and after the date hereof, each reference in the Credit Agreement (including any reference therein to “this Credit Agreement,” “hereunder,” “hereof,” “herein” or words of like import referring thereto) or in any other Loan Document shall mean and be a reference to the Credit Agreement as amended hereby.
(b)	Except as specifically amended above, the Credit Agreement and all other documents, instruments and agreements executed and/or delivered in connection therewith, shall remain in full force and effect, and are hereby ratified and confirmed.
(c)	The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Administrative Agent or the Lenders, nor, except as expressly provided herein in respect of the Collection Account Agreements, constitute a waiver of any provision of the Credit Agreement or any other documents, instruments and agreements executed and/or delivered in connection therewith.

                6. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (INCLUDING 735 ILCS 105/5-1 ET SEQ., BUT OTHERWISE WITHOUT REGARD TO THE CONFLICT OF LAW PROVISIONS) OF THE STATE OF ILLINOIS.

                7. Headings. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose.

                8. Counterparts. This Amendment may be executed by one or more of the parties to this Amendment on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument.

[REMAINDER OF PAGE INTENTIONALLY BLANK]

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               IN WITNESS WHEREOF, this Amendment has been duly executed as of the day and year first above written.

ALION SCIENCE AND TECHNOLOGY CORPORATION, as Borrower
By:	/s/ John M. Hughes
	Name:	John M. Hughes
	Title:	Chief Financial Officer
LASALLE BANK NATIONAL ASSOCIATION, as Administrative Agent and as a Lender
By:	/s/ Scott D. Parsons
	Name:	Scott D. Parsons
	Title:	Vice President
NCB CAPITAL CORPORATION, as a Lender
By:	/s/ Meg Shrum
	Name:	Meg Shrum
	Title:	Vice President
BRANCH BANKING & TRUST COMPANY, as a Lender
By:	/s/ Gregg E. Dougherty
	Name:	Gregg E. Dougherty
	Title:	Senior Vice President

SIGNATURE PAGE TO AMENDMENT NO. 3

U.S. BANK NATIONAL ASSOCIATION, as a Lender
By:	/s/ Tim Fossa
	Name:	Tim Fossa
	Title:	Vice President
ORIX FINANCIAL SERVICES, INC., as a Lender
By:	/s/ Christopher L. Smith
	Name:	Christopher L. Smith
	Title:	Authorized Representative

SIGNATURE PAGE TO AMENDMENT NO. 3

ATTACHMENT A

REAFFIRMATION

               The undersigned hereby acknowledges receipt of a copy of the foregoing Amendment No. 3 to the Credit Agreement dated as of December 20, 2002 by and among ALION SCIENCE AND TECHNOLOGY CORPORATION (the “Borrower”), the institutions from time to time parties thereto (the “Lenders”), and LASALLE BANK NATIONAL ASSOCIATION, a national banking association, in its individual capacity as a Lender and in its capacity as contractual representative (the “Administrative Agent”)(as amended by an Amendment No. 1 dated as of February 6, 2004, and by Amendment No. 2 dated as of March 31, 2004 and as further amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”), which Amendment No. 3 is dated as of May 28, 2004 (the “Amendment”). Capitalized terms used in this Reaffirmation and not defined herein shall have the meanings given to them in the Credit Agreement. Without in any way establishing a course of dealing by the Administrative Agent or any Lender, the undersigned reaffirms the terms and conditions of the Guaranty, the Security Agreement and any other Loan Document executed by it and acknowledges and agrees that such agreement and each and every such Loan Document executed by the undersigned in connection with the Credit Agreement remains in full force and effect and is hereby reaffirmed, ratified and confirmed. All references to the Credit Agreement contained in the above-referenced documents shall be a reference to the Credit Agreement as so modified by the Amendment and as the same may from time to time hereafter be amended, modified or restated.

Dated: May 28, 2004

HUMAN FACTORS APPLICATIONS, INC.
By /s/ John M. Hughes
Name:	John M. Hughes
Title:	Treasurer

REAFFIRMATION SIGNATURE PAGE TO AMENDMENT NO. 3

ATTACHMENT B

DEPOSIT ACCOUNTS

	Account	Balance
Bank Name	Number	04/30/04	Contact
Compass Bank-Alabama	046-9598-4	GENERALLY	256-532-6240
Cashier’s Account		BELOW 20K
P.O. Box 10566
Birmingham, AL 35296
First Hawaiian Bank		GENERALLY	Evelyn Ferrera
Payroll		BELOW 100K	003eve@fhwn.com
Maite Branch 03-067513			671-475-7855
400 Route 8			Note: Guam is approx 15-16 hours
Mongmong, Guam 96927			later than our time zone
First Hawaiian Bank		GENERALLY	SAME
Cashier’s Account		BELOW 40K
Maite Branch 03-074250
400 Route 8

REAFFIRMATION

               The undersigned hereby acknowledges receipt of a copy of the foregoing Amendment No. 3 to the Credit Agreement dated as of December 20, 2002 by and among ALION SCIENCE AND TECHNOLOGY CORPORATION (the “Borrower”), the institutions from time to time parties thereto (the “Lenders”), and LASALLE BANK NATIONAL ASSOCIATION, a national banking association, in its individual capacity as a Lender and in its capacity as contractual representative (the “Administrative Agent”)(as amended by an Amendment No. 1 dated as of February 6, 2004, and by an Amendment No. 2 on March 31, 2004, and as further amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”), which Amendment No. 3 is dated as of May     , 2004 (the “Amendment”). Capitalized terms used in this Reaffirmation and not defined herein shall have the meanings given to them in the Credit Agreement. Without in any way establishing a course of dealing by the Administrative Agent or any Lender, the undersigned reaffirms the terms and conditions of the Guaranty, the Security Agreement and any other Loan Document executed by it and acknowledges and agrees that such agreement and each and every such Loan Document executed by the undersigned in connection with the Credit Agreement remains in full force and effect and is hereby reaffirmed, ratified and confirmed. All references to the Credit Agreement contained in the above-referenced documents shall be a reference to the Credit Agreement as so modified by the Amendment and as the same may from time to time hereafter be amended, modified or restated.

Dated: May    , 2004 HUMAN FACTORS APPLICATIONS, INC.
By /s/ John M. Hughes
Name:	John M. Hughes
Title:	Treasurer

REAFFIRMATION SIGNATURE PAGE TO AMENDMENT NO. 3

EX-10.34

EXHIBIT 10.34

EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT (the “Agreement”) is made this 2nd day of February, 2004, by and between Alion Science and Technology Corporation, a Delaware corporation (the “Company”) and James C. Fontana (the “Employee”).

     WHEREAS, the Company and Employee desire to enter into this Agreement as of the date hereof and no other agreement concerning employment,except as provided in the Employee’s Offer of Employment, dated January 15, 2004 (the “Offer Letter”), attached hereto and incorporated herein by reference.

     NOW THEREFORE, in consideration of the foregoing recitals and mutual promises and conditions set forth herein, and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Employee agree as follows:

     1. Employment. Upon the terms and subject to the conditions contained herein, the Company hereby employs the Employee as Senior Vice President, and General Counsel and Secretary, at will and terminable by either party at any time for any reason, with or without prior notice, subject to the terms and provisions of this Agreement.

     3. Compensation. The Employee’s salary (“Annual Base Salary”) and benefits shall be as set forth in the Offer Letter initial base salary during the term of this Agreement shall be Two Hundred and Twenty Five Thousand Dollars and No/100 Cents ($225,000.00) per annum (“Annual Base Salary”). Commencing with the Company’s first performance review cycle after the effective date of employment, the Employee shall participate in the Company’s annual performance review process, at which time the Company may at its sole discretion increase annual base salary as deemed appropriate by the Company, which shall become the new Annual Base Salary when effective.

     4. Term. Unless terminated or extended in accordance with the provisions hereof, the term of this agreement shall commence on the Effective Date and end the second anniversary of the Effective Date (“Term”). Nondisclosure of Proprietary Company Information. During the term of this Agreement and for a period of two (2) years thereafter, Employee agrees: (a) to treat all Company Proprietary Information in a secret and confidential manner, take all reasonable steps to maintain such secrecy, and comply with all applicable procedures established by the Company with respect to maintaining the secrecy and confidentiality of Company Proprietary Information; (b) to use Company Proprietary Information only as necessary and proper in the performance of Employee’s duties as an employee of the Company; and (c) except as required in this Section, to not directly or indirectly, without the written consent of the Company, reproduce, copy, disseminate, publish, disclose, provide or otherwise make available to any person, firm, corporation, agency or other entity, any Company Proprietary Information. Under no circumstances shall Employee use, directly or indirectly, any such Company Proprietary Information for his or her personal gain or profit.

     5. Change of Control Benefits.

          A. In the event of a Change of Control, as defined herein below, if the Employee meets the Eligibility Requirements set forth in section 6 below, the Company’s successor or assign shall pay Employee, in lieu of severance benefits, a lump sum amount equal to the amount of Employee’s Annual Base Salary as of the date of the Change of Control.

          B. In addition to the salary benefits provided in Section 5A, Employee shall have continued eligibility to participate, for a period of one (1) year from the Termination Date as defined herein (the “Post Termination Period”) ,in the Company’s successor’s or assigns’ insured welfare benefit plans and policies (including, without limitation, health, dental, vision, disability and term life insurance benefits) at the same level of employee cost and at the same level of coverage provided to Employee as of the Termination Date, it being understood that the Company’s successor or assign has and reserves the right to amend, modify or replace such plans or policies to provide substantially similar insured coverage during the Post Termination Period. For purposes of the Company’s successor or assigns welfare benefit plans and policies subject to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”),

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Employee’s “qualifying event” for COBRA purposes shall be the Termination Date.(The salary and other benefits specified in Sections 5A and B hereof are collectively referred to as the “Severance Benefits”). Employee shall enjoy continued entitlement to such other accrued or earned and vested benefits provided under the Company’s successor’s or assign’s plans, programs, policies and practices as of the Termination Date.C. Notwithstanding any other provision under this Agreement, Employee shall not be entitled to receive the Severance Benefits in the event that: (i) the Company’s successor or assign (or any of its respective affiliates) terminates Employee’s employment for Cause (as defined in Section 5D below); (ii) Employee dies (in which case the terms of Section 5E below shall apply); (iii) Employee is determined to be totally and permanently disabled (in which case the terms of Section 5E shall apply); or (iv) Employee resigns other than for Good Reason. In any such event, Employee, in addition to any benefits payable in accordance with this Agreement, shall be entitled only to his salary and benefits accrued or earned and vested under other plans, programs, policies, practices and coverages of the Company’s successor or assign (or any of its respective affiliates).

          D. For purposes of this Agreement, “Cause” is defined as the occurrence of one of the following: (i) the Employee’s breach of any material provision of this Agreement; (ii) any act, failure to act, series of acts or failures to act, or course of conduct of Employee constituting reckless, willful, or criminal misconduct in the performance of duties specified in this Agreement; (iii) any failure to perform, or gross negligence or incompetence in the performance of, the duties specified in this Agreement; or (iv) the Employee’s commission of a crime involving conversion, misappropriation, larceny, theft, fraud, dishonesty, embezzlement, moral turpitude or any other felony, regardless of whether such crime involves the Company. Following an initial determination by the President that Cause exists, the President shall provide Employee with written notice of the details of the alleged Cause and opportunity to a hearing before the Chairman of the Board of Directors to contest the validity of the initial determination. The President, with the concurrence of the Chairman of the Board of Directors, shall thereafter make a final determination as to whether Cause exists.

          E. In the event of Employee’s death or total disability (as defined in the Company’s long term disability insurance plan) at any time the Employee is entitled to benefits

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under this Section 5, the Company shall pay to Employee’s heir or personal representatives, as the case may be, six (6) monthly payments, each equal to one-twelfth (1/12) of Employee’s then-current salary, commencing with the first calendar month after termination. In the event of the Employee’s total disability at any time the Employee is entitled to benefits under this Section 5, the Company shall pay to Employee six (6) monthly payments, each equal to one-twelfth (1/12) of Employee’s then-current salary less any payments under the Company’s long term disability insurance plan that Employee receives or is entitled to receive in each such month, commencing with the first calendar month after termination.

     6. Eligibility for Change of Control Benefits. If Employee terminates employment with any successor or assign (or any of their respective affiliates) of the Company at any time during the twenty four (24) month period beginning on the effective date of a Change in Control (the “Protection Period”), he shall be entitled to the Change of Control Benefits described in Section 5. If during the Protection Period, Employee terminates his employment for Good Reason (as defined below) by delivering to the successor or assign of the Company (or its respective affiliate), as applicable, each no later than thirty (30) days after learning of the occurrence of an event constituting Good Reason: (i) a Preliminary Notice of Good Reason (as defined below); and (ii) a Notice of Termination (as defined below); Employee shall have the right, in his sole and reasonable discretion, to receive Change of Control Benefits. For purposes of this Agreement, the following terms shall have the respective meanings:

          A. “Good Reason” shall only result upon the occurrence, without Employee’s prior written consent, of one or more of the following events, as determined by Employee in good faith, during the Protection Period: (i) Employee’s authority or responsibility has materially diminished as compared to Employee’s authority and responsibility in effect immediately prior to a Change in Control; (ii) Employee has been assigned permanent duties inconsistent with his position, responsibility and status with the Company immediately prior to the Protection Period; (iii) there has been an adverse change in Employee’s title or office as in effect immediately prior to the Protection Period; (iv) Employee’s base pay or incentive compensation has been reduced; or (v) Employee’s principal work location is more than ten (10) miles away from the principal work location as immediately prior to the Protection Period; provided, however, that “Good

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Reason” shall not include (x) acts not taken in bad faith that are cured by the Company’s successor or assign in all respects, including without limitation restoration of all back pay and incentive compensation through the Termination Date, not later than thirty (30) days from the date of receipt by the successor or assign of the Company (or its respective affiliate), as applicable, of a written notice from Employee identifying in reasonable detail the act or acts constituting “Good Reason” in a “Preliminary Notice of Good Reason”, or (y) acts for which Employee does not provide a Preliminary Notice of Good Reason within thirty (30) days of learning of the occurrence of the event constituting Good Reason.

           B. “Notice of Termination” shall mean a notice that indicates in reasonable detail the facts and circumstances claimed to provide a basis for termination of Employee’s employment.

           C. “Termination Date” shall mean the date specified in the Notice of Termination for termination of Employee’s employment under this Agreement.

     7. Change in Control. For the purposes of this Agreement, a “Change of Control” shall mean and shall be effective upon the closing date of: (i) the dissolution or liquidation of the Company; (ii) the merger or consolidation of the Company with any other corporation, foundation, association or other entity which results in the Company’s shareholders owning less than 51% of the resulting merged or consolidated entity; (iii) the amendment of the Company’s corporate documents to grant a party other than the Company’s Employee Stock Ownership Plan, the right to designate, elect or remove a majority of the Company’s voting directors; or (iv) the transfer to another corporation, foundation, association or other entity in a sale, lease, exchange or other similar transfer (in a single transaction or in a series of related transactions) of all or substantially all of the assets of the Company.

     8. Indemnification. The Company shall indemnify, defend, hold and save Employee, his heirs, administrators or executors harmless from any and all actions and causes of actions, claims, demands, liabilities, losses, costs, damages or expenses of whatsoever kind of nature, including judgments, interest and attorney’s fees, that Employee, his heirs, administrators or executors may sustain or incur subsequent to the date of this Agreement or become subject to

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by reason of any claim or claims, resulting from Employee’s execution of the terms and conditions of this Agreement, except for Employee’s fraudulent or criminal acts or omissions or gross negligence except as prohibited by applicable law.

     9. Miscellaneous.

          A. Any notices required by this Agreement shall: (i) be delivered by messenger or made in writing and mailed by certified mail, return receipt requested, with adequate postage prepaid; (ii) be deemed given when so delivered or mailed; and (iii) in the case of the Company, be delivered or mailed to its office at 1750 Tysons Boulevard, Suite 1300, McLean, Virginia 22102-4213, Attn: Chief Executive Officer, or in the case of the Employee, be mailed to the last home address that the Employee has given to the Company.

          B. The obligations and duties of the Employee under this Agreement are personal and not assignable. This Agreement shall be binding upon and inure to the benefit of, the parties, their successors, assigns, personal representatives, distributes, heirs, and legatees. If any term or provision of this Agreement is held to be illegal or invalid, such illegality or invalidity shall not affect the remaining terms or provisions hereof, and each such remaining term and provision of this Agreement shall be enforced to the fullest extent permitted by law.

          C. If any dispute arises under this Agreement, such dispute shall be referred to a panel of three (3) arbitrators for resolution. The three-arbitrator panel shall be selected as follows: the Company will designate one arbitrator, the Employee will designate one arbitrator, and the two designees will mutually select the third. The American Arbitration Association’s Voluntary Labor Arbitration Rules shall govern procedures for the arbitration, unless the three arbitrators unanimously agree to adopt a different rule or rules. The arbitration shall occur in the the City of McLean, Virginia. Notwithstanding the foregoing, and specifically in the event of a dispute over the Employee’s termination by the Company, Employee may, at his or her option, elect to have a court rather than an arbitrator resolve the dispute.

          D. This Agreement may be altered, amended or modified only by written agreement signed by both the Employee and the Company. No oral modification of this Agreement, or of any part of this Agreement including this paragraph, shall have any force or effect. No waiver by either of such parties of their rights under this Agreement shall be deemed

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to constitute a waiver with respect to any subsequent occurrences or transactions hereunder unless such waiver specifically states that it is to be construed as a continuing waiver.

          E. In any action or claim brought by either party against the other under or pursuant to this Agreement, the substantially prevailing party shall be entitled to an award of all actual attorney’s fees, costs and expenses incurred by the substantially prevailing party.

          F. This Agreement contains the entire understanding between the parties and supersedes any prior written or oral agreement(s) between the Company and Employee relating to the subject matter contained herein. This Agreement shall not be modified or waived except by written instrument signed by the parties.

          G. This Agreement shall be governed by, construed and enforced in accordance with the laws of the Commonwealth of Virginia.

ALION SCIENCE AND TECHNOLOGY
CORPORATION	EMPLOYEE
/s/ Katherine C. Madaleno	/s/ James C. Fontana
Signature	Signature
Katherine C. Madaleno	James C. Fontana
Name	Name
Corporate Vice President
Director, Human Resources, Payroll and Risk Management
Title

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EX-10.35

EXHIBIT 10.35

SECOND AMENDMENT TO THE
ALION SCIENCE AND TECHNOLOGY CORPORATION
PHANTOM STOCK PLAN

WHEREAS, Alion Science and Technology Corporation (“Alion”) adopted the Alion Science and Technology Corporation Phantom Stock Plan (the “Plan”), effective February 11, 2003; and

WHEREAS, Alion amended the Plan by adoption of the First Amendment, effective November 11, 2003; and

WHEREAS, Alion desires to further amend the Plan to permit participants in the Plan to elect to continue to participate in Phantom Stock awards by deferring the exercise of Phantom Stock awards;

NOW, THEREFORE, pursuant to the powers reserved in Article 8 of the Plan, Alion does hereby amend the Plan, effective as of June 25, 2004:

Section 1

Article 2, Definitions, is hereby amended by adding the following defined terms to the Plan:

2.14A “Exercise Date” shall mean the date as of which a Participant surrenders Phantom Stock shares.

2.23 “Valuation Date” shall mean a date as of which the Fair Market Value of Common Stock of the Company is determined.

Section 2

Section 5.4 of the Plan is hereby renamed “Amount of Payment Upon Exercise of Awards.”

Section 3

Section 6.1 of the Plan is amended by inserting the phrase “exercise or” immediately before the phrase “receive payment for”, wherever it appears.

Section 4

(a) Section 7.1 of the Plan is hereby amended to state as follows, effective for any Phantom Stock shares that become vested after the effective date hereof:

7.1 Exercise of Awards. A Participant may elect to exercise any vested shares of Phantom Stock by filing a written election to exercise with the Plan Administrator at least six (6) months in advance of the Exercise Date and at least three (3) months in advance of the Valuation Date that will apply to such Exercise Date; provided, however, that the Phantom Stock that becomes vested on November 12, 2004 may be exercised as of November 12, 2004, based upon an election by the Participant filed no later than August 2, 2004. Notwithstanding the foregoing, the

Exercise Date of vested shares of Phantom Stock shall not be earlier than the date the Phantom Stock becomes vested nor later than the earliest of (1) the date of the occurrence of an event described in Section 6.2(a), (b), (c), (d) or (e), or any other Termination of Employment of the Participant; (2) the date of a Change in Control; or (3) the fifth (5^th) anniversary of the date of grant of the Phantom Stock. An election to exercise Phantom Stock shall be made in such form and at such time as the Administrator deems acceptable.

(b) Section 7.2 of the Plan is hereby amended to state as follows, effective for any Phantom Stock shares that become vested after the effective date hereof:

7.2 Amount and Timing of Payment. A Participant shall be entitled to a cash payment upon exercise of an Award equal to the number of shares of Phantom Stock subject to exercise multiplied by the Fair Market Value as of the Valuation Date coincident with or immediately preceding the Exercise Date; provided, however, that in the case of exercise due to a Change in Control, the Fair Market Value as of the date of the Change in Control or the immediately preceding Valuation Date, whichever is higher, shall be used. Except as provided in Section 7.3, the Company shall make payment of the amount receivable upon the exercise of an Award by the delivery of cash in a lump sum within sixty (60) days of such exercise. Notwithstanding the foregoing, the Administrator has the discretion to delay payment of an Award for a period not to exceed five (5) years from the date of vesting. If the determination is made to delay the payment, the unpaid balance shall bear interest at the prime rate as announced in the Wall Street Journal on the Exercise Date. In making this determination, the Administrator will examine the available cash and anticipated cash needs of the Company.

(c) Section 7.3 of the Plan is hereby amended to state as follows, effective for any Phantom Stock shares that become vested after the effective date hereof:

7.3 Election to Defer Benefits. If a Participant has elected as the Exercise Date for Phantom Stock the fifth (5^th) anniversary of the date of grant of such Phantom Stock, and the Participant is also a participant in the Alion Science and Technology Corporation Executive Deferred Compensation Plan (the “Deferred Compensation Plan”), he or she may elect, at least 180 days prior to such Exercise Date, to defer receipt of all or a portion of the Plan benefit through a contribution to the Deferred Compensation Plan equal to the amount that would otherwise have been payable under Section 7.2.

(d) A new Section 7.6 is hereby added to the Plan, to state as follows:

7.6 Modification of Permitted Elections. In the event of a change in law or regulation that may result in adverse tax consequences to a Participant as a result of exercising Phantom Stock shares after the shares become vested, or as a result of a deferral election permitted under Section 7.3, or the availability of any such election, the Administrator may require that Participants file any such election(s) earlier than the date or dates set forth above, or may limit the availability of any such election entirely; provided, however, that Participants shall, as of the date of grant of shares of Phantom Stock, be entitled to elect to receive the value of any vested shares of Phantom Stock as of the date such shares become vested. Any modification hereunder shall apply to all similarly-situated Participants on a nondiscriminatory basis.

2

IN WITNESS WHEREOF, the undersigned has caused this instrument to be executed as of June 25, 2004, and certifies that the foregoing Plan Amendment was duly adopted by the Board of the Company on June 25, 2004.

Alion Science and Technology Corporation
By:	/s/ Bahman Atefi
	Chief Executive Officer
Attest:	/s/ Jonathon Emery
	Secretary

3

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

FOR THE CHIEF EXECUTIVE OFFICER

     I, Bahman Atefi, certify that:

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

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

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

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

     a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     b) [Reserved]

     c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 13, 2004
	By:
	/s/ Bahman Atefi
	Name: Bahman Atefi
	Title: Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

FOR THE CHIEF FINANCIAL OFFICER

     I, John M. Hughes, certify that:

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

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

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

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

     a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     b) [Reserved]

     c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 13, 2004
	By:
	/s/ John M. Hughes
	Name: John M. Hughes
	Title: Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Quarterly Report of Alion Science and Technology Corporation (the “Corporation”) on Form 10-Q for the period ending June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Bahman Atefi, Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Corporation.

Date: August 13, 2004
	By:
	/s/ Bahman Atefi
	Name: Bahman Atefi
	Title: Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Quarterly Report of Alion Science and Technology Corporation (the “Corporation”) on Form 10-Q for the period ending June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John M. Hughes, Chief Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Corporation.

Date: August 13, 2004
	By:
	/s/ John M. Hughes
	Name: John M. Hughes
	Title: Chief Financial Officer