10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

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

Alion Science and Technology Corporation

(Exact name of Registrant as Specified in its Charter)

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

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

(Address, including Zip Code and Telephone Number, including

Area Code, of Principal Executive Offices)

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

None

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

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

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

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

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

Documents Incorporated by Reference:

None

ALION SCIENCE AND TECHNOLOGY CORPORATION

FORM 10-K

TABLE OF CONTENTS

PART I
	Item 1.	Business	2
	Item 2.	Properties	26
	Item 3.	Legal Proceedings	26
	Item 4.	Submission of Matters to a Vote of Security Holders	26
PART II
	Item 5.	Market for Registrant’s Common Stock and Related Stockholder Matters	26
	Item 6.	Selected Financial Data	27
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
	Item 7a.	Quantitative and Qualitative Disclosures about Market Risk	52
	Item 8.	Financial Statements and Supplementary Data	54
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	96
	Item 9a.	Controls and Procedures	96
	Item 9b.	Other Information	96
PART III
	Item 10.	Directors and Executive Officers of the Registrant	97
	Item 11.	Executive Compensation	102
	Item 12.	Security Ownership of Certain Beneficial Owners and Management	112
	Item 13.	Certain Relationships and Related Transactions	113
	Item 14.	Principal Accounting Fees and Services	114
PART IV
	Item 15.	Exhibits, Financial Statement Schedules	115
	Signatures		118

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PART I

Item 1. Business

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

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

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

Pro Forma Financial Data

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

Overview

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

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

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

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

Estimated Revenue by Fiscal Year*

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

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

* Revenues and percentages based on management estimates.

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

•  Wireless and communications-electronics engineering: we perform work for the government “communications-electronics” and commercial wireless communities. The term “communications-electronics” refers to all devices or systems that use the radio frequency spectrum. Our work for the government sector includes such tasks as conducting modeling and simulation of communications networks, testing and evaluating navigational systems, and analyzing radar and space systems performance. For our commercial customers, both foreign and domestic, we determine whether wireless communication networks have the geographic coverage the customers desire, and whether the

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	systems operate free of interference, and we make recommendations designed to improve network performance. We also evaluate and make recommendations for the design of radio transmitters, receivers and antennas for our commercial customers.
•	Spectrum management: we perform studies and analyses related to the manner in which the radio frequency spectrum may be utilized without interruption or interference by both new and existing users and technologies. In addition, we assess existing and new technologies for their ability to utilize the radio frequency spectrum efficiently — in other words, to accomplish designated tasks without using too much of the available radio frequency spectrum. Our services, which include providing spectrum policy advice, are used to support decisions of senior government officials in the U.S. and abroad.
•	C4ISR system engineering: we deliver Command, Control, Communication and Computer Intelligence, Surveillance, and Reconnaissance (C4ISR) engineering and analysis support for radio frequency communications, radar, Identification Friend or Foe (IFF), and navigation systems to the U.S. Department of Defense system developers and integrators. We also develop automated spectrum management software to assign frequencies to multiple users of the radio frequency spectrum in an effort to minimize interference. Our software tool, Spectrum XXI, is the automated spectrum management system used worldwide by the U.S. Department of Defense, and it is now also being used by other agencies of the federal government. We also design, integrate and deploy spectrum monitoring software to locate and track violators of the rules and regulations of spectrum usage.
•	Electromagnetic environmental effects: we perform studies and analyses to measure and predict electromagnetic environmental effects for both government and commercial customers. Our work has involved building automated tools designed to predict the effects of potential hazards of electromagnetic radiation to ordnance, fuel and personnel. We also analyze electronic components in automotive parts such as brakes and airbags for electromagnetic interference issues on behalf of various commercial customers.

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

•  Homeland security: we provide integrated solutions and vulnerability analysis for protecting people and systems, and we provide critical infrastructure tools for decision support, risk assessment, information assurance, and physical security.

•  Strategic planning and operational analysis: we assist the U.S. Army in its objective to become a more technologically sophisticated and versatile combat force by providing readiness studies that employ decision support tools to improve strategic planning and decision making.

•  Military transformation: we identify and analyze issues and programs of major importance for the Office of the Secretary of Defense (OSD) and related U.S. military services transformation initiatives such as joint warfare experimentation and integrate command, control, communication and computer intelligence (C4I) initiatives.

•  Logistics management: we provide support to the U.S. Army on a broad range of requirements including infrastructure assessment, reserve force mobilization, defense industrial base assessment, financial management, cost analysis, and base realignment.

•  Readiness assessments and operational support: we deliver strategic planning and decision-making process improvements by providing technical assistance and decision support tools, such as Full Spectrum Analysis and Distributed Information System Collaboration Architecture (DISCATM).

•  Distance learning services: we develop policy and technology solutions to permit training and education from remote locations. We develop the necessary technology, compile the information to be used in the courseware, and then translate this into an electronic or web-based advanced distant learning medium so that the student can interact with the courseware from a remote location.

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

•  Wargaming, experimentation, scenario design and execution: we design and conduct strategic and operations analytic wargames to evaluate future operational concepts and force transformation initiatives, create and implement training scenarios for 2 dimensional and 3 dimensional simulation systems, support Joint Forces Command’s (JFCOM) Millennium Challenge, and we support Joint Conflict and Tactical Simulation (JCATS) scenarios.

•  C4I integration: for the U.S. Department of Defense, we design and develop policies to enable standard automated interfaces between simulation and Command, Control, Communication and Computer Intelligence systems which support improved planning, training and military operations.

•  Analysis and visualization: we develop terrain modeling and manage the Modeling and Simulation Information Analysis Center (MSIAC) for the U.S. Department of Defense (DoD).

•  Phenomenological modeling: we develop phenomenological models for nuclear, chemical, biological and electromagnetic environments.

•  Transport systems: we design and build railroad car simulators and complementary training programs for railway carriers to train their employees. Participation in our simulation training is designed to improve safety and to minimize fuel consumption for carriers. Our training tools range from training simulators based on desktop computers to full motion simulators for both electric and diesel-electric locomotives. We have delivered our training tools and services to domestic government and commercial customers and to customers in the U.K., Brazil, Turkey, India, Australia and South Africa.

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

•  Enterprise architecture development and integration: we design, develop and implement enterprise information systems.

•  Applications development: we develop web-based and stand-alone solutions, as well as decision support tools.

•  Knowledge management: we deliver solutions for data warehousing/mining, decision support, and information analysis.

•  Network design and secure network operations: we provide information assurance, business continuity and disaster planning, network planning, and call center modeling.

•  Independent verification and validation: we implement modeling and simulation, test and evaluation, and database monitoring.

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

•  Reliability, material and manufacturing engineering: we apply technology to enhance production, improve performance, reduce cost and extend life of complex engineered products.

•  Sensor technology development: we develop, evaluate, adapt and integrate sensor technologies.

•  Facilities engineering: we provide expertise in engineering, architecture and related disciplines (e.g., construction management, logistics, design oversight and inspection).

•  Research and analysis center management: we manage numerous U.S. Department of Defense information and analysis centers such as the: Reliability Analysis Center (RAC), Advanced Materials and Processes Technology Information Analysis Center (AMPTIAC), Manufacturing Technology Information Analysis Center (MTIAC), Electronic Packaging and Interconnection Technology Center and DuPage Manufacturing Research Center.

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•  Acoustic engineering: we test and evaluate various components for sound transmission, absorption and intensity.

•  Aerospace coating production and application: we develop and apply coatings to protect government and commercial satellites.

•  Innovative manufacturing technologies: we develop and integrate systems for low-volume productivity (e.g., laser cladding of parts), micro-machines and rapid manufacturing systems.

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

•  Chemical and biological research: we provide research that examines the fundamentals necessary to improve defense strategy against chemical and biological weapons.

•  Analytical and design methods: we provide analytical methods to enhance safe handling of chemical substances and design methods to convert harmful chemical and biological materials into harmless materials.

•  Threat reduction: we provide technical expertise to branches of the U.S. military, the FBI, police departments, hospitals, fire departments, and other federal government and commercial customers, to reduce the threat of chemical-biological terrorism.

•  Laboratory support: we provide support to U.S. Environmental Protection Agency laboratories in their pursuit of identifying and monitoring chemical contaminants in soil, air and water at specified Superfund sites.

•  Explosive sciences: we provide unexploded ordnance services to the U.S. Army Corps of Engineers and to other departments of the U.S. military. Through our wholly-owned subsidiary, Human Factors Applications, Inc. (HFA), we develop and use technologies for detection, recovery and disposal of unexploded ordnance in the U.S. and abroad. We also perform decontamination and demolition of buildings and equipment contaminated with explosive materials.

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

      Nuclear Safety and Analysis. we provide nuclear safety and analysis services to the U.S. Department of Energy (DOE) and its National Laboratories as well as to the commercial nuclear power industry. Our services include:

•  Modeling and simulation: we provide services in the areas of computational fluid dynamics, structural response, materials behavior, and neutronics.

•  Safety and risk performance analysis: we provide services in the areas of probabilistic safety assessments, accident consequence analysis, and source term dose assessment.

•  Design and performance assessments: we provide services related to nuclear power facilities in the areas of control room habitability, power rate analysis, and license extension.

•  Management systems and program services: we provide technical expertise in the areas of compliance (e.g., regulatory analysis, policy development, and audits), project management, and training.

•  Regulatory compliance support services: we provide technical support in the areas of nuclear plant operational readiness reviews and conduct of operations.

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

•  Frequency Assignment & Certification Engineering Tool (FACET^TM). This software tool automates the assignment of radio frequencies, which we refer to as spectrum management, in a way that is designed to minimize interference between multiple users of the radio frequency spectrum.

•  Advanced Cosite Analysis Tool (ACAT^TM). This software tool is designed to permit co-location of numerous antennas on towers, rooftops and other platforms by predicting interference between the various systems and informing the user how to minimize interference.

•  Individual Isolation Pod (IIP^TM). This transport pod is designed to isolate and transport individuals contaminated with biological or chemical agents. The transport pod is designed to enable first responders to administer emergency medical treatment.

•  Spectrum Monitoring Automatic Reporting and Tracking System (SMART^TM). This system characterizes the frequency usage in a given geographic area, allowing the customer to remotely monitor the spectrum to identify unauthorized users and to look for gaps in the spectrum usage.

•  Cave Dog: This product is a small, remote-controlled hemispherical, multi-spectral vision robot vehicle used for surveillance and reconnaissance.

•  Real Time Location System (RTLS). This product is designed to enable customers to track thousands of users in a defined area, such as a seaport, a football stadium or an office building, using low cost antennas and badges.

Corporate History

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

The Acquisition and Deal Terms for the Purchase of Assets from IITRI (The “Transaction”)

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

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

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

      Assumption of Liabilities. Alion assumed substantially all of the liabilities of IITRI’s business, with certain identified exceptions.

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

The Purchase of Alion Common Stock by ESOP Trust

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

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

•  Alion’s and HFA’s organization and corporate standing, their authority to enter into the stock purchase agreement and the binding effect of the agreement on us;

•  the accuracy, compliance with U.S. generally accepted accounting principles and consistency with past practice of the financial statements with respect to the portion of IITRI’s business transferred to Alion; and

•  our obligation to repurchase any shares of our common stock distributed to ESOP participants.

      The ESOP trustee, on behalf of the ESOP trust, made representations and warranties to us, including, but not limited to:

•  the trustee’s authority to enter into the stock purchase agreement and the binding effect of the agreement on the ESOP trust; and

•  the investment intent of the ESOP trust.

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

•  we will not take any steps without the ESOP trust’s consent to change our status as an S corporation;

•  we will not enter into any transactions with any of our officers or directors without approval from our board of directors or compensation committee;

•  we will enforce our obligations under the asset purchase agreement with IITRI and other related agreements;

•  we will obtain the ESOP trust’s consent before effecting our first public offering of stock to be listed on any securities exchange;

•  we will not take actions that would prevent the ESOP trust from acquiring any additional shares of our stock under the control share acquisition provisions of the Delaware General Corporation Law;

•  we will repurchase any shares of common stock distributed to participants in the ESOP component of the KSOP, to the extent required by the ESOP, any ESOP related documents and applicable laws;

•  we will maintain the KSOP and the ESOP trust so that they will remain in compliance with the qualification and tax exemption requirements under the Internal Revenue Code; and

•  we will use our best efforts to ensure that the ESOP trust fully enjoys its right to elect a majority of our board of directors and to otherwise control Alion.

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

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

The Alion ESOP

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

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

•  rolling over their eligible retirement account balances into the ESOP component of the KSOP by making an individual one-time ESOP investment election available to new hires; and/or

•  directing a portion of their pre-tax payroll income to be invested in the ESOP component of the KSOP.

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

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

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

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

Growth Strategy

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

      To build on our experience in wireless communications. We anticipate that U.S. Department of Defense budgets for the next few years will reflect an increased emphasis on communications and spectrum issues in which we have established expertise. For example, we expect to play a significant role for the U.S. Department of Defense in the development of Global Electromagnetic Spectrum Information (GEMSIS) as part of the Department of Defense’s move toward net-centric warfare. In addition, civilian agencies of the federal government are interested in the communications solutions we have developed for the U.S. Department of Defense. We also intend to try to expand our communications research base to include more foreign and commercial customers.

      To support the nation in homeland security. Alion has a long history of research and development in defense and destruction of chemical and biological agents. We have also developed a suite of software tools to support first responders in training to deal with potential release of chemical, biological, or nuclear material. We plan to expand our support to the Department of Homeland Security (DHS) and state and local governments in these areas.

      To expand our defense operations research. We will seek to provide new services to the U.S. Department of Defense. We intend to expand our military planning, operations, readiness assessment, and distance learning services to the Navy; historically, more of our services in the defense arena have been provided to the Army and Air Force. We also intend to use our technical capabilities to develop modeling and simulation systems for all branches of the U.S. armed forces.

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      To expand our information technology research. We intend to promote our specialized information technology expertise to a broader range of customers, including the civilian agencies of the federal government, primarily by applying technology research and solutions originally developed for military use.

      To develop new software tool and technical products. We will seek to capture some of our intellectual property in the form of stand-alone tools and products to increase revenue. We intend to develop these tools and products to better serve existing customers, and to offer them separately as stand-alone tools and products for new customers.

      To recruit and retain highly skilled employees. We will seek to recruit and retain engineers, scientists, and technical experts with the experience, skills and innovation necessary to design and implement solutions to the complex problems our customers face. We will also seek to attract and retain other motivated professionals who have the qualities necessary to assist us in implementing our future business strategy and meeting our future business goals. As an employee owned company, we believe we will be able to provide enhanced financial incentives to our employees, and that those incentives will be important recruitment and retention tools.

      To pursue strategic acquisitions. We intend to broaden our customer base and our capabilities in our core research fields by pursuing strategic acquisitions from companies with talent and technologies complementary to our current fields and to our future business goals in order to add new clients and expand our core competencies. During fiscal year 2004, Alion completed the following acquisitions:

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

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

Market and Industry Background

Trends in government spending likely to affect our business.

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

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

•  Increased Spending on National Defense. The terrorist attacks of September 11, 2001 and subsequent events have intensified the federal government’s commitment to strengthen our country’s military, intelligence, and homeland security capabilities. Department of Defense appropriations, excluding military construction and supplemental appropriations to pay for the ongoing efforts in Iraq and Afghanistan, were increased from $366 billion in federal fiscal year 2004 to $391 billion for federal fiscal year 2005 and grew at an average annual growth rate over the past five years of 5.9%. In addition, the federal fiscal year 2005 Homeland Security budget proposal totaled $47 billion, with $27 billion allocated to initiatives in the Department of Homeland Security, $8 billion allocated to the Department of Defense, and $12 billion allocated to other federal agencies.

•  Increased interest in procurement and development. We expect that the U.S. Department of Defense budget for research and development, testing and evaluation (R,D,T&E), all of which fund our programs, will grow proportionately with overall defense spending.

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

•  training and training transformation;

•  modeling and simulation as basis for mission planning and preparation;

•  the enhancement of defenses against biological, chemical and nuclear attacks;

•  the use of information technology for national security; and

•  an overall increase in spending for homeland defense.

We are primarily a government contractor.

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

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

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

•  Cost-reimbursement contracts allow us to recover our direct labor and allocable indirect costs, plus a fee which may be fixed or variable depending on the contract arrangement. Allocable indirect costs refer to those costs related to operating our business that can be recovered under a contract.

•  Time-and-material contracts allow us to recover our labor costs, based on negotiated, fixed hourly rates, as well as certain other costs.

•  Under fixed-price contracts, customers pay us a fixed dollar amount to cover all direct and indirect costs, plus a fee. Under fixed-price contracts, we assume the risk of any cost overruns and receive the benefit of any cost savings.

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

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

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

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

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

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

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

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

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

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

•  in-process backlog, which refers to proposals that we are preparing to submit following a request from a customer, and

•  submitted backlog, which refers to proposals that we have submitted to a customer and for which we are awaiting an award decision.

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

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

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

Seasonality and Cyclicality

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

Corporate Culture

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

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

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

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

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Our Customers

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

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

Competition

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

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

•  technical capabilities and approach;

•  quality of the personnel, including management capabilities;

•  successful past contract performance; and

•  price.

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

S Corporation Status

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

•  one class of stock;

•  up to 75 shareholders; and

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

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

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

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

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

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

Business Development and Promotional Activities

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

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

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

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

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

Resources

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

Patents and Proprietary Information

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

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

Foreign Operations

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

Company Information Available on the Internet

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

Environmental Matters

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

•  emissions into the air,

•  discharges into the environment,

•  handling and disposal of regulated substances, and

•  contamination by regulated substances.

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

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

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

Risk Factors

Risks Related to Our Business

An economic downturn could harm our business.

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

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

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

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

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

      Our indebtedness could:

•  limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and other general corporate activities;

•  limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

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•  make it more difficult for us to satisfy our obligations to our creditors, including our repurchase obligations to ESOP participants, and, if we fail to comply with the requirements of the indebtedness, may require refinancing on terms unfavorable to us, or if refinancing is not possible, our creditors could accelerate the maturity of our indebtedness, which could cause us to default under other indebtedness, dispose of assets or declare bankruptcy;

•  limit our ability to successfully withstand a downturn in our business or the economy generally; and

•  place us at a competitive disadvantage against other less leveraged competitors.

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

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

•  funding of our contract backlog;

•  the time within which our customers pay our accounts receivable;

•  new contract awards and our performance under these contracts;

•  continued increase in revenues on an annual basis;

•  interest rate levels;

•  our status as an S corporation for federal income tax purposes; and

•  general economic conditions.

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

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

Risks Related to Our Industry

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

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

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

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

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

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

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

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

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

Government contracts contain termination provisions that are unfavorable to us.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

•  the frequent need to bid on programs in advance of the completion of their design, which may result in unforeseen technological difficulties and/or cost overruns;

•  the substantial time and effort, including design, development and promotional activities, required to prepare bids and proposals for contracts that may not be awarded to us; and

•  the design complexity and rapid rate of technological advancement of most of our research offerings.

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

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

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

      Our ability to compete for these contracts will depend on:

•  the effectiveness of our research and development programs;

•  our ability to offer better performance than our competitors at a lower or comparable cost;

•  the readiness of our facilities, equipment and personnel to perform the programs for which we compete; and

•  our ability to attract and retain key personnel.

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

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Risks Related To Our Operations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

•  modifications to current laws and regulations;

•  new laws and regulations;

•  new guidance or new interpretation of existing laws and regulations; or

•  the discovery of previously unknown contamination.

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Item 2. Properties

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

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

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

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

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

Item 3. Legal Proceedings

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

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

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

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

PART II

Item 5. Market for Registrant’s Common Stock and Related Stockholders Matters

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

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

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

Dividend Policy

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

Item 6. Selected Financial Data

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

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

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

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

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Selected Financial Data of Alion Science and Technology Corporation

For Years Ended September 30,

																	Pro Forma			Pro Forma
		2004(1)			2003(2)			2002(3)			2001(3)			2000(3)			2003(11)			2002(11)
		(In thousands, except share and per share data)
Consolidated Operating Data
Contract revenue		$	269,940		$	165,917		$	201,738		$	193,152		$	156,137		$	213,182		$	201,738
Direct contract expenses			196,388			120,559			147,377			140,555			111,122			155,214			147,377
Operating expenses(4)			73,703			46,273			48,488			41,726			39,641			64,842			57,942
Operating income (loss)			(151	)		(915	)		5,873			10,871			5,374			(6,874	)		(3,581	)
Other income (expense)(5)			(14,943	)		(11,701	)		(586	)		(1,072	)		(694	)		(13,847	)		(9,652	)
Income tax (expense) benefit(6)			(17	)		—			(589	)		(302	)		(398	)		(27	)		(589	)
Net income (loss)(7)		$	(15,111	)	$	(12,616	)	$	4,698		$	9,497		$	4,282		$	(20,748	)		(13,822	)
Basic and diluted loss per share			(4.91	)		(6.05	)
Basic and diluted weighted-average common shares outstanding			3,074,709			2,085,274
Unaudited pro forma as adjusted basic and diluted earnings (loss) per common share(8)																		(7.83	)		(5.37	)
Consolidated Balance Sheet Data at End of Period
Net accounts receivable		$	68,949		$	42,775		$	49,051		$	56,095		$	56,473
Total assets			188,461			144,754			71,096			76,309			82,702
Current portion of long-term debt			468			5,000			3,330			141			3,646
Long-term debt, excluding current portion			99,631			74,719			1,654			11,886			22,289
Redeemable common stock warrants			20,777			14,762			—			—			—
Long-term deferred gain on sale of building to Illinois Institute of Technology, excluding current portion			—			—			3,523			4,054			—
Other Data
Depreciation and amortization		$	13,447		$	9,553		$	3,447		$	3,488		$	3,754
Capital expenditures			3,678			1,329			3,643			1,940			2,795
Cash flows provided by (used in):
	Operating activities	$	5,675		$	14,264		$	14,713		$	7,907		$	(5,306	)
	Investing activities		(23,625	)		(61,428	)		(4,466	)		9,863			(2,967	)
	Financing activities		22,173			47,652			(9,851	)		(17,770	)		4,961
Funded contract backlog(9)			161,000			107,000			72,000			67,000			88,000
Unfunded contract backlog(10)			1,793,000			1,435,000			1,431,000			737,000			849,000
Number of employees			1,880			1,604			1,622			1,458			1,334

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

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

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

Operating results for these businesses are included in our consolidated totals from the respective dates of acquisitions.

(2)	For historical fiscal year 2003 (October 1, 2002 to September 30, 2003), the operations data presented reflects approximately nine months of Alion operations since the Transaction occurred on December 20, 2002, which was at the end of IITRI’s first quarter of operations for fiscal 2003. During the period October 1, 2002 to December 20, 2002, Alion was organizationally a business shell, operationally inactive until the Transaction occurred.
(3)	Represents consolidated operating and balance sheet data of the Selected Operations of IIT Research Institute which was acquired by Alion on December 20, 2002.
(4)	Operating expenses include (i) non-recurring transaction expenses of approximately $6.7 million and $6.4 million for fiscal years ended September 30, 2003 and 2002, respectively and (ii) non-recurring, conversion and roll-out expenses of approximately $1.5 million for the fiscal year ended September 30, 2003.
(5)	Other income (expense) for the year ended September 30, 2004 includes a gain of approximately $2.1 million on the sale of the Company’s minority interest in Matrics Incorporated. For the years ended September 30, 2004 and 2003, other income (expense) includes approximately $16.8 million and $13.9 million, respectively, in interest-related expense associated with the debt financing (which includes the related change in warrant valuation associated with the change in the share price of Alion stock) resulting from the Transaction. For the year ended September 30, 2000, other income includes a gain of $1.3 million on the sale of land in Annapolis, Maryland and a $0.5 million loss in equity of an affiliate.
(6)	Income tax (expense) benefit primarily relates to income (loss) of our for-profit, wholly-owned subsidiary, HFA prior to HFA becoming a Q-sub beginning on December 21, 2002.
(7)	The decrease in net income for the year ended September 30, 2002, as compared to the year ended September 30, 2001 is primarily attributable to approximately $6.4 million in non-recurring costs (e.g., outside legal, finance, accounting and audit fees) related to the acquisition of the Selected Operations of IITRI.
(8)	IITRI has operated as a non-stock, not-for-profit corporation since its inception. Therefore, prior to 2003, our historical capital structure is not indicative of our current capital structure and, accordingly, historical earnings per share information has not been presented. Pro forma basic and diluted earnings per common share are computed based upon approximately 2.575 million shares of our stock outstanding after closing of the Transaction and completion of the one-time ESOP investment election being reflected as outstanding for the period prior to the closing of the Transaction. As of September 30, 2003, the pro forma basic and diluted earnings per common share are computed based upon approximately 2.65 million weighted average shares outstanding.
(9)	Funded backlog represents the total amount of contracts that have been awarded and whose funding has been authorized minus the amount of revenue booked under the contracts from their inception to date.

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

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

•  our incurrence of approximately $96.1 million of debt with detachable warrants to purchase common stock, in connection with the purchase of IITRI’s assets;

•  the acquisition of IITRI’s assets, which was accounted for under the purchase method of accounting; and

•  the purchase of our common stock for approximately $25.8 million by the ESOP Trust.

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ALION SCIENCE AND TECHNOLOGY CORPORATION

Unaudited Pro Forma Consolidated Statements of Operations

For the Years Ended September 30, 2003 and 2002

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

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

(1)  Represents Alion board of director expenses and interest expense on the $0.9 million note due to officer under terms of a compensation agreement, net of estimated fair value of detachable warrants.

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(2)	Represents the elimination of the amortization of the deferred gain related to the sale of real estate during the year ended September 30, 2001.
(3)	Reversal of IITRI’s historical amortization expense related to pre-acquisition goodwill.
(4)	Under the provisions of SFAS No. 141,“Business Combinations”, the Transaction purchase price was allocated between net tangible assets, the value attributed to identifiable intangible assets (purchased contracts) and goodwill. For purposes of the pro forma consolidated statements of operations, the excess purchase price over the identifiable net assets acquired is considered to be goodwill with an indefinite life and therefore is not amortizable. The estimated value of $30.6 million attributed to intangible assets has an estimated useful life of three years and has been amortized accordingly using the straight-line method in the pro forma statements of operations. Additionally, an estimated value of approximately $1.5 million was assigned to a single lot of non-capitalized assets (e.g., office furnishings, laptop computers, etc.). This asset has an estimated useful life of three years and has been amortized accordingly using the straight-line method in the pro forma statement of operations.
(5)	Represents interest expense on approximately $96.1 million of debt, utilizing a weighted average interest factor of approximately 8.1% per year, issued to finance the Transaction. The senior term note is a variable rate note that is indexed to the prime rate. The prime rate used for the weighted average interest rate calculation was 4.25%.
(6)	Represents amortization of debt issuance costs under the effective interest method over the life of the senior term note of five years.
(7)	Represents accretion of long-term debt to face value over the term of the debt using the effective interest method. Discount to debt reflects estimated fair value of detachable warrants of $10.3 million.
(8)	Our historical capital structure is not indicative of our current structure, and accordingly, historical earnings per share information has not been presented. For the fiscal year ended September 30, 2003, unaudited pro forma basic and diluted loss per share of common stock has been calculated in accordance with the rules for initial public offerings. These rules require that the weighted average share calculation give retroactive effect to any changes in our capital structure. Accordingly, pro forma weighted average shares assume the approximately 2.575 million shares issued by Alion after completion of the initial one-time ESOP investment on December 20, 2002, were outstanding for the entire period presented.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

About This Management’s Discussion and Analysis

      The discussion and analysis that follows is organized to:

•  provide an overview of our business;

•  explain the year-over-year trends in our results of operations;

•  describe our liquidity and capital resources; and,

•  explain our critical accounting policies.

Overview

Pro Forma Comparisons of Results of Operations

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

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

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

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

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

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

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

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

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

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

Summary of Annual Revenues by Customer/ Government Agency

					Percentage of
		Primary Core	FY04 Annual		FY04 Annual
Sponsor/Government Agency	Title	Business Area*	Revenue		Revenue
			(In thousands)
Department of Defense - Joint Spectrum Center	Joint Spectrum Center Engineering Support Services	Wireless Communications	$	49,477		18	%
General Services Administration	Information Technology Services - U.S. Department of Defense	Information Technology	$	48,588		18	%
Department of Defense - Defense Information Systems Agency	Modeling and Simulation Information Analysis Center	Modeling and Simulation	$	35,136		13	%
Department of Defense - Defense Logistics Agency	Modeling and Simulation	Modeling and Simulation	$	18,895		7	%
Department of Defense - Army (subcontractor to Parsons Corporation)	Newport Chemical Agent Disposal Facility	Chemical and Biodefense	$	12,870		5	%
Subtotal			$	164,966		61	%
Other Sponsors/ Agencies			$	104,970		39	%
Total Revenues			$	269,936		100	%

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

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

34

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

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

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

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

•  In September 1998, we acquired Human Factors Applications, Inc. (HFA), a supplier of ordnance and explosive waste remediation services. HFA has core competencies in demilitarization, de-mining, environmental remediation, explosion sciences, ordnance management, and training.

•  In May 1999, we acquired EMC Science Center, Inc. which has technical expertise in electromagnetic environmental effects research and training, and an analytical laboratory.

•  In February 2000, we completed our acquisition of AB Technologies, Inc. which specializes in defense operations research, training-related modeling and simulation, education and training support, complex problem analysis, and military policy development for the federal government.

•  In May 2002, we acquired Daedalic, Inc., which develops modeling and simulation software for large-scale vehicle and air mobility operations.

•  In October 2003, we completed the acquisition of Innovative Technology Solutions Corporation (ITSC) which provides nuclear safety and analysis services for the U.S. Department of Energy (DOE) and the commercial nuclear power industry.

•  In February 2004, we completed the acquisition of Identix Public Sector, Inc. (IPS) which provides program management and acquisition management services, integrated logistics support, and foreign military support primarily to U.S. Navy customers.

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

•  help us expand our research base to include increasingly large and complex programs;

•  increase our opportunities to exploit the synergies between different research fields in which we work to broaden our offerings to our existing customers;

•  bring new strengths to our technical capabilities through cross-utilization of research technology and engineering skills; and

•  increase the overall depth and experience of our management.

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Results of Operations

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

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

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

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

•  We completed the acquisition of IPS on February 13, 2004. IPS is based in Fairfax, Virginia. IPS provides program and acquisition management, integrated logistics support, and foreign military support primarily to U.S. Navy customers.

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

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

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

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

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

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

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

•  Direct labor costs for the year ended September 30, 2004 increased by $14.5 million, or 13.8%, to $120.0 million from $105.5 million for the year ended September 30, 2003. As a percentage of revenue, direct labor cost was 44.5% for the year ended September 30, 2004 as compared to 49.5% for the year ended September 30, 2003. The percentage decrease in direct labor cost is directly associated with the relative percentage increase in M&S cost associated with the M&S revenue of the acquired operations, as described above.

•  M&S cost increased approximately $26.2 million, or 62.1%, to $68.3 million for the year ended September 30, 2004, compared to $42.1 million for the year ended September 30, 2003. As a percentage of revenue, M&S cost was 25.3% for the year ended September 30, 2004 as compared to 19.8% for the year ended September 30, 2003. The percentage increase in M&S cost is directly associated with the relative percentage increase in M&S cost of the contracts performed by acquired operations, as described above. As a percentage of M&S revenue, M&S cost was approximately 97.1% during the years ended September 30, 2004 and 2003.

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

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

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

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

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

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

      The changes in other specific components of operating expenses are:

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

•  Overhead expenses for indirect personnel and facilities costs related to rental and occupancy expenses increased approximately $8.3 million, or 40.8%, to $28.6 million for the year ended September 30, 2004, from $20.3 million for the year ended September 30, 2003. As a percentage of revenue, operating expense relating to indirect personnel and facilities expense was 10.6% for the year ended September 30, 2004 as compared to 9.5% for the year ended September 30, 2003. The increase, as a percentage of revenue, is partially attributable to the increase in indirect labor costs associated with the integration activities of the ITSC and IPS acquisitions.

•  General and administrative (G&A) expense increased approximately $3.6 million, or 14.1%, to $28.1 million for the year ended September 30, 2004, compared to $24.7 million for the year ended September 30, 2003. As a percentage of revenues, general and administrative expenses were 10.4% for the year ended September 30, 2004, compared to 11.6% for the year ended September 30, 2003. As a result of integrating the activities of ITSC and IPS, the costs associated with providing G&A activities

39

	for the acquired operations have been partially absorbed by the existing G&A infrastructure, resulting in a decrease in expense expressed as a percentage of revenue.
•	Stock-based compensation and deferred compensation relate primarily to the expense associated with the SAR and phantom stock plans. Stock-based compensation increased approximately $1.6 million, or 178% to $2.5 million for year ended September 30, 2004, from approximately $0.9 million for the year ended September 30, 2003. As a percentage of revenue, operating expense relating to stock-based compensation and deferred compensation expense was 0.9% for the year ended September 30, 2004 as compared to 0.4% for the year ended September 30, 2003. The increase in stock based compensation and deferred compensation is a result of the increase in the value of Alion’s common stock and the increase in awards granted.
•	Non-recurring Transaction-related expenses (e.g., third party legal, accounting, and finance) was not incurred during the year ended September 30, 2004. For the year ended September 30, 2003, Transaction-related expenses were approximately $6.7 million.
•	Depreciation and amortization expense increased approximately $1.0 million, or 8.1%, to $13.4 million for the year ended September 30, 2004, as compared to $12.4 million for the year ended September 30, 2003.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

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

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

Discussion of Debt Structure

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

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

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

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

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

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

45

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

48

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

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

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

49

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

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

•  Repurchase obligations under the KSOP;

•  Obligations related to the holders’ put rights associated with the Mezzanine Note warrants;

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

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

•  Obligations relating to deferred compensation programs for senior managers.

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

	Number of Shares				Total Value
Date	Repurchased		Share Price		Repurchased
June 2003		5,248	$	11.13	$	58,412
July 2003		2,696	$	11.13	$	30,000
December 2003		50,031	$	14.71	$	735,956
May 2004		117	$	16.56	$	1,938
June 2004		727	$	16.56	$	12,039
June 2004		743	$	16.56	$	12,304
July 2004		48,309	$	16.56	$	799,997

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

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

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

50

Summary of Critical Accounting Policies

Revenue Recognition

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

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

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

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

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

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

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

Goodwill and Intangible Assets

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

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

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

51

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

Contractual Obligations

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

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

(1)  Includes interest payments and forecasted debt obligations.

Off-Balance Sheet Financing Arrangements

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

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

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

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

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

52

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

•  Repurchase obligations under the KSOP;

•  Obligations related to the holders’ put rights associated with the Mezzanine Note warrants;

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

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

•  Obligations relating to deferred compensation programs for senior managers.

53

Item 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

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

54

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Alion Science and Technology Corporation:

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

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

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

/s/     KPMG LLP

Chicago, Illinois

December 10, 2004

55

ALION SCIENCE AND TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS

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

See accompanying notes to consolidated financial statements.

56

ALION SCIENCE AND TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

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

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

See accompanying notes to consolidated financial statements.

57

ALION SCIENCE AND TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY (DEFICIT)

						Additional
	Common			Common		Paid-In		Treasury			Treasury			Accumulated
	Shares			Stock		Capital		Shares			Stock			Deficit			Total
	(In thousands, except share information)
Balances at October 10, 2001 (inception)		—		$	—	$	—		—		$	—		$	—		$	—
Issuance of common stock to KSOP Trust		100			—		1								—			1
Net loss for the period ended September 30, 2002		—			—		—		—			—			(91	)		(91	)
Balances at September 30, 2002		100		$	—	$	1		—		$	—		$	(91	)	$	(90	)
Issuance of common stock to KSOP Trust		2,973,713			29		30,549		—			—			—			30,578
Purchase of common stock from KSOP Trust		(7,944	)		—		—		7,944			(88	)		—			(88	)
Release of Treasury shares to KSOP Trust		7,944					28		(7,944	)		88			—			116
Net loss for the period ended September 30, 2003		—			—		—		—			—			(12,616	)		(12,616	)
Balances at September 30, 2003		2,973,813		$	29	$	30,578		—		$	—		$	(12,707	)	$	17,900
Purchase of common stock from KSOP Trust		(99,927	)		—		—		99,927			(1,562	)		—			(1,562	)
Release of Treasury shares to KSOP Trust		99,927			—		—		(99,927	)		1,562			—			1,562
Issuance of common stock to KSOP Trust		402,384			5		6,954		—			—			—			6,959
Net loss for the year ended September 30, 2004		—			—		—		—			—			(15,111	)		(15,111	)
Balances at September 30, 2004		3,376,197		$	34	$	37,532		—		$	—		$	(27,818	)	$	9,748

See accompanying notes to consolidated financial statements.

58

ALION SCIENCE AND TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

								Period from
		Year Ended September 30,						October 10, 2001
								(Inception) through
		2004			2003			September 30, 2002
		(In thousands)
Cash flows from operating activities:
	Net loss	$	(15,111	)	$	(12,616	)	$	(91	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
	Depreciation and amortization		13,447			9,553			—
	Accretion of debt to face value		1,449			1,024			—
	Amortization of debt issuance costs		1,462			353			—
	Decrease in value of interest rate cap agreement		204			148			—
	Change in fair value of redeemable common stock warrants		6,015			4,453			—
	Stock-based compensation		2,513			856
	Loss on disposal of assets		—			7			—
	Gain on investments		(2,223	)		(113	)		—
Changes in assets and liabilities, net of effect of acquisitions:
	Accounts receivable, net		(14,160	)		4,571			—
	Other assets		(4,215	)		793			86
	Sale of marketable securities		405			—			—
	Trade accounts payable and accruals		13,808			5,664			—
	Other liabilities		2,081			(429	)		—
Net cash provided by (used in) operating activities			5,675			14,264			(5	)
Cash flows from investing activities:
	Cash paid for acquisitions, net of cash acquired		(21,678	)		(60,099	)		—
	Capital expenditures		(3,678	)		(1,329	)		—
	Proceeds from sale of investment securities		3,064			—			—
	Purchase of investment securities		(1,333	)		—			—
Net cash used in investing activities			(23,625	)		(61,428	)		—
Cash flows from financing activities:
	Proceeds from Term B Senior Credit Facility note payable		50,000			—
	Proceeds from senior note payable		—			35,000			10
	Payment of debt issuance costs		(3,280	)		(1,700	)		—
	Repayment of senior note payable		(29,250	)		(5,750	)		—
	Repayment of mezzanine note payable		(750	)		—
	Proceeds from agreement with officer		750			—			1
	Borrowings (repayments) under revolving credit facility		24,000			(6,185	)		—
	Repayment of LaSalle Bank revolving credit facility		(24,000	)		—			—
	Repayment of ITSC revolving credit facility		(375	)		—			—
	Purchase of interest rate cap agreement		(319	)		(245	)		—
	Purchase of shares of common stock from ESOP Trust		(1,562	)		(88	)		—
	Cash received from issuance of common stock to ESOP Trust		6,959			26,620			—
Net cash provided by financing activities			22,173			47,652			11
Net increase in cash			4,223			488			6
Cash at beginning of period			494			6			—
Cash at end of period		$	4,717		$	494		$	6

59

ALION SCIENCE AND TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)

								Period from
		Year Ended September 30,						October 10, 2001
								(Inception) through
		2004			2003			September 30, 2002
		(In thousands)
Supplemental disclosure of cash flow information:
	Cash paid for interest	$	7,563		$	3,774		$	—
	Cash paid (received) for taxes		(29	)		(105	)
Non-cash investing and financing activities:
	Mezzanine note and warrants issued in connection with acquisition of selected operations of IITRI		—			20,343			—
	Subordinated note and warrants issued in connection with acquisition of selected operations of IITRI		—			39,900			—
	Bank debt assumed in connection with the acquisition of selected operations of IITRI		—			6,188			—
	IITRI transaction costs assumed in connection with the acquisition of selected operations of IITRI		—			2,300			—
	Additional non-cash consideration paid in connection with acquisition of selected operations of IITRI		—			1,520			—
	Deferred compensation arrangement with officer		—			857			—
	Common Stock issued to ESOP Trust in satisfaction of employer contribution liability		4,330			2,828			—

See accompanying notes to consolidated financial statements.

60

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Description and Formation of the Business

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

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

•  $58,571 cash, consisting of $56,721 paid to IITRI and $1,517 paid for certain transaction expenses on behalf of IITRI, and $333 paid for other transaction expenses;

•  $39,900 in seller notes to IITRI, with detachable warrants representing approximately 26% of the outstanding common stock of Alion at the closing date (on a fully diluted basis). The seller notes bear interest at an effective interest rate of 6.71% per annum. See notes 8 and 9;

•  $20,343 in mezzanine notes to IITRI, with detachable warrants representing 12% of the outstanding common stock of Alion at the closing date (on a fully diluted basis). The mezzanine notes bear interest at 12% per annum. See notes 8 and 9;

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

•  $6,188 in assumed IITRI debt due to its bank; and

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

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

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

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

61

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(2) Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

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

Fiscal, Quarter and Interim Periods

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

Use of Estimates

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

Reclassifications

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

Revenue Recognition

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

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

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

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

62

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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

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

Income Taxes

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

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

Restricted Cash

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

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

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

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

63

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Goodwill and Other Intangibles

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

Fixed Assets

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

Fair Value of Financial Instruments

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

Cash, cash equivalents, and accounts receivable

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

Marketable securities

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

Senior Long-term debt

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

Interest rate cap

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

Redeemable common stock warrants

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

64

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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

(4) Pensions and Postretirement Benefits

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

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

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

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

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

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

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

65

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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

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

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

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

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

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

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

      Estimated future benefit payments -fiscal years ending September 30:

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

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

66

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(5) Loss Per Share

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

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

(6) Shareholder’s Equity, Subject to Redemption

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

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

(7) Goodwill and Intangible Assets

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

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

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

(8) Long-Term Debt

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

67

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Term B Senior Credit Facility

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

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

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

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

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

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

68

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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

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

Senior Credit Agreement

      On December 20, 2002, the Company executed a Senior Credit Agreement among LaSalle Bank National Association, US Bank, National Cooperative Bank, Orix Financial Services, Inc. and BB&T Bank to refinance and replace IITRI’s prior credit arrangements and to finance, in part, the Transaction. The Senior Credit Agreement consists of a $35.0 million Senior Term Note and a $25.0 million revolving credit facility. All principal obligations under the Senior Credit Agreement are to be repaid in full no later than December 20, 2007. The Senior Credit Agreement is secured by a first priority, perfected security interest in all of the Company’s current and future tangible and intangible property. On December 20, 2002, the Company paid $1.7 million to obtain this facility which was recorded as debt discount. The Company is using the effective interest method to accrete the value of long-term debt to its face value. For the fiscal year ended September 30, 2004, the Company recognized approximately $1.3 million of interest expense related to accretion of this discount.

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

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

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

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

69

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Mezzanine Note

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

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

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

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

Subordinated Note

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

Other Notes and Agreements

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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

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

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

(1)	The Term B Senior Credit Facility requires the Company to repay 1 percent of the principal balance outstanding under the senior term loan during the first four years (i.e., fiscal years 2005 through 2008) of the Term B Senior Credit Facility’s term and 96 percent of the principal balance outstanding during the fifth and final year of the term. The Term B Senior Credit Facility also requires the Company to make mandatory prepayments of principal depending upon whether the Company generates certain excess cash flow in a given fiscal year, issue certain equity, issue or incur certain debt or sell certain assets. Due to the uncertainty of these payments, the table does not reflect any such payments. The approximate $50.0 million includes, as of September 30, 2004, approximately $3.2 million of the remaining unamortized debt discount. Approximately $3.3 million of debt issuance costs were originally recorded as debt discount.
(2)	Repayment of $19.6 million for the face value of Mezzanine Note. The approximate $19.6 million includes, as of September 30, 2004, approximately $2.1 million of the remaining unamortized debt discount, assigned to the fair value of the detachable warrants. At date of issuance, December 20, 2002, approximately $3.1 million was assigned as the fair value of the warrants in accordance with Emerging Issues Task Force Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially settled in, a Company’s Own Stock.” The $19.6 million repayment is to be financed by the Senior Secured Term B Loan and is disclosed as a long-term liability on the consolidated balance sheet as of September 30, 2004.
(3)	Repayment of $39.9 million for the face value of the Subordinated Seller Note in two equal payments of $19.95 million in years 2009 and 2010. The $39.9 million includes, as of September 30, 2004, approximately $5.7 million of the remaining unamortized debt discount, assigned to fair value of the detachable warrants. At date of issuance, December 20, 2002, approximately $7.1 million was assigned as the fair value of the warrants in accordance with Emerging Issues Task Force Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially settled in, a Company’s Own Stock.”

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(4)

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

(5)

Repayment of $0.86 million agreement with officer. Repayment of $0.75 million promissory with officer.

(9) Redeemable Common Stock Warrants

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

(10) Leases

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

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

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

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ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

(11) Fixed Assets

      Fixed assets at September 30 consisted of the following:

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

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

(12) Stock Appreciation Rights

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

	Number of		Number of SARs
	SARs		Granted to						Cumulative
	Granted to		Board		Total Number of		Exercise		Number of
Effective Date of Grant	Employees		of Directors		SARs Granted		Price/Share		SARs Granted
December 23, 2002		68,550		29,400		97,950	$	10.00/share		97,950
May 15, 2003		300				300	$	11.13/share		98,250
June 5, 2003		300				300	$	11.13/share		98,550
December 21, 2003		131,200		12,600		143,800	$	14.71/share		242,350

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

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

(13) Phantom Stock Program

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

73

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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

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

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

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

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

(14) Segment Information and Customer Concentration

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

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

(15) Business Combinations

IITRI Acquisition and Pro Forma Information

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

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ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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

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

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

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

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

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

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

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

75

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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

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

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

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

(16) Related Party Transactions

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

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

(17) Commitments and Contingencies

Earn Out Commitments

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

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

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

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

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ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Legal Proceedings

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

Government Audits

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

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

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

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

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

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

(19) Subsequent Event

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

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

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ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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

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

Consolidated Financial Statement Schedule

      Schedule II — Valuation and Qualifying Accounts (in thousands)

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

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

78

INDEPENDENT AUDITORS’ REPORT

The Board of Governors

IIT Research Institute:

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

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

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

/s/ KPMG LLP

Chicago, Illinois

December 6, 2002 except as to note 13,

  which is as of December 20, 2002

79

SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE

CONSOLIDATED BALANCE SHEETS

As of September 30, 2002 and 2001

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

See accompanying notes to consolidated financial statements.

80

SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE

CONSOLIDATED STATEMENTS OF INCOME

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

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

See accompanying notes to consolidated financial statements.

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SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE

CONSOLIDATED STATEMENTS OF CHANGES IN OWNER’S NET INVESTMENT

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

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

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SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE

CONSOLIDATED STATEMENTS OF CASH FLOW

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

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

See accompanying notes to consolidated financial statements.

83

SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Nature of Organization and Business

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

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

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

(2) Basis of Presentation and Principles of Consolidation

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

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

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

(3) Summary of Significant Accounting Policies

Use of Estimates

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Fiscal and Interim Periods

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

Unaudited Financial Information

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

Revenue Recognition

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

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

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

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

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

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

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SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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

Restricted Cash

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

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

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

Goodwill

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

Property, Plant, and Equipment

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

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SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Income Taxes

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

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

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

Earnings per Common Share

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

Derivative Financial Instruments

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

Segment Information and Customer Concentration

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

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Recently Issued Accounting Pronouncements

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

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

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

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

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

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SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Reclassifications

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

(4) Business Combinations

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

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

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

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

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

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

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SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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

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

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

(5) Property, Plant, and Equipment

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

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

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

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

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(6) Debt

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

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

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

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

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

(7) Income Taxes

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

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

(8) Pensions and Postretirement and Other Benefits

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

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

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

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SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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

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

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

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

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

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SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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

(9) Leases

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

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

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

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

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

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

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

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

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SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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

(11) Commitments and Contingencies

Legal Proceedings

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

AB Technologies Lawsuit

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

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

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

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

Government Audits

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

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

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SELECTED OPERATIONS OF IIT RESEARCH INSTITUTE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(12) Interim Period Information (Unaudited)

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

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

(13) Sale of Business (Unaudited)

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

•  $58,571 cash, consisting of $56,721 paid to IITRI and $1,517 paid for certain transaction expenses on behalf of IITRI, and $333 paid for other transaction expenses;

•  $39,900 in seller notes to IITRI with detachable warrants representing approximately 26% of the outstanding common of stock of Alion (on a fully diluted basis) attached. The seller notes bear a weighted average interest rate of 6.7% per annum;

•  $20,343 in mezzanine notes to the IITRI with detachable warrants representing 12% of the outstanding common stock of Alion (on a fully diluted basis) attached. The mezzanine notes bear interest at 12% per annum;

•  transaction costs of $2,300, less the $1,517 noted above;

•  assumption of debt from Wachovia (formerly First Union) of $6,188; and

•  amounts due to IITRI of $2,094.

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

      There are no changes in or disagreements with our accountants.

Item 9a. Controls and Procedures

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

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

Item 9b. Other Information

Sales of Unregistered Securities

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

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

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PART III

Item 10. Directors and Executive Officers of the Registrant

      Information Regarding the Directors of the Registrant

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Compensation of Directors

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

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

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

Establishment of Committees

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

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

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

Compensation Committee Interlocks and Insider Participation

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

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Information Regarding the Executive Officers of the Registrant

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

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

(1)  Member of the ESOP committee

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

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

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

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

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

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

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

Code of Ethics

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

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

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Item 11. Executive Compensation

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

Summary Compensation Table

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

(1)	Unless otherwise indicated, no executive officer named in this summary compensation table received personal benefits or perquisites with an aggregate value equal to or exceeding the lesser of $50,000 or 10% of his or her aggregate salary and bonus.
(2)	See the “Long Term Incentive Plan — Awards in Last Fiscal Year” table, set forth below, for details related to phantom stock grants. See the “SAR Grants in Last Fiscal Year” and “Aggregate SAR Exercises in Last Fiscal Year and Fiscal Year End SAR Values” tables, set forth below, for details related to SAR grants.
(3)	In February 2003, Dr. Atefi was awarded 65,500 shares of performance-based phantom stock. In November 2003, Dr. Atefi was awarded 18,695 shares of performance-based phantom stock as described more fully below.
(4)	Bonus amounts for fiscal year 2004 were paid in December 2004.
(5)	2004 includes Company matching contributions of $11,817 under Alion’s KSOP. Includes $648 in term life insurance premiums and $3,980 in club membership dues paid by Alion.

       2003 includes Company matching contribution of $11,000 under Alion’s KSOP. Includes $857,000 vested under a deferred compensation arrangement with the Company. See below, “Deferred Compensation Arrangement for Bahman Atefi”. Includes $648 in term life insurance premiums and $4,430 in club membership dues paid by Alion.

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

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

       2003 includes Company matching contributions of $955 and $1,910 under IITRI’s 403(b) and 401(a) plans, respectively. These contributions cover the period October 1, 2002 to December 20, 2002, prior to the Transaction. Includes Company matching contribution of $11,878 under Alion’s KSOP. Includes $295,000 vested under a Retention Incentive Agreement. Includes $533 in term life insurance premiums paid by Alion.

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

(8)	In February 2003, Mr. Crawford was awarded 33,000 shares of performance-based phantom stock. In November 2003, Mr. Crawford was awarded 6,798 shares of performance-based phantom stock as described more fully below.
(9)	2004 includes Company matching contributions of $13,291 under Alion’s KSOP. Includes $534 in term life insurance premiums paid by Alion.

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

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

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

       2003 includes Company matching contribution of $10,687 under Alion’s KSOP. Includes $488 in term life insurance premiums paid by Alion. Includes $500 in club membership dues.

(16)

Retention Incentive Agreements. In September 2001, IITRI entered into and funded retention incentive agreements with Bahman Atefi, Randy Crawford and Barry Watson for $550,000, $270,000 and $215,000, respectively, via a non-qualified deferred compensation agreement. Alion’s acquisition if IITRI’S assets constituted a change in control of IITRI and these retention incentive awards vested fully upon closing of the Transaction.

(17)

2004 includes Company matching contributions of $13,753 under Alion’s KSOP and $508 in term life insurance paid by Alion.

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

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

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

Stock Appreciation Rights Plans

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

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

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

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

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

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

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

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

AR Grants in Last Fiscal Year

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

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

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

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

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

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

				Number of Securities		Value of Unexercised
				Underlying Unexercised		In-The-Money
		Shares		Options/SARs at Fiscal		Options/SARs at Fiscal
		Acquired	Value	Year End (Number)		Year End (Dollars)
Name		on Exercise	Realized	Exercisable/Unexercisable(4)		Exercisable/Unexercisable(5)
		(In dollars)*
Bahman Atefi(1)
Barry Watson(1)
Randy Crawford(1)
Jack Hughes(1)
Rob Goff(2)					240/ 960	$	2,386/ $9,542
	(3)				0/ 2,500	$	0/ $13,075

*	Refers to the “Alion Science and Technology Corporation 2002 Stock Appreciation Rights (SAR) Plan” (see above, “Stock Appreciation Rights Plan” for more information regarding the SAR Plan).
(1)	No SAR awards as of September 30, 2004.
(2)	In 2003, Mr. Goff was awarded 1,200 SARs at the exercise price of $10.00 per share. As of September 30, 2004, the value of Alion common stock is $19.94 per share.
(3)	In 2004, Mr. Goff was awarded 2,500 SARs at the exercise price of $14.71 per share. As of September 30, 2004, the value of Alion common stock is $19.94 per share.

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(4)

The number of exercisable and unexercisable SARs is dependent on the plan vesting schedule. For example, as of September 30, 2004, for Mr. Goff, only 20% of the 1,200 SARs awarded in 2003 have vested, resulting in 240 exercisable SARs. As of September 30, 2004, the remaining SARs are unexercisable.

(5)

The value of exercisable and unexercisable SARs is dependent on the difference between the exercise price per share and the current fair value per share of Alion common stock. For example, as of September 30, 2004, for Mr. Goff, the exercise price is $10 per share and the current value per share of Alion common stock is $19.94. The value of the exercisable SARs is $2,386 (240 shares multiplied by the difference between the current fair value per share of Alion stock, $19.94, and the exercise price per share, $10.00).

Phantom Stock Plan

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

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

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

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

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

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

•  Select which employees are to be awarded phantom stock and determine when it will be awarded;

•  Determine the number of shares of common stock to be covered by or used for reference purposes for a grant of phantom stock;

•  Adjust the number and price of shares as a result of special circumstances or certain business actions, including but not limited to mergers, reorganizations and the like;

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•  Determine, modify, and waive from time to time the terms and conditions, including without limitation vesting and other restrictions, of any grant of phantom stock;

•  Accelerate or otherwise change the time in which a grant of phantom stock may be exercised;

•  Impose limitations on grants of phantom stock, including limitations on transfer provisions;

•  Modify, extend, or renew outstanding awards of phantom stock, or accept the surrender of outstanding awards of phantom stock and substitute new awards of phantom stock;

•  Administer and interpret the provisions of the plan;

•  Terminate the plan;

•  Decide all questions of fact arising in the application of the plan; and

•  Prescribe, amend, and rescind rules and regulations relating to the plan, including (under the first phantom stock plan only) rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws.

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

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

•  Date of grant;

•  Number of shares of the phantom stock awarded; and

•  Provisions governing vesting of the phantom stock awarded.

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

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

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

•  the numerator of which is the number of months from the date of grant of the phantom stock through the end of the month of such termination; and

•  the denominator of which is 60.

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

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

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

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

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

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

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

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

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

	Number of
	Shares, Units,		Full Vesting		Period Until
Name	or Rights(1)		Period(2)		Payout(3)
Bahman Atefi		65,500 18,695		February 2008 November 2008		February 2008 November 2008
Barry Watson		34,000 6,798		February 2008 November 2008		February 2008 November 2008
Randy Crawford		33,000 6,798		February 2008 November 2008		February 2008 November 2008
Jack Hughes		10,000 6,798		February 2008 November 2008		February 2008 November 2008
Robert Goff		3,399		November 2008		November 2008

(1)	The awards made in November 2003 were made to executive and senior management of Alion. The initial set of awards made in February 2003 were made solely to Alion’s executive management team.
(2)	Pursuant to the phantom stock plan, recipients will become fully vested on the fifth year from the grant date, or approximately February 2008 and November 2008.
(3)	Pursuant to the phantom stock plan or applicable award agreement, recipients will be paid commencing on the fifth year from the date of grant.

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Employment Agreements

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

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

•  Dr. Atefi’s annual base salary at the time of termination, for the unexpired term of the employment agreement up to a maximum of three years; or

•  an amount equal to Dr. Atefi’s base salary plus $100,000.

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

•  his authority or responsibility is materially diminished;

•  he is assigned duties inconsistent with his position, responsibility and status;

•  there is an adverse change in his title or office;

•  his base pay or incentive compensation is reduced; and

•  his principal work location is more than ten miles away from his principal work location immediately prior to the change of control event.

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

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

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

•  his authority or responsibility is materially diminished;

•  he is assigned duties inconsistent with his position, responsibility and status;

•  there is an adverse change in his title or office;

•  his base pay or incentive compensation is reduced; and

•  his principal work location is more than ten miles away from his principal work location immediately prior to the change of control event.

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

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

•  Mr. Crawford’s annual base salary at the time of termination for the unexpired term of the employment agreement up to a maximum of two years; or

•  an amount equal to Mr. Crawford’s base salary.

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

•  his authority or responsibility is materially diminished;

•  he is assigned duties inconsistent with his position, responsibility and status;

•  there is an adverse change in his title or office;

•  his base pay or incentive compensation is reduced; and

•  his principal work location is more than ten miles away from his principal work location immediately prior to the change of control event.

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

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

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

•  Mr. Hughes’ annual base salary at the time of termination for the unexpired term of the employment agreement up to a maximum of two years; or

•  an amount equal to Mr. Hughes base salary.

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

•  his authority or responsibility is materially diminished;

•  he is assigned duties inconsistent with his position, responsibility and status;

•  there is an adverse change in his title or office;

•  his base pay or incentive compensation is reduced; and

•  his principal work location is more than ten miles away from his principal work location immediately prior to the change of control event.

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

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

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

•  his authority or responsibility is materially diminished;

•  he is assigned duties inconsistent with his position, responsibility and status;

•  there is an adverse change in his title or office;

•  his base pay or incentive compensation is reduced; and his principal work location is more than ten miles away from his principal work location immediately prior to the change of control event.

Deferred Compensation Arrangement for Bahman Atefi

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

111

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

Deferred Compensation Plans

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

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

      Each Plan permits an individual to defer payment to a specified future date and to specify whether deferrals are to be paid in a lump sum or installments. Under certain limited circumstances, deferrals may be paid out early or further deferred. In general, individuals may make only one qualifying deferral election per year.

Item 12. Security Ownership of Certain Beneficial Owners and Management

      The following table sets forth certain information as of September 30, 2004, regarding the beneficial ownership of the Company’s common stock by certain beneficial owners and all directors and Named Executive Officers, both individually and as a group. The Company knows of no other person not disclosed herein beneficially owning more than 5% of the Company’s Common Stock. The address of the beneficial owner (as required) and the dates applicable to the beneficial ownership indicated are set forth in the footnotes below.

			Amount and Nature
			Beneficial of			Percentage
Name of Beneficial Owner	Title of Class		Ownership			of Class(1)
Five Percent Security Holders:
Illinois Institute of Technology(2)		Common stock		1,585,339	(3)		32.0
Directors(4) and Executive Officers:
Bahman Atefi		Common stock		87,316	(5)		2.6
Jack Hughes		Common stock		5,262	(6)		*
Barry Watson		Common stock		51,112	(7)		1.5
Randy Crawford		Common stock		47,343	(8)		1.4
Rob Goff		Common stock		8,105	(9)		*
All Directors and Officers as a Group (5 Persons)		Common stock		199,138	(10)		5.9

* less than 1%.

(1)  Applicable percentages based on 3,376,197 shares outstanding on September 30, 2004, and also includes shares of Common Stock subject to warrants that may be exercised within 60 days of September 30, 2004. Such shares are deemed to be outstanding for the purposes of computing the percentage ownership of the individual or entity holding the shares, but are not deemed outstanding for purposes of computing the percentage of any other person shown in the table. This table is based upon information in the Company’s possession and believed to be accurate. Unless indicated in the footnotes to this table

112

	and subject to community property laws where applicable, the Company believes that each of the shareholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned.
(2)	Illinois Institute of Technology’s address is 3300 South Federal Street, Chicago, IL 60616.
(3)	The number of shares deemed to be beneficially held by IIT represents currently exercisable warrants held by IIT under the Mezzanine Warrant and the Subordinated Warrant for an aggregate of 1,585,339 shares of Common Stock.
(4)	No directors (other than Dr. Atefi) are believed by us to be beneficial owners of our common stock.
(5)	Includes warrants to purchase 22,062 shares of common stock pursuant to Dr. Atefi’s Deferred Compensation Arrangement with Alion and interests to purchase 65,254 shares of Alion’s common stock pursuant to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan, which we refer to as the KSOP.
(6)	Includes interests to purchase 5,262 shares of Alion’s common stock pursuant to the KSOP.
(7)	Includes interests to purchase 51,112 shares of Alion’s common stock pursuant to the KSOP.
(8)	Includes interests to purchase 47,343 shares of Alion’s common stock pursuant to the KSOP.
(9)	Includes interests to purchase 8,105 shares of Alion’s common stock pursuant to the KSOP

(10)  Includes 119,138 shares of KSOP interests beneficially owned by the Named Executive Officers as of September 30, 2004, warrants to purchase 22,062 shares of common stock held by Dr. Atefi.

Changes in Control

      We do not know of any agreements, the operation of which may at a subsequent date result in a change in control of the Company.

Item 13. Certain Relationships and Related Transactions

      On March 28, 2003, IITRI sold and Jon Emery, the then General Counsel of Alion, purchased Mezzanine Notes in the principal amount of $750,000 and accompanying Mezzanine Warrants to purchase 19,327 shares of Alion common stock at an exercise price of $10 per share, for an aggregate purchase price of $750,000. On November 12, 2003, Alion purchased the Mezzanine Note and all accompanying warrants from Mr. Emery for an aggregate purchase price of $1,034,020, which amount consisted of $795,000 for the purchase of the Notes, $193,270 for the purchase of the warrants, and $35,000 for reimbursement for legal and other professional fees and $10,750 for interest earned on the Mezzanine Note. The determination to purchase the notes and warrants for this amount was made by the Chief Executive Officer. The purchase price for the Mezzanine Notes represents a premium of 6% above the aggregate principal amount of the notes, which is derived from repurchase terms contained in the notes. The $10 per share purchase price for the warrants represents a negotiated amount with Mr. Emery in conjunction with his resignation.

      On February 11, 2004, the Company borrowed $750,000 from an officer of the Company. In exchange, on June 7, 2004, the Company issued the officer a promissory note with interest at a rate of 15% per annum until March 31, 2009. The annual interest period was effective beginning February 11, 2004. The agreement essentially replaces a note, which is described above, for the same sum previously issued to another officer of the Company, the termination of whose employment relationship resulted in repurchase of the note. The agreement with the officer is subordinate to the Term B Senior Credit Facility. On December 8, 2004, the Promissory Note with the officer was extinguished. An amount of $750,000 plus accrued interest of $21,635 was paid to the officer.

      Except as described above, since the beginning of our last fiscal year, including any currently proposed transactions, no directors, executive officers or immediate family members of such individuals were engaged in transactions with us or any subsidiary involving more than $60,000, other than the arrangements described in the section “Executive Compensation.”

113

Item 14. Principal Accounting Fees and Services

      Consistent with the charter of Audit and Finance Committee, the Committee is responsible for engaging the Company’s independent auditors. Beginning with the year ended September 30, 2003, all audit and permitted non-audit services require pre-approval by the Audit and Finance Committee. The full Committee approves proposed services and fee estimates for these services. During fiscal years 2003 and 2004 all services performed by the auditors were pre-approved.

      The following table summarizes the fees of KPMG LLP, our independent auditors, billed to the Company for each of the last two fiscal years for audit services and billed to the Company in each of the last two fiscal years for other services:

Fee Category	2004		2003
Audit Fees(1)	$	536,772	$	599,734
Audit-Related Fees(2)	$	382,661	$	811,117
Tax fees and other	$	—	$	—
Total Fees	$	919,433	$	1,410,851

(1)

Audit fees consist of fees for the audit of the Company’s financial statements, the review of the interim financial statements included in the Company’s quarterly reports on Form 10-Q, and other professional services provided in connection with statutory and regulatory filings or engagements.

(2)

Audit-related fees consist of fees for assurance and related services that are reasonably related to the performance of the audit and the review of our financial statements and which are not reported under “Audit Fees”. In fiscal 2004, these services related primarily to audit services provided in conjunction with acquisitions, accounting consultations, and audits of employee benefit plans. These services were approved by the Audit and Finance Committee.

114

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

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

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

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

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

115

Exhibit
No.			Description
	4	.8	Seventh Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan.(7)
	4	.9	Eighth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan.(7)
	4	.10	Ninth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan.
	10	.5	Seller Note Securities Purchase Agreement by and between IITRI and Alion Science and Technology Corporation.(4)
	10	.8	Rights Agreement.(4)
	10	.9	First Amendment to The Alion Science and Technology Corporation 2002 Stock Appreciation Rights Plan.(5)*
	10	.14	Employment Agreement between Alion Science and Technology Corporation and Bahman Atefi.(4)*
	10	.15	Employment Agreement between Alion Science and Technology Corporation and Stacy Mendler.(4)*
	10	.16	Employment Agreement between Alion Science and Technology Corporation and Randy Crawford.(4)*
	10	.17	Employment Agreement between Alion Science and Technology Corporation and Barry Watson.(4)*
	10	.18	Employment Agreement between Alion Science and Technology Corporation and John Hughes.(4)*
	10	.23	Alion Executive Deferred Compensation Plan.(4)*
	10	.24	Alion Director Deferred Compensation Plan.(4)*
	10	.25	First Amendment to The Alion Science and Technology Corporation Director Deferred Compensation Plan.(5)*
	10	.26	Alion Science and Technology Corporation Phantom Stock Plan.(4)*
	10	.27	First Amendment to The Alion Science and Technology Corporation Employee Phantom Stock Plan.(11)*
	10	.29	First Amendment to the Credit Agreement by and among LaSalle Bank National Association as agent, various lenders and Alion Science and Technology Corporation.(8)
	10	.30	Second Amendment to the Credit Agreement by and among LaSalle Bank National Association as agent, various lenders and Alion Science and Technology Corporation.(10)
	10	.31	Agreement between Alion Science and Technology Corporation and James Fontana.(10)*
	10	.32	Employment Agreement between Alion Science and Technology Corporation and Leroy R. Goff III.(10)*
	10	.33	Third Amendment to the Credit Agreement by and among LaSalle Bank National Association as agent, various lenders and Alion Science and Technology Corporation.(9)
	10	.34	Addendum to Employment Agreement between Alion Science and Technology Corporation and James Fontana.(9)*
	10	.35	Second Amendment to the Alion Science and Technology Corporation Phantom Stock Plan.(9)*
	10	.36	Senior Secured Credit facility, that includes a revolving credit facility and Term B note, by and among Credit Suisse First Boston as arranger, various lenders, and Alion Science and Technology Corporation.
	10	.37	First Amendment to the Mezzanine Warrant Agreement.
	10	.38	First Amendment to the Seller Warrant Agreement.
	10	.39	First Amendment to the Alion Mezzanine Warrant Agreement between Alion Science and Technology Corporation, Alion Science and Technology Corporation Employee Ownership, Savings and Investment Trust, and Bahman Atefi.*

116

Exhibit
No.			Description
	21		Subsidiaries of Alion Science and Technology Corporation:(i) Human Factors Applications, Inc., incorporated in the Commonwealth of Pennsylvania, (ii) Innovative Technology Solutions Corporation, incorporated in the State of New Mexico, and (iii) Identix Public Sector, incorporated in the Commonwealth of Virginia, are wholly-owned by Alion Science and Technology Corporation.
	23	.1	Independent Auditor’s Consent.
	23	.2	Consent of Independent Registered Public Accounting Firm.
	31	.1	Certification of Chief Executive Officer of Alion Science and Technology Corporation pursuant to Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
	31	.2	Certification of Chief Financial Officer of Alion Science and Technology Corporation pursuant to 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
	32	.1	Certification of Chief Executive Officer of Alion Science and Technology Corporation, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32	.2	Certification of Chief Financial Officer of Alion Science and Technology Corporation, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

(1)	Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Post-Effective Amendment No. 2 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 9, 2002 (File no. 950133-2-4018).
(2)	Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Pre-Effective Amendment No. 3 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 7, 2002 (File no. 950133-2-3343).
(3)	Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Pre-Effective Amendment No. 2 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 17, 2002 (File no. 950133-2-3224).
(4)	Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Post-Effective Amendment No. 3 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 24, 2003 (File no. 950133-3-862).
(5)	Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s quarterly report on Form 10-Q for the quarterly period ended July 4, 2003, filed with the Securities and Exchange Commission on August 15, 2003.
(6)	Incorporated by reference to the corresponding exhibit previously filed as an exhibit to Company’s current report on Form 8-K/ A, filed with the Securities and Exchange Commission on March 5, 2004 (File no. 950133-04-000745).
(7)	Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on April 28, 2004 (File no. 950133-04-001602).
(8)	Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s quarterly report on Form 10-Q for the quarterly period ended December 31, 2003, filed with the Securities and Exchange Commission on February 17, 2003 (File no. 950133-04-000432).
(9)	Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2004, filed with the Securities and Exchange Commission on August 13, 2004 (File no. 950133-04-003228).

(10)  Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s quarterly report on Form 10-Q for the quarterly period ended March 31, 2004, filed with the Securities and Exchange Commission on May 17, 2004 (File no. 950113-04-002056).

117

(11)  Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s annual report Form 10-K for the fiscal year ended September 30, 2003, filed with the Securities and Exchange Commission on December 24, 2003 (File no. 950133-03-004374).

117.1

SIGNATURES

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

ALION SCIENCE AND TECHNOLOGY CORPORATION

(Registrant)

By:  /s/ BAHMAN ATEFI

Bahman Atefi

Chairman, Chief Executive Officer and Director

Date: December 22, 2004

      Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ BAHMAN ATEFI Bahman Atefi	Chairman, Chief Executive Officer and Director	December 22, 2004
/s/ JOHN M. HUGHES John M. “Jack” Hughes	Chief Financial Officer (Principal Financial Officer)	December 22, 2004
/s/ GARY N. AMSTUTZ Gary N. Amstutz	Senior Vice President and Executive Director of Finance (Principal Accounting Officer)	December 22, 2004
/s/ LESLIE ARMITAGE Leslie Armitage	Director	December 22, 2004
Lewis Collens	Director	December 22, 2004
/s/ HAROLD W. GEHMAN, JR. Admiral (Ret.) Harold W. Gehman Jr.	Director	December 22, 2004
/s/ DONALD GOSS Donald Goss	Director	December 22, 2004
/s/ ROBERT L. GROWNEY Robert L. Growney	Director	December 22, 2004
/s/ GEORGE A. JOULWAN General (Ret.) George A. Joulwan	Director	December 22, 2004
/s/ MICHAEL E. RYAN General (Ret.) Michael E. Ryan	Director	December 22, 2004
/s/ EDWARD C. ALDRIDGE, JR. Edward C. Aldridge, Jr.	Director	December 22, 2004

118

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

      No annual report or proxy material has been sent to security holders.

119

Exhibit
No.			Description
	2	.1	Stock Purchase Agreement by and among Identix Public Sector, Inc. Identix Incorporated and Alion Science and Technology Corporation, dated February 13, 2004(6)
	3	.1	Second Amended and Restated Certificate of Incorporation of Beagle Holdings, Inc.(3)
	3	.2	Amended and Restated By-laws of Alion Science and Technology Corporation.(1)
	4	.1	Amended and Restated Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan.(2)
	4	.2	First Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan.(4)
	4	.3	Second Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan.(5)
	4	.4	Third Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan.(5)
	4	.5	Fourth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan.(5)
	4	.6	Fifth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan.(7)
	4	.7	Sixth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan.(7)
	4	.8	Seventh Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan.(7)
	4	.9	Eighth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan.(7)
	4	.10	Ninth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan.
	10	.5	Seller Note Securities Purchase Agreement by and between IITRI and Alion Science and Technology Corporation.(4)
	10	.8	Rights Agreement.(4)
	10	.9	First Amendment to The Alion Science and Technology Corporation 2002 Stock Appreciation Rights Plan.(5)*
	10	.14	Employment Agreement between Alion Science and Technology Corporation and Bahman Atefi.(4)*
	10	.15	Employment Agreement between Alion Science and Technology Corporation and Stacy Mendler.(4)*
	10	.16	Employment Agreement between Alion Science and Technology Corporation and Randy Crawford.(4)*
	10	.17	Employment Agreement between Alion Science and Technology Corporation and Barry Watson.(4)*
	10	.18	Employment Agreement between Alion Science and Technology Corporation and John Hughes.(4)*
	10	.23	Alion Executive Deferred Compensation Plan.(4)*
	10	.24	Alion Director Deferred Compensation Plan.(4)*
	10	.25	First Amendment to The Alion Science and Technology Corporation Director Deferred Compensation Plan.(5)*
	10	.26	Alion Science and Technology Corporation Phantom Stock Plan.(4)*
	10	.27	First Amendment to The Alion Science and Technology Corporation Employee Phantom Stock Plan.(11)*
	10	.29	First Amendment to the Credit Agreement by and among LaSalle Bank National Association as agent, various lenders and Alion Science and Technology Corporation.(8)

120

Exhibit
No.			Description
	10	.30	Second Amendment to the Credit Agreement by and among LaSalle Bank National Association as agent, various lenders and Alion Science and Technology Corporation.(10)
	10	.31	Agreement between Alion Science and Technology Corporation and James Fontana.(10)*
	10	.32	Employment Agreement between Alion Science and Technology Corporation and Leroy R. Goff III.(10)*
	10	.33	Third Amendment to the Credit Agreement by and among LaSalle Bank National Association as agent, various lenders and Alion Science and Technology Corporation.(9)
	10	.34	Addendum to Employment Agreement between Alion Science and Technology Corporation and James Fontana.(9)*
	10	.35	Second Amendment to the Alion Science and Technology Corporation Phantom Stock Plan.(9)*
	10	.36	Senior Secured Credit facility, that includes a revolving credit facility and Term B note, by and among Credit Suisse First Boston as arranger, various lenders, and Alion Science and Technology Corporation.
	10	.37	First Amendment to the Mezzanine Warrant Agreement.
	10	.38	First Amendment to the Seller Warrant Agreement.
	10	.39	First Amendment to the Alion Mezzanine Warrant Agreement between Alion Science and Technology Corporation, Alion Science and Technology Corporation Employee Ownership, Savings and Investment Trust, and Bahman Atefi.*
	21		Subsidiaries of Alion Science and Technology Corporation:(i) Human Factors Applications, Inc., incorporated in the Commonwealth of Pennsylvania, (ii) Innovative Technology Solutions Corporation, incorporated in the State of New Mexico, and (iii) Identix Public Sector, incorporated in the Commonwealth of Virginia, are wholly-owned by Alion Science and Technology Corporation.
	23	.1	Independent Auditor’s Consent.
	23	.2	Consent of Independent Registered Public Accounting Firm.
	31	.1	Certification of Chief Executive Officer of Alion Science and Technology Corporation pursuant to Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
	31	.2	Certification of Chief Financial Officer of Alion Science and Technology Corporation pursuant to 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
	32	.1	Certification of Chief Executive Officer of Alion Science and Technology Corporation, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32	.2	Certification of Chief Financial Officer of Alion Science and Technology Corporation, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

121 EX-4.10 2 w69301exv4w10.htm EX-4.10

Exhibit 4.10

NINTH AMENDMENT TO
ALION SCIENCE AND TECHNOLOGY CORPORATION
EMPLOYEE OWNERSHIP, SAVINGS AND INVESTMENT PLAN

     WHEREAS, Alion Science and Technology Corporation (the “Company”) maintains an Employee Ownership, Savings and Investment Plan for the benefit of its Employees and the Employees of any other Adopting Employer, which Plan was last restated as of December 19, 2001 (the “Plan”) and has been amended eight times since that date; and

     WHEREAS, under Section 15.1 of the Plan, the Company reserved the right to amend the Plan at any time, in whole or in part, by action of its Board of Directors; and

     WHEREAS, the Board of Directors of the Company, pursuant to Section 15.1 of the Plan, has delegated authority to amend the Plan to the undersigned officer, provided he determines that the amendment would not materially increase costs of the Plan to the Company or any Adopting Employer; and

     WHEREAS, the undersigned officer has determined that this Ninth Amendment would not materially increase costs of the Plan to the Company or any Adopting Employer;

     NOW THEREFORE, pursuant to the powers of amendment reserved under Section 15.1 of the Plan, the Plan is hereby amended by the Company, effective July 1, 2004, unless otherwise provided, as follows:

ARTICLE VIII

Section 8.1(a) – As amended, further amended by adding at the end thereof the following new sentence:

“In addition, effective July 1, 2004, subject to the terms and conditions prescribed in Section 8.3, a Participant who has attained at least age fifty-nine and one-half (59½) may elect to withdraw all or a portion of his or her Non-ESOP ITSC Elective Deferral Account (as described in Exhibit B).”

Section 8.3(b) – Effective January 1, 2004, amended by striking the last sentence and substituting in lieu thereof the following new sentence:

“An in-service withdrawal from the Participant’s

ESOP Account shall be valued based on the Current Market Value of Common Stock as of the Valuation Date coinciding with or immediately preceding the withdrawal; provided, however, that the ESOP Committee may order an interim valuation performed as of any date (including retroactively), which valuation shall be used.”

ARTICLE IX

Section 9.1(b) – Effective January 1, 2003, as amended, further amended by striking the third sentence and substituting in lieu thereof the following new sentence:

“Distributions shall comply with the final regulations in Treas. Regs. §§ 1.401(a)(9)-1 through 1.401(a)(9)-9 and with any other provisions reflecting Section 401(a)(9) of the Code that are prescribed by the IRS in revenue rulings, notices and other guidance published in the Internal Revenue Bulletin.”

Section 9.2(f) – Effective January 1, 2004, amended by striking the last sentence and substituting in lieu thereof the following new sentences:

“Notwithstanding the preceding sentences of this Section 9.2(f) or any other contrary provisions in the Plan, for distributions after December 31, 2003, a Participant who has attained age seventy and one-half (70½) and is subject to the mandatory distribution requirements of Section 401(a)(9) of the Code shall no longer be required to receive a lump sum distribution of his or her entire Account at the time distributions must commence (and of additional allocated amounts at such later times as mandatory distributions are required to comply with Section 401(a)(9) of the Code). Instead, subject to Section 9.1(b), distributions after December 31, 2003 shall commence (or be made) to such Participants at the time distributions must commence (or be made) to comply with Section 401(a)(9) of the Code, and the amount distributed to such Participants for each calendar year is not required to be greater than the minimum amount necessary to comply with Section 401(a)(9) of the Code.”

Section 9.14(d) – Effective October 1, 2003, amended by adding at the end thereof the following new sentence:

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“Notwithstanding anything in this Plan to the contrary, effective October 1, 2003, if Company Stock is distributed from the Trust to a Participant who directs that the Company Stock be distributed to his individual retirement arrangement in a direct rollover, then the Company shall repurchase the Company Stock immediately upon the distribution of the Company Stock to the Participant’s individual retirement arrangement.”

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ARTICLE X

Sections 10.2 through 10.10 – Amended by striking the same in its entirety and substituting in lieu thereof the following:

“10.2 Written Loan Policy.

      “The ESOP Committee in authorizing a loan to be made to a Participant shall determine all terms of the loan, such as the amount and method of repayment, the repayment period of the loan, the rate of interest to be paid on such loan and the security for the loan. The ESOP Committee shall set forth in writing the rules and regulations with respect to Participant loans which are to provide, at a minimum, the following: (a) the identity of the person or position authorized to administer the loan program; (b) a procedure for applying for loans; (c) the basis on which loans will be approved or denied; (d) limitations (if any) on the types and amount of loans offered; (e) the procedure for determining a reasonable rate of interest; (f) the types of collateral which may secure a loan; and (g) the events constituting default and the steps that will be taken to preserve Plan assets in the event of a default.

“10.3 Maximum Amount of Loan.

      “No loan in excess of fifty percent (50%) of the Participant’s Available Loan Amount will be permitted. In addition, limits imposed by the Code and any other requirements of applicable statute or regulation will be applied. Under the current requirements of the Code, a loan cannot exceed the lesser of one-half (½) of the value of the Participant’s Available Loan Amount or fifty thousand dollars ($50,000) reduced by the excess of (a) the highest outstanding balance of loans by that Participant from the Plan during the one (1) year period ending on the day before the date on which such loan was made, over (b) the outstanding balance of that Participant’s loans from the Plan on the date on which such loan was made. For purposes of the above limitations, all loans from all plans of the Employer or one of the Adopting Employers, and other members of a group of employers described in Section 414(b), (c), (m) and (o) of the Code, are aggregated.

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“10.4 Repayment Schedule.

      “Unless the loan is used to acquire any dwelling unit which within a reasonable time is to be used (determined at the time the loan is made) as the principal residence of the Participant, the loan, under its terms, must be repaid within five (5) years. All repayments shall be made through payroll deductions in accordance with the loan agreement executed at the time the loan is made, except as otherwise provided by the ESOP Committee. The repayment schedule shall provide for substantially level amortization of the loan. Loan repayments will be suspended under this Plan as permitted under Section 414(u) of the Code and as required to comply with an order issued in a bankruptcy proceeding.

“10.5 Interest Rate.

      “A loan pursuant to this ARTICLE shall bear a reasonable rate of interest that provides a return commensurate with the prevailing interest rate charged on similar loans by persons in the business of lending money.

“10.6 Security for Loans.

      “A loan shall be adequately secured with the value and liquidity of the security being such that it may reasonably be anticipated that loss of principal or interest by the Plan will not result from the loan due date to the actual date of enforcement of the security interest in the event of a default. Each loan shall be secured by any security that the ESOP Committee may in its sole discretion require of the Participant, including the Participant’s Available Loan Amount, as long as the Trustee is willing to accept said security. No more than fifty percent (50%) of a Participant’s Available Loan Amount may be used as security for the outstanding balance of all Plan loans made to that Participant. The requirement in the preceding sentence must be satisfied immediately after the origination of each Participant loan secured in whole or in part by any portion of the Participant’s Available Loan Amount.”

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In General

Any provision of the amended and restated Plan, as amended, inconsistent with the foregoing changes is hereby amended to be consistent herewith.

     IN WITNESS WHEREOF, Alion Science and Technology Corporation has caused this Ninth Amendment to the Plan to be executed on its behalf by its duly authorized officer on this 28th day of May, 2004.

ALION SCIENCE AND TECHNOLOGY CORPORATION
By:	/s/ Bahman Atefi
Title:	Chairman and CEO
	(Seal)

6

EX-4.10

exv4w10

EX-10.36

EXECUTION COPY

Exhibit 10.36

CREDIT AGREEMENT

dated as of August 2, 2004,

among

ALION SCIENCE AND TECHNOLOGY CORPORATION,

THE LENDERS PARTY HERETO,

and

CREDIT SUISSE FIRST BOSTON,

as Administrative Agent and Collateral Agent

CREDIT SUISSE FIRST BOSTON,

as Sole Bookrunner and Sole Lead Arranger,

LASALLE BANK NATIONAL ASSOCIATION,

as Syndication Agent,

and

CREDIT SUISSE FIRST BOSTON,

as Documentation Agent

[CS&M Ref No. 5865-259]

TABLE OF CONTENTS

	Page
ARTICLE I
Definitions
SECTION 1.01. Defined Terms		1
SECTION 1.02. Terms Generally		25
SECTION 1.03. Pro Forma Calculations		26
SECTION 1.04. Classification of Loans and Borrowings		26
SECTION 1.05. Senior Debt		26
ARTICLE II
The Credits
SECTION 2.01. Commitments		26
SECTION 2.02. Loans		27
SECTION 2.03. Borrowing Procedure		28
SECTION 2.04. Evidence of Debt; Repayment of Loans		28
SECTION 2.05. Fees		29
SECTION 2.06. Interest on Loans		30
SECTION 2.07. Default Interest		31
SECTION 2.08. Alternate Rate of Interest		31
SECTION 2.09. Termination and Reduction of Commitments		31
SECTION 2.10. Conversion and Continuation of Borrowings		32
SECTION 2.11. Repayment of Term Borrowings		33
SECTION 2.12. Optional Prepayment		34
SECTION 2.13. Mandatory Prepayments		35
SECTION 2.14. Reserve Requirements; Change in Circumstances		36
SECTION 2.15. Change in Legality		38
SECTION 2.16. Indemnity		38
SECTION 2.17. Pro Rata Treatment		39
SECTION 2.18. Sharing of Setoffs		39
SECTION 2.19. Payments		40
SECTION 2.20. Taxes		40
SECTION 2.21. Assignment of Commitments Under Certain Circumstances; Duty to Mitigate		42
SECTION 2.22. Swingline Loans		43
SECTION 2.23. Letters of Credit		44
SECTION 2.24. Increase in Term Loan Commitments		49
ARTICLE III
Representations and Warranties

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	Page
SECTION 3.01. Organization; Powers		51
SECTION 3.02. Authorization		51
SECTION 3.03. Enforceability		52
SECTION 3.04. Governmental Approvals		52
SECTION 3.05. Financial Statements		52
SECTION 3.06. No Material Adverse Change		53
SECTION 3.07. Title to Properties; Possession Under Leases		53
SECTION 3.08. Subsidiaries		53
SECTION 3.09. Litigation; Compliance with Laws		54
SECTION 3.10. Agreements		54
SECTION 3.11. Federal Reserve Regulations		54
SECTION 3.12. Investment Company Act; Public Utility Holding Company Act		54
SECTION 3.13. Use of Proceeds		55
SECTION 3.14. Tax Returns		55
SECTION 3.15. No Material Misstatements		55
SECTION 3.16. Employee Benefit Plans		55
SECTION 3.17. Environmental Matters		55
SECTION 3.18. Insurance		56
SECTION 3.19. Security Documents		56
SECTION 3.20. Location of Real Property and Leased Premises		57
SECTION 3.21. Labor Matters		57
SECTION 3.22. Solvency		57
SECTION 3.23. Subchapter S Corporation Status; ESOT Tax-Exempt Status		57
SECTION 3.24. ESOP		57
SECTION 3.25. Subordinated Indebtedness		59
ARTICLE IV
Conditions of Lending
SECTION 4.01. All Credit Events		59
SECTION 4.02. First Credit Event		60
ARTICLE V
Affirmative Covenants
SECTION 5.01. Existence; Businesses and Properties		63
SECTION 5.02. Insurance		63
SECTION 5.03. Obligations and Taxes		64
SECTION 5.04. Financial Statements, Reports, etc		64
SECTION 5.05. Litigation and Other Notices		66
SECTION 5.06. Information Regarding Collateral		67
SECTION 5.07. Maintaining Records; Access to Properties and Inspections; Maintenance of Ratings		68
SECTION 5.08. Use of Proceeds		68
SECTION 5.09. Further Assurances		68

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	Page
SECTION 5.10. Interest Rate Protection		69
SECTION 5.11. Mezzanine Note Redemption		69
ARTICLE VI
Negative Covenants
SECTION 6.01. Indebtedness		70
SECTION 6.02. Liens		72
SECTION 6.03. Sale and Lease-Back Transactions		74
SECTION 6.04. Investments, Loans and Advances		74
SECTION 6.05. Mergers, Consolidations, Sales of Assets and Acquisitions		76
SECTION 6.06. Restricted Payments; Restrictive Agreements		76
SECTION 6.07. Transactions with Affiliates		77
SECTION 6.08. Business of the Borrower and Subsidiaries		78
SECTION 6.09. Other Indebtedness and Agreements		78
SECTION 6.10. Assets as Plan Assets		78
SECTION 6.11. Prohibited Transaction		78
SECTION 6.12. Interest Coverage Ratio		78
SECTION 6.13. Maximum Leverage Ratio		79
SECTION 6.14. Fiscal Year		79
ARTICLE VII
Events of Default
ARTICLE VIII
The Administrative Agent and the Collateral Agent
ARTICLE IX
Miscellaneous
SECTION 9.01. Notices		85
SECTION 9.02. Survival of Agreement		86
SECTION 9.03. Binding Effect		86
SECTION 9.04. Successors and Assigns		86
SECTION 9.05. Expenses; Indemnity		91
SECTION 9.06. Right of Setoff		92
SECTION 9.07. Applicable Law		92
SECTION 9.08. Waivers; Amendment		93
SECTION 9.09. Interest Rate Limitation		94
SECTION 9.10. Entire Agreement		94
SECTION 9.11. WAIVER OF JURY TRIAL		94
SECTION 9.12. Severability		95

iii

	Page
SECTION 9.13. Counterparts		95
SECTION 9.14. Headings		95
SECTION 9.15. Jurisdiction; Consent to Service of Process		95
SECTION 9.16. Confidentiality		96
SECTION 9.17. USA Patriot Act Notice		97

SCHEDULES
Schedule 1.01(a)	-	ESOP Plan Documents
Schedule 1.01(b)	-	Existing Letters of Credit
Schedule 1.01(c)	-	Subsidiary Guarantors
Schedule 2.01	-	Lenders and Commitments
Schedule 3.04(b)	-	Material Contracts
Schedule 3.08	-	Subsidiaries
Schedule 3.09	-	Litigation
Schedule 3.17	-	Environmental Matters
Schedule 3.18	-	Insurance
Schedule 3.19(a)	-	UCC Filing Offices
Schedule 3.20(a)	-	Owned Real Property
Schedule 3.20(b)	-	Leased Real Property
Schedule 3.24	-	Certain ESOP Plan Documents
Schedule 6.01	-	Indebtedness Existing on the Closing Date
Schedule 6.02	-	Liens Existing on the Closing Date

EXHIBITS
Exhibit A	-	Form of Administrative Questionnaire
Exhibit B	-	Form of Assignment and Acceptance
Exhibit C	-	Form of Borrowing Request
Exhibit D	-	Form of Guarantee and Collateral Agreement
Exhibit E	-	Form of Notice of Conversion/Continuation
Exhibit F	-	Form of Notice of Prepayment
Exhibit G	-	Form of Opinion of Baker & McKenzie
Exhibit H-1		Form of Revolving Promissory Note
Exhibit H-2		Form of Term Promissory Note

iv

     CREDIT AGREEMENT dated as of August 2, 2004, among ALION SCIENCE AND TECHNOLOGY CORPORATION, a Delaware corporation (the “Borrower”), the LENDERS (as defined in Article I) and CREDIT SUISSE FIRST BOSTON, as administrative agent (in such capacity, the “Administrative Agent”) and as collateral agent (in such capacity, the “Collateral Agent”) for the Lenders.

     The Borrower has requested the Lenders to extend credit in the form of (a) Term Loans (such term and each other capitalized term used but not defined in this introductory statement having the meaning given it in Article I) on the Closing Date and on up to three other occasions occurring during the Delayed Draw Availability Period in an aggregate principal amount not in excess of $100,000,000, and (b) Revolving Loans at any time and from time to time prior to the Revolving Credit Maturity Date, in an aggregate principal amount at any time outstanding not in excess of $30,000,000. The Borrower also has requested the Swingline Lender to extend credit, at any time and from time to time prior to the Revolving Credit Maturity Date, in the form of Swingline Loans, in an aggregate principal amount at any time outstanding not in excess of $5,000,000, and the Issuing Bank to issue Letters of Credit, in an aggregate face amount at any time outstanding not in excess of $5,000,000. The proceeds of the Term Loans to be made on the Closing Date will be used on the Closing Date solely (a) to repay all amounts due or outstanding under the Existing Credit Agreement, including accrued interest and prepayment penalties (if any), and (b) to pay related fees and expenses. The proceeds of the Term Loans made during the Delayed Draw Availability Period will be used solely (a) to finance Permitted Acquisitions, (b) to effect in whole or in part the Mezzanine Note Redemption and (c) to pay related fees and expenses. The proceeds of Incremental Term Loans made from time to time will be used solely to effect the Mezzanine Note Redemption (to the extent not completed during the Delayed Draw Availability Period), to finance Permitted Acquisitions and to effect the payment and satisfaction of the Mezzanine Warrant Put Right, if it is exercised, or for any other lawful purpose set forth in the applicable Incremental Term Loan Assumption Agreement. The proceeds of the Revolving Loans and the Swingline Loans are to be used solely for ongoing working capital needs and other general corporate purposes, including to finance Permitted Acquisitions. The Letters of Credit will be used solely to support payment obligations incurred in the ordinary course of business by the Borrower and the Subsidiaries.

     The Lenders are willing to extend such credit to the Borrower and the Issuing Bank is willing to issue Letters of Credit for the account of the Borrower on the terms and subject to the conditions set forth herein. Accordingly, the parties hereto agree as follows:

ARTICLE I

Definitions

     SECTION 1.01. Defined Terms. As used in this Agreement, the following terms shall have the meanings specified below:

     “ABR”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate.

     “Acquired Entity” shall have the meaning assigned to such term in Section 6.04(g).

     “Adjusted LIBO Rate” shall mean, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum equal to the product of (a) the LIBO Rate in effect for such Interest Period and (b) Statutory Reserves.

     “Administrative Agent Fees” shall have the meaning assigned to such term in Section 2.05(b).

     “Administrative Questionnaire” shall mean an Administrative Questionnaire in the form of Exhibit A, or such other form as may be supplied from time to time by the Administrative Agent.

     “Affiliate” shall mean, when used with respect to a specified person, another person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the person specified; provided, however, that, for purposes of Section 6.07, the term “Affiliate” shall also include any person that directly or indirectly owns 5% or more of any class of Equity Interests of the person specified or that is an officer or director of the person specified.

     “Aggregate Revolving Credit Exposure” shall mean the aggregate amount of the Lenders’ Revolving Credit Exposures.

     “Agreement” shall mean this Credit Agreement, as it may be amended, restated, supplemented or otherwise modified from time to time, including the Schedules and Exhibits hereto.

     “Alternate Base Rate” shall mean, for any day, a rate per annum equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus ½ of 1%. If the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including the inability or failure of the Administrative Agent to obtain sufficient quotations in accordance with the terms of the definition thereof, the Alternate Base Rate shall be determined without regard to clause (b) of the preceding sentence until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, as the case may be.

     “Applicable Percentage” shall mean, except as otherwise provided in the applicable Incremental Term Loan Assumption Agreement with respect to any Other Term Loan, for any day, (a) with respect to any Eurodollar Term Loan, 2.75%, (b) with

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respect to any ABR Term Loan, 1.75%, (c) with respect to any Swingline Loan, the applicable percentage set forth below under the caption “ABR Spread”, based upon the Leverage Ratio as of the relevant date of determination, and (d) with respect to any Eurodollar Loan or ABR Loan that is a Revolving Loan, the applicable percentage set forth below under the caption “Eurodollar Spread” or “ABR Spread”, as the case may be, based upon the Leverage Ratio as of the relevant date of determination:

Leverage Ratio	Eurodollar Spread			ABR Spread
Category 1		2.75	%		1.75	%
Greater than or equal to 3.00 to 1.00
Category 2		2.50	%		1.50	%
Greater than or equal to 2.50 to 1.00 but less than 3.00 to 1.00
Category 3		2.25	%		1.25	%
Greater than or equal to 2.00 to 1.00 but less than 2.50 to 1.00
Category 4		2.00	%		1.00	%
Less than 2.00 to 1.00

     Each change in the Applicable Percentage resulting from a change in the Leverage Ratio shall be effective with respect to all Revolving Loans, Swingline Loans and Letters of Credit outstanding on and after the date of delivery to the Administrative Agent of the financial statements required by Section 5.04(a) or (b) and certificates required by Section 5.04(c) indicating such change until the date immediately preceding the next date of delivery of such financial statements and certificates indicating another such change. Notwithstanding the foregoing, until the Borrower shall have delivered the financial statements required by Section 5.04(b) and the certificate required by Section 5.04(c) covering a period of at least six full months following the Closing Date, the Leverage Ratio shall be deemed to be in Category 1 for purposes of determining the Applicable Percentage with respect to Swingline Loans, Revolving Loans and Letters of Credit. In addition, (a) if the Borrower shall have failed to deliver the financial statements required by Section 5.04(a) or (b) or the certificate required by Section 5.04(c) when required, and such failure shall continue for at least five days, or (b) at any time after the occurrence of an Event of Default, the Leverage Ratio shall be deemed to be in Category 1 for the purposes of determining the Applicable Percentage with respect to Revolving Loans, Swingline Loans and Letters of Credit until such time as (i) such

3

financial statements or certificate shall have been delivered or (ii) such Event of Default shall have been cured or waived.

     “Asset Sale” shall mean the sale, transfer or other disposition (by way of merger, casualty, condemnation or otherwise) by the Borrower or any of the Subsidiaries to any person other than the Borrower or any Subsidiary Guarantor of (a) any Equity Interests of any of the Subsidiaries (other than directors’ qualifying shares) or (b) any other assets of the Borrower or any of the Subsidiaries (other than (i) inventory, damaged, obsolete or worn out assets, scrap and Permitted Investments, in each case disposed of in the ordinary course of business, (ii) non-exclusive licenses of intellectual property and sale or discount of overdue accounts receivable in connection with collections, in each case made in the ordinary course of business, and (iii) dispositions between or among Foreign Subsidiaries); provided that any transaction or series of related transactions described in clause (b) above having a value not in excess of $350,000 shall be deemed not to be an “Asset Sale” for purposes of this Agreement.

     “Assignment and Acceptance” shall mean an assignment and acceptance entered into by a Lender and an assignee, and accepted by the Administrative Agent, in the form of Exhibit B or such other form as shall be approved by the Administrative Agent.

     “Assignment of Claims Act” shall mean the Assignment of Claims Act of 1940, as amended from time to time.

     “Board” shall mean the Board of Governors of the Federal Reserve System of the United States of America.

     “Borrowing” shall mean (a) Loans of the same Class and Type made, converted or continued on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect, or (b) a Swingline Loan.

     “Borrowing Request” shall mean a request by the Borrower in accordance with the terms of Section 2.03 and substantially in the form of Exhibit C, or such other form as shall be approved by the Administrative Agent.

     “Business Day” shall mean any day other than a Saturday, Sunday or day on which banks in New York City are authorized or required by law to close; provided, however, that when used in connection with a Eurodollar Loan, the term “Business Day” shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market.

     “Capital Expenditures” shall mean, for any period, without duplication, (a) the additions to property, plant and equipment and other capital expenditures of the Borrower and its consolidated Subsidiaries that are (or should be) set forth in a consolidated statement of cash flows of the Borrower for such period prepared in accordance with GAAP and (b) Capital Lease Obligations or Synthetic Lease Obligations incurred by the Borrower and its consolidated Subsidiaries during such period, but excluding in each case any such expenditure made to restore, replace or rebuild property to the condition of such property immediately prior to any damage, loss, destruction or condemnation of such

4

property, to the extent such expenditure is made with insurance proceeds, condemnation awards or damage recovery proceeds relating to any such damage, loss, destruction or condemnation.

     “Capital Lease Obligations” of any person shall mean the obligations of such person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP.

     A “Change in Control” shall be deemed to have occurred if (a) prior to a Qualified Public Offering, the ESOT shall fail to own, directly or indirectly, beneficially and of record, shares representing at least 51% of each of the aggregate ordinary voting power and aggregate equity value represented by the issued and outstanding Equity Interests of the Borrower, (b) after a Qualified Public Offering, any “person” or “group” (within the meaning of the Securities Exchange Act of 1934 and the rules of the Securities and Exchange Commission thereunder as in effect on the date hereof) other than IIT or the ESOT becomes, directly or indirectly, the beneficial owner of Equity Interests in the Borrower representing more than 37.5% of the aggregate ordinary voting power represented by the issued and outstanding Equity Interests of the Borrower, (c) a majority of the seats (other than vacant seats) on the board of directors of the Borrower shall at any time be occupied by persons who were neither (i) nominated by the board of directors of the Borrower nor (ii) appointed by directors so nominated, or (d) any change in control (or similar event, however denominated) with respect to the Borrower shall occur under and as defined in (i) any indenture or agreement in respect of Material Indebtedness to which the Borrower or any Subsidiary is a party or (ii) any of the then existing and effective Securities Purchase Agreements, Warrants or Rights Agreement.

     “Change in Law” shall mean (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by any Lender or the Issuing Bank (or, for purposes of Section 2.14, by any lending office of such Lender or by such Lender’s or Issuing Bank’s holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement.

     “Class”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are Revolving Loans, Term Loans, Other Term Loans or Swingline Loans and, when used in reference to any Commitment, refers to whether such Commitment is a Revolving Credit Commitment, a Term Loan Commitment, an Incremental Term Commitment or a Swingline Commitment.

     “Closing Date” shall mean August 2, 2004.

5

     “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time.

     “Collateral” shall mean all the “Collateral” as defined in any Security Document.

     “Commitment” shall mean, with respect to any Lender, such Lender’s Revolving Credit Commitment, Term Loan Commitment, Incremental Term Commitment and/or Swingline Commitment.

     “Commitment Fee” shall have the meaning assigned to such term in Section 2.05(a).

     “Confidential Information Memorandum” shall mean the Confidential Information Memorandum of the Borrower dated July 2004.

     “Consolidated EBITDA” shall mean, for any period, Consolidated Net Income for such period plus (a) without duplication and to the extent deducted in determining such Consolidated Net Income, the sum of (i) Consolidated Interest Expense for such period, (ii) consolidated income tax expense for such period, (iii) all amounts attributable to depreciation and amortization, including amortization of goodwill and other intangible assets, for such period, (iv) cash contributions to the ESOP during such period in respect of the repurchase liability of the Borrower under the ESOP Plan Documents, (v) any non-cash charges or expenses (other than the write-down of current assets) for such period, including (A) non-cash expenses associated with the recognition of the difference between the fair market value of the Warrants and the exercise price of such Warrants, (B) non-cash expenses with respect to stock appreciation rights, phantom stock plans, the Warrants and accretion of the Warrants and (C) non-cash contributions to the ESOP, (vi) any extraordinary losses for such period and (vii) any non-recurring charges and adjustments for such period treated as such by the independent third-party valuation firm that prepares valuation reports in connection with the ESOP and minus (b) without duplication (i) all cash payments made during such period on account of reserves, restructuring charges and other non-cash charges added to Consolidated Net Income pursuant to clause (a)(v) above in a previous period and (ii) to the extent included in determining such Consolidated Net Income, any extraordinary gains and all non-cash items of income for such period, all determined on a consolidated basis in accordance with GAAP. For purposes of determining the Interest Coverage Ratio and the Leverage Ratio as of or for the periods ended on September 30, 2004, December 31, 2004 and March 31, 2005, Consolidated EBITDA will be deemed to be equal to (i) for the fiscal quarter ended December 31, 2003, $7,500,000, (ii) for the fiscal quarter ended March 31, 2004, $7,000,000, and (iii) for the fiscal quarter ended June 30, 2004, $7,700,000.

     “Consolidated Interest Expense” shall mean, for any period, the sum of (a) the interest expense (excluding fees but including imputed interest expense in respect of Capital Lease Obligations and Synthetic Lease Obligations) of the Borrower and the Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP, plus (b) any interest accrued during such period in respect of Indebtedness of the Borrower or any Subsidiary that is required to be capitalized rather than included in

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consolidated interest expense for such period in accordance with GAAP. For purposes of the foregoing, interest expense shall be determined after giving effect to any net payments made or received by the Borrower or any Subsidiary with respect to interest rate Hedging Agreements. For purposes of determining the Interest Coverage Ratio for the period of four consecutive quarters ended September 30, 2004, December 31, 2004 and March 31, 2005, Consolidated Interest Expense shall be deemed to be equal to (a) the Consolidated Interest Expense payable in cash for the fiscal quarter ended September 30, 2004, multiplied by 4, (b) the Consolidated Interest Expense payable in cash for the two consecutive fiscal quarters ended December 31, 2004, multiplied by 2 and (c) the Consolidated Interest Expense payable in cash for the three consecutive fiscal quarters ended March 31, 2005, multiplied by 4/3, respectively.

     “Consolidated Net Income” shall mean, for any period, the net income or loss of the Borrower and the Subsidiaries for such period determined on a consolidated basis in accordance with GAAP; provided that there shall be excluded (a) the income of any Subsidiary to the extent that the declaration or payment of dividends or similar distributions by the Subsidiary of that income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, statute, rule or governmental regulation applicable to such Subsidiary, (b) the income or loss of any person accrued prior to the date it becomes a Subsidiary or is merged into or consolidated with the Borrower or any Subsidiary or the date that such person’s assets are acquired by the Borrower or any Subsidiary and (c) any gains or losses attributable to sales of assets out of the ordinary course of business and the transaction costs in connection with such sales.

     “Control” shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of voting securities, by contract or otherwise, and the terms “Controlling” and “Controlled” shall have meanings correlative thereto.

     “Controlled Group” shall mean the group consisting of (a) any corporation which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the Borrower, (b) a partnership or other trade or business (whether or not incorporated) which is under common control (within the meaning of Section 414(c) of the Code) with the Borrower, and (c) a member of the same affiliated service group (within the meaning of Section 414(m) of the Code) as the Borrower, any corporation described in clause (a) above or any partnership or trade or business described in clause (b) above.

     “Credit Event” shall have the meaning assigned to such term in Section 4.01.

     “Credit Facilities” shall mean the revolving credit and term loan facilities provided for by this Agreement.

     “Current Assets” shall mean, at any time, the consolidated current assets (other than cash and Permitted Investments) of the Borrower and the Subsidiaries.

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     “Current Liabilities” shall mean, at any time, the consolidated current liabilities of the Borrower and the Subsidiaries at such time, but excluding, without duplication, (a) the current portion of any long-term Indebtedness and (b) outstanding Revolving Loans and Swingline Loans.

     “Default” shall mean any event or condition which upon notice, lapse of time or both would constitute an Event of Default.

     “Defaulting Lender” shall mean any Revolving Credit Lender that has (a) defaulted in its obligation to make a Revolving Loan or to fund its participation in a Letter of Credit or Swingline Loan required to be made or funded by it hereunder, (b) notified the Administrative Agent or a Loan Party in writing that it does not intend to satisfy any such obligation or (c) become insolvent or has been taken over by any Governmental Authority.

     “Delayed Draw Availability Period” shall mean the period commencing on and including the first Business Day following the Closing Date and ending on and including the date that is 60 days after the Closing Date.

     “dollars” or “$” shall mean lawful money of the United States of America.

     “Domestic Subsidiaries” shall mean all Subsidiaries incorporated or organized under the laws of the United States of America, any State thereof or the District of Columbia.

     “Environmental Laws” shall mean all former, current and future Federal, state, local and foreign laws (including common law), treaties, regulations, rules, ordinances, codes, decrees, judgments, directives, orders (including consent orders), and agreements in each case, relating to protection of the environment, natural resources, human health and safety or the presence, Release of, or exposure to, Hazardous Materials, or the generation, manufacture, processing, distribution, use, treatment, storage, transport, recycling or handling of, or the arrangement for such activities with respect to, Hazardous Materials.

     “Environmental Liability” shall mean all liabilities, obligations, damages, losses, claims, actions, suits, judgments, orders, fines, penalties, fees, expenses and costs (including administrative oversight costs, natural resource damages and remediation costs), whether contingent or otherwise, arising out of or relating to (a) compliance or non-compliance with any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the Release of any Hazardous Materials or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing.

     “Equity Interests” shall mean shares of capital stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust, including the ESOT, or other equity interests in any person.

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     “Equity Issuance” shall mean any issuance or sale by the Borrower or any Subsidiary of any Equity Interests of the Borrower or any such Subsidiary, as applicable, except in each case for (a) any issuance or sale to the Borrower or any Subsidiary, (b) any issuance of directors’ qualifying shares, and (c) sales or issuances of common stock, options, warrants, stock appreciation rights, phantom stock, or other incentive agreements of the Borrower (i) to the ESOT Trustee (for the benefit of the ESOP) or (ii) to management or employees of the Borrower or any Subsidiary under any employee stock option or stock purchase plan, stock appreciation rights plan, phantom stock plan or arrangement or employee benefit plan or arrangement in existence from time to time.

     “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as the same may be amended from time to time.

     “ERISA Affiliate” shall mean any trade or business (whether or not incorporated) that, together with the Borrower, is treated as a single employer under Section 414(b) or (c) of the Code, or solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code.

     “ERISA Event” shall mean (a) any “reportable event”, as defined in Section 4043 of ERISA or the regulations issued thereunder, with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an “accumulated funding deficiency” (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by the Borrower or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan or the withdrawal or partial withdrawal of the Borrower or any of its ERISA Affiliates from any Plan or Multiemployer Plan; (e) the receipt by the Borrower or any of its ERISA Affiliates from the PBGC or a plan administrator of any notice relating to the intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f) the adoption of any amendment to a Plan that would require the provision of security pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA; (g) the receipt by the Borrower or any of its ERISA Affiliates of any notice, or the receipt by any Multiemployer Plan from the Borrower or any of its ERISA Affiliates of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA; (h) the occurrence of a “prohibited transaction” with respect to which the Borrower or any of the Subsidiaries is a “disqualified person” (within the meaning of Section 4975 of the Code) or with respect to which the Borrower or any such Subsidiary could otherwise be liable; or (i) any other event or condition with respect to a Plan or Multiemployer Plan that could result in liability of the Borrower or any Subsidiary.

     “ESOP” shall mean the employee benefit plan entitled “The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan” adopted and maintained by the Borrower.

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     “ESOP Fiduciary” shall mean the named fiduciary of the ESOP under ERISA. As of the Closing Date, the ESOP Fiduciary is the ESOP Committee of the Borrower.

     “ESOP Plan Documents” shall mean collectively, the documents listed on Schedule 1.01(a), each as may be amended, supplemented or modified from time to time as permitted by Section 6.09.

     “ESOT” shall mean the trust entitled “The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Trust” and adopted and maintained by the Borrower pursuant to the applicable ESOP Plan Documents.

     “ESOT Trustee” shall mean the trustee of the ESOT. As of the Closing Date, the ESOT Trustee is State Street Bank and Trust Company.

     “Eurodollar”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Adjusted LIBO Rate.

     “Event of Default” shall have the meaning assigned to such term in Article VII.

     “Excess Cash Flow” shall mean, for any fiscal year of the Borrower, the excess of (a) the sum, without duplication, of (i) Consolidated EBITDA for such fiscal year and (ii) reductions to noncash working capital of the Borrower and the Subsidiaries for such fiscal year (i.e., the decrease, if any, in Current Assets minus Current Liabilities from the beginning to the end of such fiscal year) over (b) the sum, without duplication, of (i) the amount of any Taxes payable in cash by the Borrower and the Subsidiaries with respect to such fiscal year, (ii) Consolidated Interest Expense for such fiscal year, (iii) Capital Expenditures made in cash during such fiscal year, except to the extent financed with the proceeds of Indebtedness, equity issuances, casualty proceeds, condemnation proceeds or other proceeds that would not be included in Consolidated EBITDA, (iv) permanent repayments of Indebtedness (except any mandatory prepayments of Loans under Section 2.13) made by the Borrower and the Subsidiaries during such fiscal year, but only to the extent that such prepayments by their terms cannot be reborrowed or redrawn and do not occur in connection with a refinancing of all or any portion of such Indebtedness, (v) additions to noncash working capital for such fiscal year (i.e., the increase, if any, in Current Assets minus Current Liabilities from the beginning to the end of such fiscal year), (vi) the purchase price of all Permitted Acquisitions paid in cash during such fiscal year, (vii) cash contributions made to the ESOP during such fiscal year and included in Consolidated EBITDA pursuant to clause (a)(iv) of the definition of the term “Consolidated EBITDA”, and (viii) extraordinary losses and non-recurring charges and adjustments during such fiscal year, in each case to the extent included in Consolidated EBITDA pursuant to clauses (a)(vi) and (a)(vii), respectively, of the definition of the term “Consolidated EBITDA”.

     “Excluded Taxes” shall mean, with respect to the Administrative Agent, any Lender, the Issuing Bank or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) income or franchise taxes

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imposed on (or measured by) its net income by the United States of America, or by the jurisdiction under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction described in clause (a) above and (c) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under Section 2.21(a)), any withholding tax that is imposed on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement (or designates a new lending office) or is attributable to such Foreign Lender’s failure to comply with Section 2.20(e), except to the extent that such Foreign Lender (or its assignor, if any) was entitled, at the time of designation of a new lending office (or assignment), to receive additional amounts from the Borrower with respect to such withholding tax pursuant to Section 2.20(a).

     “Existing Credit Agreement” shall mean the Credit Agreement dated as of December 20, 2002, as amended, by and among the Borrower, the institutions from time to time party thereto as lenders and LaSalle Bank National Association, as Administrative Agent.

     “Existing Letters of Credit” shall mean each Letter of Credit previously issued for the account of the Borrower that is (a) outstanding on the Closing Date and (b) listed on Schedule 1.01(b).

     “Federal Funds Effective Rate” shall mean, for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for the day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it.

     “Fee Letter” shall mean the Fee Letter dated June 10, 2004, between the Borrower and the Administrative Agent.

     “Fees” shall mean the Commitment Fees, the Administrative Agent Fees, the L/C Participation Fees and the Issuing Bank Fees.

     “Financial Officer” of any person shall mean the chief financial officer, principal accounting officer, treasurer or controller of such person.

     “Foreign Lender” shall mean any Lender that is organized under the laws of a jurisdiction other than that in which the Borrower is located. For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction.

     “Foreign Ownership Control or Influence” has the meaning given to such phrase in the Federal National Industrial Security Program Operating Manual and any successor documentation or program thereto.

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     “Foreign Subsidiary” shall mean any Subsidiary that is not a Domestic Subsidiary.

     “GAAP” shall mean United States generally accepted accounting principles applied on a basis consistent with the practices the Borrower has employed historically in preparing its financial statements.

     “Government” shall mean the United States government or any department or agency thereof.

     “Governmental Authority” shall mean any Federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body.

     “Government Contracts” shall mean written contracts between the Borrower or any Subsidiary Guarantor and the Government.

     “Granting Lender” shall have the meaning assigned to such term in Section 9.04(i).

     “Guarantee” of or by any person shall mean any obligation, contingent or otherwise, of such person guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other person (the “primary obligor”) in any manner, whether directly or indirectly, and including any obligation of such person, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Indebtedness or other obligation, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment of such Indebtedness or other obligation or (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation; provided, however, that the term “Guarantee” shall not include endorsements for collection or deposit in the ordinary course of business.

     “Guarantee and Collateral Agreement” shall mean the Guarantee and Collateral Agreement, substantially in the form of Exhibit D, among the Borrower, the Subsidiaries party thereto and the Collateral Agent for the benefit of the Secured Parties.

     “Hazardous Materials” shall mean (a) any petroleum products or byproducts and all other hydrocarbons, coal ash, radon gas, asbestos, urea formaldehyde foam insulation, polychlorinated biphenyls, chlorofluorocarbons and all other ozone-depleting substances and (b) any chemical, material, substance or waste that is prohibited, limited or regulated by or pursuant to any Environmental Law.

     “Hedging Agreement” shall mean any interest rate protection agreement, foreign currency exchange agreement, commodity price protection agreement or other interest or currency exchange rate or commodity price hedging arrangement.

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     “IIT” shall mean Illinois Institute of Technology, an Illinois not-for-profit corporation.

     “IITRI” shall mean IIT Research Institute, a not-for-profit Illinois corporation controlled by IIT.

     “Incentive Arrangements” shall mean any stock ownership, restricted stock, warrants, stock option, or stock appreciation rights plans, “phantom” stock plans, deferred compensation arrangements, employment agreements, non-competition agreements, subscription and stockholders agreements and other incentive and bonus plans and similar arrangements made in connection with the retention of directors, executives, officers or employees of the Borrower and its Subsidiaries.

     “Incremental Term Commitment” shall mean the commitment of any Lender, established pursuant to Section 2.24, to make Incremental Term Loans to the Borrower.

     “Incremental Term Lender” shall mean a Lender with an Incremental Term Commitment or an outstanding Incremental Term Loan.

     “Incremental Term Loan Amount” shall mean, at any time, the excess, if any, of (a) the sum of (i) $50,000,000 plus (ii) the amount of unused Term Loan Commitments upon the expiration of the Delayed Draw Availability Period over (b) the aggregate amount of all Incremental Term Commitments established prior to such time pursuant to Section 2.24.

     “Incremental Term Loan Assumption Agreement” shall mean an Incremental Term Loan Assumption Agreement in form and substance reasonably satisfactory to the Administrative Agent, among the Borrower, the Administrative Agent and one or more Incremental Term Lenders.

     “Incremental Term Loan Maturity Date” shall mean the final maturity date of any Incremental Term Loan, as set forth in the applicable Incremental Term Loan Assumption Agreement.

     “Incremental Term Loan Repayment Dates” shall mean the dates scheduled for the repayment of principal of any Incremental Term Loan, as set forth in the applicable Incremental Term Loan Assumption Agreement.

     “Incremental Term Loans” shall mean Term Loans made by one or more Lenders to the Borrower pursuant to Section 2.01(b). Incremental Term Loans may be made in the form of additional Term Loans or, to the extent permitted by Section 2.24 and provided for in the relevant Incremental Term Loan Assumption Agreement, Other Term Loans.

     “Indebtedness” of any person shall mean, without duplication, (a) all obligations of such person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such person upon which interest charges are

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customarily paid, (d) all obligations of such person under conditional sale or other title retention agreements relating to property or assets purchased by such person (excluding trade accounts payable and accrued obligations incurred in the ordinary course of business), (e) all obligations of such person issued or assumed as the deferred purchase price of property or services (excluding trade accounts payable, accrued obligations incurred in the ordinary course of business and contingent earn-out obligations), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such person, whether or not the obligations secured thereby have been assumed, (g) all Guarantees by such person of Indebtedness of others, (h) all Capital Lease Obligations and Synthetic Lease Obligations of such person, (i) all obligations of such person as an account party in respect of letters of credit and (j) all obligations of such person in respect of bankers’ acceptances. The Indebtedness of any person shall include the Indebtedness of any partnership in which such person is a general partner.

     “Indemnified Taxes” shall mean Taxes other than Excluded Taxes.

     “Insignificant Subsidiary” shall mean any Subsidiary that either (a)(i) does not conduct any business operations, (ii) has assets with a total book value not in excess of $100,000 and (iii) does not have any Indebtedness outstanding, or (b) is a direct or indirect Subsidiary of the Borrower formed for purposes of effecting a Permitted Acquisition which Subsidiary is formed with the intention of meeting, and within one year after the consummation of such Permitted Acquisition meets, the criteria set forth in clause (a) above; provided that at no time shall any Subsidiary otherwise satisfying the criteria of this clause (b) be considered an “Insignificant Subsidiary” if such Subsidiary and all other such Subsidiaries hold 5% or more of the consolidated assets of the Borrower.

     “Interest Coverage Ratio” shall mean, for any period, the ratio of (a) Consolidated EBITDA for such period minus Capital Expenditures for such period to (b) Consolidated Interest Expense for such period payable in cash.

     “Interest Payment Date” shall mean (a) with respect to any ABR Loan (including any Swingline Loan), the last Business Day of each March, June, September and December, and (b) with respect to any Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months’ duration, each day that would have been an Interest Payment Date had successive Interest Periods of three months’ duration been applicable to such Borrowing.

     “Interest Period” shall mean, with respect to any Eurodollar Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day (or, if there is no numerically corresponding day, on the last day) in the calendar month that is 1, 2, 3 or 6 months thereafter (or 9 or 12 months thereafter if, at the time of the relevant Borrowing, all Lenders participating therein agree to make an Interest Period of such duration available), as the Borrower may elect; provided, however, that if any Interest Period would end on a day other than a Business Day, such

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Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day. Interest shall accrue from and including the first day of an Interest Period to but excluding the last day of such Interest Period. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing.

     “Issuing Bank” shall mean, as the context may require, (a) Credit Suisse First Boston, in its capacity as the issuer of Letters of Credit hereunder, (b) with respect to the Existing Letters of Credit, LaSalle Bank National Association and/or (c) any other Lender that may become an Issuing Bank pursuant to Section 2.23(i) or (k), with respect to Letters of Credit issued by such Lender. The Issuing Bank may, in its discretion, arrange for one or more Letters of Credit to be issued by Affiliates of the Issuing Bank, in which case the term “Issuing Bank” shall include any such Affiliate with respect to Letters of Credit issued by such Affiliate.

     “Issuing Bank Fees” shall have the meaning assigned to such term in Section 2.05(c).

     “L/C Commitment” shall mean the commitment of the Issuing Bank to issue Letters of Credit pursuant to Section 2.23.

     “L/C Disbursement” shall mean a payment or disbursement made by the Issuing Bank pursuant to a Letter of Credit.

     “L/C Exposure” shall mean at any time the sum of (a) the aggregate undrawn amount of all outstanding Letters of Credit at such time and (b) the aggregate principal amount of all L/C Disbursements that have not yet been reimbursed at such time. The L/C Exposure of any Revolving Credit Lender at any time shall equal its Pro Rata Percentage of the aggregate L/C Exposure at such time.

     “L/C Participation Fee” shall have the meaning assigned to such term in Section 2.05(c).

     “Lenders” shall mean (a) the persons listed on Schedule 2.01 (other than any such person that has ceased to be a party hereto pursuant to an Assignment and Acceptance) and (b) any person that has become a party hereto pursuant to an Assignment and Acceptance. Unless the context clearly indicates otherwise, the term “Lenders” shall include the Swingline Lender.

     “Letter of Credit” shall mean any letter of credit issued or deemed issued pursuant to Section 2.23.

     “Leverage Ratio” shall mean, on any date, the ratio of Total Debt on such date to Consolidated EBITDA for the period of four consecutive fiscal quarters most recently ended on or prior to such date.

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     “LIBO Rate” shall mean, with respect to any Eurodollar Borrowing for any Interest Period, the rate per annum determined by the Administrative Agent at approximately 11:00 a.m., London time, on the date that is two Business Days prior to the commencement of such Interest Period by reference to the British Bankers’ Association Interest Settlement Rates for deposits in dollars (as set forth by any service selected by the Administrative Agent that has been nominated by the British Bankers’ Association as an authorized information vendor for the purpose of displaying such rates) for a period equal to such Interest Period; provided that, to the extent that an interest rate is not ascertainable pursuant to the foregoing provisions of this definition, the “LIBO Rate” shall be the interest rate per annum determined by the Administrative Agent to be the average of the rates per annum at which deposits in dollars are offered for such relevant Interest Period to major banks in the London interbank market in London, England by the Administrative Agent at approximately 11:00 a.m., London time, on the date that is two Business Days prior to the beginning of such Interest Period.

     “Lien” shall mean, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, encumbrance, charge or security interest in or on such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities.

     “Loan Documents” shall mean this Agreement, the Letters of Credit, the Security Documents, the promissory notes, if any, executed and delivered pursuant to Section 2.04(e), the Amended and Restated Master Letter of Credit Agreement dated as of the Closing Date, between the Borrower and LaSalle Bank National Association, in its capacity as an Issuing Bank, as the same may be amended, restated, supplemented or otherwise modified from time to time, and each Incremental Term Loan Assumption Agreement.

     “Loan Parties” shall mean the Borrower and the Subsidiary Guarantors.

     “Loans” shall mean the Revolving Loans, the Term Loans and the Swingline Loans.

     “Margin Stock” shall have the meaning assigned to such term in Regulation U.

     “Material Adverse Effect” shall mean (a) a materially adverse effect on the business, assets, liabilities, operations or financial condition of the Borrower and the Subsidiaries, taken as a whole, (b) a material impairment of the ability of the Borrower or any other Loan Party to perform any of its obligations under any Loan Document to which it is or will be a party or (c) a material impairment of the rights of or benefits available to the Lenders under any Loan Document.

     “Material Contract” shall mean each Government Contract that has a remaining value of at least $5,000,000.

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     “Material Indebtedness” shall mean Indebtedness (other than the Loans and Letters of Credit), or obligations in respect of one or more Hedging Agreements, of any one or more of the Borrower and the Subsidiaries in an aggregate principal amount exceeding $10,000,000. For purposes of determining Material Indebtedness, the “principal amount” of the obligations of the Borrower or any Subsidiary in respect of any Hedging Agreement at any time shall be the maximum aggregate amount (giving effect to any netting agreements) that the Borrower or such Subsidiary would be required to pay if such Hedging Agreement were terminated at such time.

     “Mezzanine Note Redemption” shall mean the redemption or repayment by the Borrower of all its outstanding Mezzanine Notes, including accrued interest and prepayment penalties (if any), pursuant to the terms of the Mezzanine Note Securities Purchase Agreement.

     “Mezzanine Note Securities Purchase Agreement” shall mean the Mezzanine Note Securities Purchase Agreement dated as of December 20, 2002, by and between the Borrower and IITRI (as subsequently assigned to IIT), as the same may be amended, supplemented or modified from time to time as permitted by Section 6.09.

     “Mezzanine Notes” shall mean the Borrower’s 12% Mezzanine Notes due December 20, 2008 in an outstanding aggregate principal amount on the Closing Date of approximately $20,343,435.

     “Mezzanine Warrant Put Right” shall mean the right of any holder of a Warrant referred to in clauses (a) and (c) in the definition of the term “Warrants” to cause the Borrower to repurchase such Warrant in accordance with the terms of such Warrant.

     “Moody’s” shall mean Moody’s Investors Service, Inc., or any successor thereto.

     “Multiemployer Plan” shall mean a multiemployer plan as defined in Section 4001(a)(3) of ERISA.

     “Net Cash Proceeds” shall mean (a) with respect to any Asset Sale, the cash proceeds (including cash proceeds subsequently received (as and when received) in respect of noncash consideration initially received), net of (i) selling expenses (including reasonable broker’s fees or commissions, legal fees, transfer and similar taxes and the Borrower’s good faith estimate of income taxes paid or payable in connection with such sale), (ii) amounts provided as a reserve, in accordance with GAAP, against any liabilities under any indemnification obligations or purchase price adjustment associated with such Asset Sale; provided that, to the extent and at the time any such amounts are released from such reserve, such amounts shall constitute Net Cash Proceeds, and (iii) the principal amount, premium or penalty, if any, interest and other amounts on any Indebtedness for borrowed money (other than Indebtedness hereunder) which is secured by the asset sold in such Asset Sale and which is required to be repaid with such proceeds (other than any such Indebtedness assumed by the purchaser of such asset); provided, however, that, if (x) the Borrower shall deliver a certificate of a Financial Officer of the Borrower to the Administrative Agent within five Business Days after receipt of any such

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Net Cash Proceeds setting forth the Borrower’s intent to reinvest such proceeds in productive assets of a kind then used or usable in the business of the Borrower and the Subsidiaries within one-year of receipt of such proceeds and (y) no Default or Event of Default shall have occurred and be continuing at the time such certificate is delivered, such proceeds shall not constitute Net Cash Proceeds except to the extent not so used at the end of such one-year period, at which time such proceeds shall be deemed to be Net Cash Proceeds; and (b) with respect to any issuance or disposition of Indebtedness or any Equity Issuance, the cash proceeds thereof, net of all taxes and customary fees, commissions, costs and other expenses (including repurchase obligations to the extent reserved in accordance with GAAP) incurred in connection therewith.

     “Obligations” shall mean all obligations defined as “Obligations” in the Guarantee and Collateral Agreement and the other Security Documents.

     “Officer Note” shall mean a promissory note of the Borrower dated February 11, 2004, issued to Gary Amstutz in the principal amount of $750,000.

     “Other Taxes” shall mean any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made under any Loan Document or from the execution, delivery or enforcement of, or otherwise with respect to, any Loan Document.

     “Other Term Loans” shall have the meaning assigned to such term in Section 2.24.

     “PBGC” shall mean the Pension Benefit Guaranty Corporation referred to and defined in ERISA.

     “Perfection Certificate” shall mean the Perfection Certificate substantially in the form of Exhibit B to the Guarantee and Collateral Agreement.

     “Permitted Acquisition” shall have the meaning assigned to such term in Section 6.04(g).

     “Permitted Investments” shall mean:

     (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within one year from the date of acquisition thereof;

     (b) investments in commercial paper maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, the highest credit rating obtainable from S&P or from Moody’s;

     (c) investments in certificates of deposit, banker’s acceptances and time deposits maturing within one year from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, the Administrative

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Agent or any domestic office of any commercial bank organized under the laws of the United States of America or any State thereof that has a combined capital and surplus and undivided profits of not less than $500,000,000;

     (d) fully collateralized repurchase agreements with a term of not more than 30 days for securities described in clause (a) above and entered into with a financial institution satisfying the criteria of clause (c) above;

     (e) investments in “money market funds” within the meaning of Rule 2a-7 of the Investment Company Act of 1940, as amended, substantially all of whose assets are invested in investments of the type described in clauses (a) through (d) above; and

     (f) other short-term investments utilized by Foreign Subsidiaries in accordance with normal investment practices for cash management in investments of a type analogous to the foregoing.

     “person” shall mean any natural person, corporation, business trust, joint venture, association, company, limited liability company, partnership, Governmental Authority or other entity.

     “Plan” shall mean any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 307 of ERISA, and in respect of which the Borrower or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an “employer” as defined in Section 3(5) of ERISA.

     “Prime Rate” shall mean the rate of interest per annum determined from time to time by Credit Suisse First Boston as its prime rate in effect at its principal office in New York City and notified to the Borrower.

     “Pro Forma Basis” shall mean, with respect to compliance with any test or covenant hereunder, compliance with such covenant or test after giving effect to (a) any proposed Permitted Acquisition or (b) any Asset Sale of a Subsidiary or operating entity for which historical financial statements for the relevant period are available (including (i) pro forma adjustments arising out of events which are directly attributable to the proposed Permitted Acquisition or Asset Sale, are factually supportable and are expected to have a continuing impact, in each case as determined on a basis consistent with Article 11 of Regulation S-X of the Securities Act of 1933, as amended, as interpreted by the Staff of the Securities and Exchange Commission, and (ii) such other adjustments as are satisfactory to the Administrative Agent, in each case as certified by a Financial Officer of the Borrower) using, for purposes of determining such compliance, the historical financial statements of all entities or assets so acquired or sold and the consolidated financial statements of the Borrower and the Subsidiaries which shall be reformulated as if such Permitted Acquisition or Asset Sale, and all other Permitted Acquisitions and Asset Sales that have been consummated during the period, and any Indebtedness or other liabilities incurred in connection with any such Permitted Acquisitions had been consummated and incurred at the beginning of such period.

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     “Pro Forma Compliance” shall mean, at any date of determination, that the Borrower shall be in pro forma compliance with the covenants set forth in Sections 6.12 and 6.13 as of the date of such determination or the last day of the most recently completed fiscal quarter, as the case may be (computed on the basis of (a) balance sheet amounts as of such date and (b) income statement amounts for the most recently completed period of four consecutive fiscal quarters for which financial statements shall have been delivered to the Administrative Agent and calculated on a Pro Forma Basis in respect of the event giving rise to such determination).

     “Pro Rata Percentage” of any Revolving Credit Lender at any time shall mean the percentage of the Total Revolving Credit Commitment represented by such Lender’s Revolving Credit Commitment. In the event the Revolving Credit Commitments shall have expired or been terminated, the Pro Rata Percentages shall be determined on the basis of the Revolving Credit Commitments most recently in effect, giving effect to any subsequent assignments.

     “Qualified Public Offering” shall mean an underwritten public offering of common stock of the Borrower pursuant to an effective registration statement filed with the Securities and Exchange Commission in accordance with the Securities Act of 1933, as amended, that results in at least $30,000,000 of Net Cash Proceeds to the Borrower and results in the listing of the common stock of the Borrower on a national securities exchange or the NASDAQ National Market quotation system.

     “Register” shall have the meaning assigned to such term in Section 9.04(d).

     “Regulation T” shall mean Regulation T of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof.

     “Regulation U” shall mean Regulation U of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof.

     “Regulation X” shall mean Regulation X of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof.

     “Related Fund” shall mean, with respect to any Lender that is a fund that invests in bank loans, any other fund that invests in bank loans and is administered, advised or managed by the same investment advisor as such Lender or by an Affiliate of such investment advisor.

     “Related Parties” shall mean, with respect to any specified person, such person’s Affiliates and the respective directors, officers, employees and agents of such person and such person’s Affiliates.

     “Release” shall mean any release, spill, emission, leaking, dumping, injection, pouring, deposit, disposal, discharge, dispersal, leaching or migration into or through the environment or within or upon any building, structure, facility or fixture.

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     “Repayment Date” shall have the meaning given such term in Section 2.11. Unless the context otherwise requires, the term “Repayment Date” shall also include each Incremental Term Loan Repayment Date.

     “Required Lenders” shall mean, at any time, Lenders having Loans (excluding Swingline Loans), L/C Exposure, Swingline Exposure and unused Revolving Credit Commitments and Term Loan Commitments representing more than 50% of the sum of all Loans outstanding (excluding Swingline Loans), L/C Exposure, Swingline Exposure and unused Revolving Credit Commitments and Term Loan Commitments at such time; provided, however, that the Revolving Loans, L/C Exposure, Swingline Exposure and unused Revolving Credit Commitments of any Defaulting Lender shall be disregarded in the determination of Required Lenders at any time.

     “Responsible Officer” of any person shall mean any executive officer or Financial Officer of such person and any other officer or similar official thereof responsible for the administration of the obligations of such person in respect of this Agreement.

     “Restricted Indebtedness” shall mean Indebtedness of the Borrower or any Subsidiary, the payment, prepayment, repurchase or defeasance of which is restricted under Section 6.09(c).

     “Restricted Payment” shall mean any dividend or other distribution (whether in cash, securities or other property) with respect to any Equity Interests in the Borrower or any Subsidiary, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of or otherwise with respect to any Equity Interests in the Borrower or any Subsidiary or any option, warrant or other right to acquire any such Equity Interests in the Borrower or any Subsidiary.

     “Revolving Credit Borrowing” shall mean a Borrowing comprised of Revolving Loans.

     “Revolving Credit Commitment” shall mean, with respect to each Lender, the commitment of such Lender to make Revolving Loans (and to participate in Letters of Credit and Swingline Loans) hereunder as set forth on Schedule 2.01, or in the Assignment and Acceptance pursuant to which such Lender assumed its Revolving Credit Commitment, as applicable, as the same may be (a) reduced from time to time pursuant to Section 2.09 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04.

     “Revolving Credit Exposure” shall mean, with respect to any Revolving Credit Lender at any time, the aggregate principal amount at such time of all outstanding Revolving Loans of such Lender, plus the aggregate amount at such time of such Lender’s L/C Exposure, plus the aggregate amount at such time of such Lender’s Swingline Exposure.

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     “Revolving Credit Lender” shall mean a Lender with a Revolving Credit Commitment or an outstanding Revolving Loan.

     “Revolving Credit Maturity Date” shall mean August 2, 2009.

     “Revolving Loans” shall mean the revolving loans made by the Lenders to the Borrower pursuant to clause (a)(iii) of Section 2.01.

     “Rights Agreement” means the Rights Agreement dated as of December 20, 2002, by and among the Borrower, the ESOT and the other holders of Equity Interests (or warrants or options therefor) issued by the Borrower.

     “Secured Parties” shall have the meaning assigned to such term in the Guarantee and Collateral Agreement.

     “Securities Purchase Agreements” shall mean (a) the Mezzanine Note Securities Purchase Agreement and (b) the Seller Note Securities Purchase Agreement dated as of December 20, 2002, by and between the Borrower and IITRI (as subsequently assigned to IIT), as the same may be amended, supplemented or modified from time to time as permitted by Section 6.09.

     “Security Documents” shall mean the Guarantee and Collateral Agreement and each of the security agreements, mortgages and other instruments and documents executed and delivered pursuant to any of the foregoing or pursuant to Section 5.09.

     “Seller Subordinated Notes” shall mean the Borrower’s 6% Seller Subordinated Notes due December 20, 2010 in an outstanding aggregate principal amount on the Closing Date of approximately $39,900,000, together with additional Seller Subordinated Notes issued in lieu of cash interest thereon in accordance with the terms thereof.

     “SPC” shall have the meaning assigned to such term in Section 9.04(i).

     “S&P” shall mean Standard & Poor’s Ratings Service, or any successor thereto.

     “Specified U.K. Company” shall mean a company organized under the laws of, or conducting a substantial part of its business in, the United Kingdom, and identified to the Administrative Agent prior to the Closing Date.

     “Specified U.K. Investment” shall mean an investment made by the Borrower on or after the Closing Date to acquire up to 25% of the share capital via an investment in equity and/or convertible debt of the Specified U.K. Company for an aggregate amount not to exceed $3,000,000.

     “Statutory Reserves” shall mean a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board and any other banking authority, domestic or foreign, to which the Administrative

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Agent or any Lender (including any branch, Affiliate or other fronting office making or holding a Loan) is subject for Eurodollar Liabilities (as defined in Regulation D of the Board). Eurodollar Loans shall be deemed to constitute Eurodollar Liabilities as defined in Regulation D of the Board) and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D. Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage.

     “subsidiary” shall mean, with respect to any person (herein referred to as the “parent”), any corporation, partnership, association or other business entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or more than 50% of the general partnership interests are, at the time any determination is being made, owned, Controlled or held, or (b) that is, at the time any determination is made, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent.

     “Subsidiary” shall mean any subsidiary of the Borrower.

     “Subsidiary Guarantor” shall mean each Subsidiary listed on Schedule 1.01(c), and each other Subsidiary that is or becomes a party to the Guarantee and Collateral Agreement.

     “Swingline Commitment” shall mean the commitment of the Swingline Lender to make loans pursuant to Section 2.22, as the same may be reduced from time to time pursuant to Section 2.09.

     “Swingline Exposure” shall mean at any time the aggregate principal amount at such time of all outstanding Swingline Loans. The Swingline Exposure of any Revolving Credit Lender at any time shall equal its Pro Rata Percentage of the aggregate Swingline Exposure at such time.

     “Swingline Lender” shall mean Credit Suisse First Boston, in its capacity as lender of Swingline Loans hereunder.

     “Swingline Loan” shall mean any loan made by the Swingline Lender pursuant to Section 2.22.

     “Synthetic Lease” shall mean, as to any person, any lease (including leases that may be terminated by the lessee at any time) of any property (whether real, personal or mixed) having a value in excess of $100,000 (a) that is accounted for as an operating lease under GAAP and (b) in respect of which the lessee retains or obtains ownership of the property so leased for U.S. federal income tax purposes, other than any such lease under which such person is the lessor.

     “Synthetic Lease Obligations” shall mean, as to any person, an amount equal to the capitalized amount of the remaining lease payments under any Synthetic Lease that

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would appear on a balance sheet of such person in accordance with GAAP if such obligations were accounted for as Capital Lease Obligations.

     “Synthetic Purchase Agreement” shall mean any swap, derivative or other agreement or combination of agreements pursuant to which the Borrower or any Subsidiary is or may become obligated to make (a) any payment in connection with a purchase by any third party from a person other than the Borrower or any Subsidiary of any Equity Interest or Restricted Indebtedness or (b) any payment (other than on account of a permitted purchase by it of any Equity Interest or Restricted Indebtedness) the amount of which is determined by reference to the price or value at any time of any Equity Interest or Restricted Indebtedness; provided that no phantom stock plan, stock appreciation right plan or similar plan providing for payments only to current or former directors, officers or employees of the Borrower or the Subsidiaries (or to their heirs or estates) shall be deemed to be a Synthetic Purchase Agreement.

     “Taxes” shall mean any and all present or future taxes, levies, imposts, duties, deductions, charges, liabilities or withholdings imposed by any Governmental Authority.

     “Term Borrowing” shall mean a Borrowing comprised of Term Loans or Incremental Term Loans.

     “Term Lenders” shall mean the Lenders with Term Loan Commitments or outstanding Term Loans. Unless the context shall otherwise require, the term “Term Lenders” shall also include the Incremental Term Lenders.

     “Term Loan Commitment” shall mean, with respect to each Lender, the commitment of such Lender to make Term Loans hereunder as set forth on Schedule 2.01, or in the Assignment and Acceptance pursuant to which such Lender assumed its Term Loan Commitment, as applicable, as the same may be (a) reduced from time to time pursuant to Section 2.09 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04. Unless the context shall otherwise require, the term “Term Loan Commitments” shall also include the Incremental Term Commitments.

     “Term Loan Maturity Date” shall mean August 2, 2009.

     “Term Loans” shall mean the term loans made by the Lenders to the Borrower pursuant to Section 2.01. Unless the context shall otherwise require, the term “Term Loans” shall also include Incremental Term Loans.

     “Total Debt” shall mean, at any time, the total Indebtedness of the Borrower and the Subsidiaries at such time (excluding (i) the Seller Subordinated Notes and (ii) Indebtedness of the type described in clause (i) of the definition of such term, except to the extent of any unreimbursed drawings thereunder).

     “Total Revolving Credit Commitment” shall mean, at any time, the aggregate amount of the Revolving Credit Commitments, as in effect at such time. The initial Total Revolving Credit Commitment is $30,000,000.

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     “Transactions” shall mean, collectively, (a) the execution, delivery and performance by the Loan Parties of the Loan Documents to which they are a party and, in the case of the Borrower, the making of the Borrowings hereunder, (b) the repayment of all amounts due or outstanding under, and the termination of, the Existing Credit Agreement, and (c) the payment of related fees and expenses.

     “Type”, when used in respect of any Loan or Borrowing, shall refer to the Rate by reference to which interest on such Loan or on the Loans comprising such Borrowing is determined. For purposes hereof, the term “Rate” shall include the Adjusted LIBO Rate and the Alternate Base Rate.

     “USA Patriot Act” shall mean The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Title III of Pub. L. No. 107-56 (signed into law October 26, 2001)).

     “Warrants” shall mean (a) an aggregate of 504,902 detachable redeemable common stock warrants issued to the holders of the Mezzanine Notes, (b) an aggregate of 1,080,437 detachable redeemable common stock warrants issued to the holders of the Seller Subordinated Notes and (c) an aggregate of 22,062 redeemable common stock warrants issued to Dr. Bahman Atefi pursuant to the Deferred Compensation Agreement dated as of December 20, 2002, by and between the Borrower and Dr. Atefi.

     “wholly owned subsidiary” of any person shall mean a subsidiary of such person of which securities (except for directors’ qualifying shares) or other ownership interests representing 100% of the Equity Interests are, at the time any determination is being made, owned, Controlled or held by such person or one or more wholly owned subsidiaries of such person or by such person and one or more wholly owned subsidiaries of such person.

     “Withdrawal Liability” shall mean liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA.

     SECTION 1.02. Terms Generally. The definitions in Section 1.01 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”. The word “will” shall be construed to have the same meaning and effect as the word “shall”; and the words “asset” and “property” shall be construed as having the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. All references herein to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Except as otherwise expressly provided herein, (a) any reference in this Agreement to any Loan Document shall mean such document as amended, restated, supplemented or otherwise modified from time to time and (b) all terms of an accounting or financial nature shall be construed in accordance

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with GAAP, as in effect from time to time; provided, however, that if the Borrower notifies the Administrative Agent that the Borrower wishes to amend any covenant in Article VI or any related definition to eliminate the effect of any change in GAAP occurring after the date of this Agreement on the operation of such covenant (or if the Administrative Agent notifies the Borrower that the Required Lenders wish to amend Article VI or any related definition for such purpose), then the Borrower’s compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Borrower and the Required Lenders.

     SECTION 1.03. Pro Forma Calculations. With respect to any period during which any Permitted Acquisition or Asset Sale of the type described in clause (b) of the definition of the term “Pro Forma Basis” occurs as permitted pursuant to the terms hereof, the Leverage Ratio and the Interest Coverage Ratio shall be calculated with respect to such period and such Permitted Acquisition or Asset Sale on a Pro Forma Basis.

     SECTION 1.04. Classification of Loans and Borrowings. For purposes of this Agreement, Loans may be classified and referred to by Class (e.g., a “Revolving Loan”) or by Type (e.g., a “Eurodollar Loan”) or by Class and Type (e.g., a “Eurodollar Revolving Loan”). Borrowings also may be classified and referred to by Class (e.g., a “Revolving Borrowing”) or by Type (e.g., a “Eurodollar Borrowing”) or by Class and Type (e.g., a “Eurodollar Revolving Borrowing”).

     SECTION 1.05. Senior Debt. The Loans and other Obligations are hereby designated as “Senior Debt” for all purposes of the Securities Purchase Agreements.

ARTICLE II

The Credits

     SECTION 2.01. Commitments. Subject to the terms and conditions and relying upon the representations and warranties herein set forth, each Lender agrees, severally and not jointly, (a)(i) to make a Term Loan to the Borrower on the Closing Date and (ii) to make Term Loans to the Borrower on no more than three occasions during the Delayed Draw Availability Period, in an aggregate principal amount for all such Term Loans not to exceed its Term Loan Commitment, (b) to make Incremental Term Loans in an aggregate principal amount for all such Incremental Term Loans not to exceed its Incremental Term Loan Commitment and (c) to make Revolving Loans to the Borrower, at any time and from time to time after the date hereof, and until the earlier of the Revolving Credit Maturity Date and the termination of the Revolving Credit Commitment of such Lender in accordance with the terms hereof, in an aggregate principal amount at any time outstanding that will not result in such Lender’s Revolving Credit Exposure exceeding such Lender’s Revolving Credit Commitment. Within the limits set forth in clause (c) of the preceding sentence and subject to the terms, conditions and limitations set forth herein, the Borrower may borrow, pay or prepay, without

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premium or penalty (subject to Section 2.16), and reborrow Revolving Loans. Amounts paid or prepaid in respect of Term Loans may not be reborrowed.

     SECTION 2.02. Loans. (a) Each Loan (other than Swingline Loans) shall be made as part of a Borrowing consisting of Loans made by the Lenders ratably in accordance with their applicable Commitments; provided, however, that the failure of any Lender to make any Loan shall not in itself relieve any other Lender of its obligation to lend hereunder (it being understood, however, that no Lender shall be responsible for the failure of any other Lender to make any Loan required to be made by such other Lender). Except for Loans made pursuant to Section 2.23(e), the Loans comprising any Borrowing shall be in an aggregate principal amount that is (i) an integral multiple of $1,000,000 (except with respect to any Incremental Term Borrowing, to the extent otherwise provided in the related Incremental Term Loan Assumption Agreement) or (ii) equal to the remaining available balance of the applicable Commitment.

     (b) Subject to Sections 2.08 and 2.15, each Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the Borrower may request pursuant to Section 2.03. Each Lender may at its option make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement. Borrowings of more than one Type may be outstanding at the same time; provided, however, that the Borrower shall not be entitled to request any Borrowing that, if made, would result in more than eight Eurodollar Borrowings outstanding hereunder at any time. For purposes of the foregoing, Borrowings having different Interest Periods, regardless of whether they commence on the same date, shall be considered separate Borrowings.

     (c) Except with respect to Loans made pursuant to Section 2.23(e), each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds to such account in New York City as the Administrative Agent may designate not later than 1:00 p.m. (New York City time), and the Administrative Agent shall promptly credit the amounts so received to an account designated by the Borrower in the applicable Borrowing Request or, if a Borrowing shall not occur on such date because any condition precedent herein specified shall not have been met, return the amounts so received to the respective Lenders.

     (d) Unless the Administrative Agent shall have received notice from a Lender prior to the date of any Revolving Credit Borrowing that such Lender will not make available to the Administrative Agent such Lender’s portion of such Revolving Credit Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the date of such Revolving Credit Borrowing in accordance with paragraph (c) of this Section and the Administrative Agent may, in its sole discretion and in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If the Administrative Agent shall have so made funds available, then, to the extent that such Lender shall not have made such portion available to the Administrative Agent, such Lender and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding

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amount together with interest thereon, for each day from the date such amount is made available to the Borrower to but excluding the date such amount is repaid to the Administrative Agent at (i) in the case of the Borrower, a rate per annum equal to the interest rate applicable at the time to the Loans comprising such Revolving Credit Borrowing and (ii) in the case of such Lender, a rate determined by the Administrative Agent to represent its cost of overnight or short-term funds (which determination shall be conclusive absent manifest error). If such Lender shall repay to the Administrative Agent such corresponding amount, such amount shall constitute such Lender’s Loan as part of such Revolving Credit Borrowing for purposes of this Agreement.

     (e) Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request any Revolving Credit Borrowing if the Interest Period requested with respect thereto would end after the Revolving Credit Maturity Date.

     SECTION 2.03. Borrowing Procedure. In order to request a Borrowing (other than a Swingline Loan as to which this Section shall not apply), the Borrower shall hand deliver or fax to the Administrative Agent (or give telephonic notice promptly confirmed by written notice) a duly completed Borrowing Request (a) in the case of a Eurodollar Borrowing, not later than 12:00 noon (New York City time) three Business Days before a proposed Borrowing, and (b) in the case of an ABR Borrowing, not later than 12:00 noon (New York City time) one Business Day before a proposed Borrowing. Each Borrowing Request shall be irrevocable, shall be signed by or on behalf of the Borrower and shall specify the following information: (i) whether the Borrowing then being requested is to be a Term Borrowing, an Incremental Term Borrowing or a Revolving Credit Borrowing, and whether such Borrowing is to be a Eurodollar Borrowing or an ABR Borrowing, (ii) the date of such Borrowing (which shall be a Business Day), (iii) the number and location of the account to which funds are to be disbursed, (iv) the amount of such Borrowing, (v) if such borrowing is to be a Term Borrowing during the Delayed Draw Availability Period or an Incremental Term Borrowing, a statement as to the use of proceeds thereof, and (vi) if such Borrowing is to be a Eurodollar Borrowing, the Interest Period with respect thereto; provided, however, that, notwithstanding any contrary specification in any Borrowing Request, each requested Borrowing shall comply with the requirements set forth in Section 2.02. If no election as to the Type of Borrowing is specified in any such notice, then the requested Borrowing shall be an ABR Borrowing. If no Interest Period with respect to any Eurodollar Borrowing is specified in any such notice, then the Borrower shall be deemed to have selected an Interest Period of one month’s duration. The Administrative Agent shall promptly advise the applicable Lenders of any notice given pursuant to this Section (and the contents thereof), and of each Lender’s portion of the requested Borrowing.

     SECTION 2.04. Evidence of Debt; Repayment of Loans. (a) The Borrower hereby unconditionally promises to pay to the Administrative Agent for the account of each Lender (i) the principal amount of each Term Loan of such Lender as provided in Section 2.11 and (ii) the then unpaid principal amount of each Revolving Loan of such Lender on the Revolving Credit Maturity Date. The Borrower hereby promises to pay to the Swingline Lender the then unpaid principal amount of each Swingline Loan on the Revolving Credit Maturity Date.

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     (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time under this Agreement.

     (c) The Administrative Agent shall maintain accounts in which it will record (i) the amount of each Loan made hereunder, the Type thereof and, if applicable, the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder from the Borrower or any Subsidiary Guarantor and each Lender’s share thereof.

     (d) The entries made in the accounts maintained pursuant to paragraphs (b) and (c) of this Section shall be prima facie evidence of the existence and amounts of the obligations therein recorded; provided, however, that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligations of the Borrower to repay the Loans in accordance with their terms. Upon request, the Borrower may review the information contained in such accounts for purposes of verifying the accuracy of same.

     (e) Any Lender may request that Loans made by it hereunder be evidenced by a promissory note. In such event, the Borrower shall execute and deliver to such Lender a promissory note payable to such Lender and its registered assigns substantially in the form of Exhibit H-1 or H-2, as applicable. Notwithstanding any other provision of this Agreement, in the event any Lender shall request and receive such a promissory note, the interests represented by such note shall at all times (including after any assignment of all or part of such interests pursuant to Section 9.04) be represented by one or more promissory notes payable to the payee named therein or its registered assigns.

     SECTION 2.05. Fees. (a) The Borrower agrees to pay to each Lender, through the Administrative Agent, on the last Business Day of March, June, September and December in each year during the term hereof and on the date on which the Commitments of such Lender shall expire or be terminated as provided herein, a commitment fee (a “Commitment Fee”) equal to 0.50% per annum on the daily unused amount of the Commitments of such Lender during the preceding quarter (or shorter period commencing with the date hereof or ending with the Revolving Credit Maturity Date (in the case of the Revolving Credit Commitments), the last day of the Delayed Draw Availability Period (in the case of the Term Loan Commitments) or the date on which such Commitments shall otherwise expire or be terminated, as applicable). All Commitment Fees shall be computed on the basis of the actual number of days elapsed in a year of 360 days. For purposes of calculating Commitment Fees only, no portion of the Revolving Credit Commitments shall be deemed utilized under Section 2.17 as a result of outstanding Swingline Loans. Notwithstanding any other provision of this Agreement to the contrary and except to the extent otherwise provided for in the applicable Incremental Term Loan Assumption Agreement, no Commitment Fees shall be payable under this Agreement in respect of Incremental Term Commitments. Notwithstanding any other

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provision in this Agreement to the contrary, no Commitment Fee shall be payable under this Agreement in respect of Swingline Commitments.

     (b) The Borrower agrees to pay to the Administrative Agent, for its own account, the administrative fees set forth in the Fee Letter at the times and in the amounts specified therein (the “Administrative Agent Fees”).

     (c) The Borrower agrees to pay (i) to each Revolving Credit Lender, through the Administrative Agent, on the last Business Day of March, June, September and December of each year and on the date on which the Revolving Credit Commitment of such Lender shall be terminated as provided herein, a fee (an “L/C Participation Fee”), calculated on such Lender’s Pro Rata Percentage of the daily aggregate L/C Exposure (excluding the portion thereof attributable to unreimbursed L/C Disbursements) during the preceding quarter (or shorter period commencing with the date hereof or ending with the Revolving Credit Maturity Date or the date on which all Letters of Credit have been canceled or have expired and the Revolving Credit Commitments of all Lenders shall have been terminated), at a rate per annum equal to the Applicable Percentage from time to time used to determine the interest rate on Revolving Credit Borrowings comprised of Eurodollar Loans pursuant to Section 2.06, and (ii) to the Issuing Bank, with respect to each Letter of Credit, a fronting fee not in excess of 0.25% per annum on the outstanding face amount of the Letter of Credit issued, together with the standard issuance and administrative fees specified from time to time by the Issuing Bank (the “Issuing Bank Fees”). All L/C Participation Fees and Issuing Bank Fees shall be computed on the basis of the actual number of days elapsed in a year of 360 days.

     (d) All Fees shall be paid on the dates due, in immediately available funds, to the Administrative Agent for distribution, if and as appropriate, among the Lenders, except that the Issuing Bank Fees shall be paid directly to the Issuing Bank. Once paid, none of the Fees shall be refundable under any circumstances.

     SECTION 2.06. Interest on Loans. (a) Subject to the provisions of Section 2.07, the Loans comprising each ABR Borrowing, including each Swingline Loan, shall bear interest (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, when the Alternate Base Rate is determined by reference to the Prime Rate and over a year of 360 days at all other times and calculated from and including the date of such Borrowing to but excluding the date of repayment thereof) at a rate per annum equal to the Alternate Base Rate plus the Applicable Percentage in effect from time to time.

     (b) Subject to the provisions of Section 2.07, the Loans comprising each Eurodollar Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal to the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Percentage in effect from time to time.

     (c) Interest on each Loan shall be payable on the Interest Payment Dates applicable to such Loan except as otherwise provided in this Agreement. The applicable

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Alternate Base Rate or Adjusted LIBO Rate for each Interest Period or day within an Interest Period, as the case may be, shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error.

     SECTION 2.07. Default Interest. If the Borrower shall default in the payment of any principal of or interest on any Loan or any other amount due hereunder, by acceleration or otherwise, or under any other Loan Document, then, or, if any other Event of Default shall have occurred and be continuing and the Administrative Agent (acting at the direction of the Required Lenders) so directs, until such defaulted amount shall have been paid in full or such other Event of Default cured or waived, to the extent permitted by law, all amounts outstanding under this Agreement and the other Loan Documents shall bear interest (after as well as before judgment), payable on demand, at the rate otherwise applicable to such Loan pursuant to Section 2.06 plus 2% per annum.

     SECTION 2.08. Alternate Rate of Interest. In the event, and on each occasion, that on the day two Business Days prior to the commencement of any Interest Period for a Eurodollar Borrowing the Administrative Agent shall have determined that dollar deposits in the principal amounts of the Loans comprising such Borrowing are not generally available in the London interbank market, or that the rates at which such dollar deposits are being offered will not adequately and fairly reflect the cost to any Lender of making or maintaining its Eurodollar Loan during such Interest Period, the Administrative Agent shall, as soon as practicable thereafter, give written or fax notice of such determination to the Borrower and the Lenders. In the event of any such determination, until the Administrative Agent shall have advised the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, any request by the Borrower for a Eurodollar Borrowing pursuant to Section 2.03 or 2.10 shall be deemed to be a request for an ABR Borrowing. Each determination by the Administrative Agent under this Section shall be conclusive absent manifest error.

     SECTION 2.09. Termination and Reduction of Commitments. (a) The Term Loan Commitments shall automatically be reduced pro tanto upon the making of each Term Loan and shall automatically terminate at 5:00 p.m. (New York City time) on the last day of the Delayed Draw Availability Period. The Revolving Credit Commitments and the Swingline Commitment shall automatically terminate at 5:00 p.m. (New York City time) on the Revolving Credit Maturity Date. The L/C Commitment shall automatically terminate on the earlier to occur of (i) the termination of the Revolving Credit Commitments and (ii) the date 30 days prior to the Revolving Credit Maturity Date. Notwithstanding the foregoing, all Commitments shall automatically terminate at 5:00 p.m. (New York City time) on August 13, 2004, if the initial Credit Event shall not have occurred by such time.

     (b) Upon at least three Business Days’ prior irrevocable written or fax notice to the Administrative Agent, the Borrower may at any time in whole permanently terminate, or from time to time in part permanently reduce, any Class of Commitments; provided, however, that (i) each partial reduction of any Class of Commitments shall be in an integral multiple of $1,000,000 and in a minimum amount of $2,000,000 and (ii) the

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Total Revolving Credit Commitment shall not be reduced to an amount that is less than the Aggregate Revolving Credit Exposure at the time.

     (c) Each reduction in any Class of Commitments hereunder shall be made ratably among the Lenders in accordance with their respective applicable Commitments of such Class. The Borrower shall pay to the Administrative Agent for the account of the applicable Lenders, on the date of each termination or reduction, the Commitment Fees on the amount of the Commitments so terminated or reduced accrued to but excluding the date of such termination or reduction, and no Commitment Fee on the amount of Commitments so terminated or reduced shall accrue thereafter.

     SECTION 2.10. Conversion and Continuation of Borrowings. The Borrower shall have the right at any time upon prior irrevocable written notice (or telephonic notice promptly confirmed by written notice) to the Administrative Agent (a) not later than 12:00 noon (New York City time) one Business Day prior to conversion, to convert any Eurodollar Borrowing into an ABR Borrowing, (b) not later than 12:00 noon (New York City time) three Business Days prior to conversion or continuation, to convert any ABR Borrowing into a Eurodollar Borrowing or to continue any Eurodollar Borrowing as a Eurodollar Borrowing for an additional Interest Period, and (c) not later than 12:00 noon (New York City time) three Business Days prior to conversion, to convert the Interest Period with respect to any Eurodollar Borrowing to another permissible Interest Period, subject in each case to the following:

     (i) each conversion or continuation shall be made pro rata among the Lenders in accordance with the respective principal amounts of the Loans comprising the converted or continued Borrowing;

     (ii) if less than all the outstanding principal amount of any Borrowing shall be converted or continued, then each resulting Borrowing shall satisfy the limitations specified in Sections 2.02(a) and (b) regarding the principal amount and maximum number of Borrowings of the relevant Type;

     (iii) each conversion shall be effected by each Lender and the Administrative Agent by recording for the account of such Lender the new Loan of such Lender resulting from such conversion and reducing the Loan (or portion thereof) of such Lender being converted by an equivalent principal amount; accrued interest on any Eurodollar Loan (or portion thereof) being converted shall be paid by the Borrower at the time of conversion;

     (iv) if any Eurodollar Borrowing is converted at a time other than the end of the Interest Period applicable thereto, the Borrower shall pay, upon demand, any amounts due to the Lenders pursuant to Section 2.16;

     (v) any portion of a Borrowing maturing or required to be repaid in less than one month may not be converted into or continued as a Eurodollar Borrowing;

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     (vi) any portion of a Eurodollar Borrowing that cannot be converted into or continued as a Eurodollar Borrowing by reason of the immediately preceding clause shall be automatically converted at the end of the Interest Period in effect for such Borrowing into an ABR Borrowing;

     (vii) no Interest Period may be selected for any Eurodollar Term Borrowing that would end later than a Repayment Date occurring on or after the first day of such Interest Period if, after giving effect to such selection, the aggregate outstanding amount of (A) the Eurodollar Term Borrowings with Interest Periods ending on or prior to such Repayment Date and (B) the ABR Term Borrowings would not be at least equal to the principal amount of Term Borrowings to be paid on such Repayment Date; and

     (viii) upon notice to the Borrower from the Administrative Agent given at the request of the Required Lenders, after the occurrence and during the continuance of a Default or Event of Default, no outstanding Loan may be converted into, or continued as, a Eurodollar Loan.

     Each notice pursuant to this Section shall be irrevocable, shall be substantially in the form of Exhibit E or such other form as shall be acceptable to the Administrative Agent and shall refer to this Agreement and specify (i) the identity and amount of the Borrowing that the Borrower requests be converted or continued, (ii) whether such Borrowing is to be converted to or continued as a Eurodollar Borrowing or an ABR Borrowing, (iii) if such notice requests a conversion, the date of such conversion (which shall be a Business Day) and (iv) if such Borrowing is to be converted to or continued as a Eurodollar Borrowing, the Interest Period with respect thereto. If no Interest Period is specified in any such notice with respect to any conversion to or continuation as a Eurodollar Borrowing, the Borrower shall be deemed to have selected an Interest Period of one month’s duration. The Administrative Agent shall advise the Lenders of any notice given pursuant to this Section and of each Lender’s portion of any converted or continued Borrowing. If the Borrower shall not have given notice in accordance with this Section to continue any Borrowing into a subsequent Interest Period (and shall not otherwise have given notice in accordance with this Section to convert such Borrowing), such Borrowing shall, at the end of the Interest Period applicable thereto (unless repaid pursuant to the terms hereof), automatically be continued into an ABR Borrowing.

     SECTION 2.11. Repayment of Term Borrowings. (a) The Borrower shall pay to the Administrative Agent, for the accounts of the Term Lenders, on the dates set forth below, or if any such date is not a Business Day, on the immediately preceding Business Day (each such date being called a “Repayment Date”), a principal amount of the Term Loans (as adjusted from time to time pursuant to Sections 2.12, 2.13(f) and 2.24(d)) equal to the percentage set forth below for such date of the aggregate principal amount of Term Loans outstanding upon the expiration of the Delayed Draw Availability Period, together in each case with accrued and unpaid interest on the principal amount to be paid to but excluding the date of such payment:

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Repayment Date	Amount
December 31, 2004		0.25	%
March 31, 2005		0.25	%
June 30, 2005		0.25	%
September 30, 2005		0.25	%
December 31, 2005		0.25	%
March 31, 2006		0.25	%
June 30, 2006		0.25	%
September 30, 2006		0.25	%
December 31, 2006		0.25	%
March 31, 2007		0.25	%
June 30, 2007		0.25	%
September 30, 2007		0.25	%
December 31, 2007		0.25	%
March 31, 2008		0.25	%
June 30, 2008		0.25	%
September 30, 2008		0.25	%
December 31, 2008		24.0	%
March 31, 2009		24.0	%
June 30, 2009		24.0	%
Term Loan Maturity Date		24.0	%

     (b) The Borrower shall pay to the Administrative Agent, for the account of the Lenders, on each Incremental Term Loan Repayment Date, a principal amount of the Other Term Loans (as adjusted from time to time pursuant to Sections 2.12 and 2.13(f)) equal to the amount set forth for such date in the applicable Incremental Term Loan Assumption Agreement, together in each case with accrued and unpaid interest on the principal amount to be paid to but excluding the date of such payment.

     (c) To the extent not previously paid, all Term Loans shall be due and payable on the Term Loan Maturity Date and all Incremental Term Loans shall be due and payable on the applicable Incremental Term Loan Maturity Date, together in each case with accrued and unpaid interest on the principal amount to be paid to but excluding the date of payment.

     (d) All repayments pursuant to this Section shall be subject to Section 2.16, but otherwise shall be without premium or penalty.

     SECTION 2.12. Optional Prepayment. (a) The Borrower shall have the right at any time and from time to time to prepay any Borrowing, in whole or in part, (i) upon at least three Business Days’ prior written or fax notice (or telephone notice promptly confirmed by written or fax notice) in the case of Eurodollar Loans, or (ii) written or fax notice (or telephone notice promptly confirmed by written or fax notice) at least one Business Day prior to the date of prepayment in the case of ABR Loans, in each case to the Administrative Agent before 12:00 noon (New York City time) on the relevant date; provided, however, that each partial prepayment shall be in an amount that is an integral multiple of $1,000,000.

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     (b) Optional prepayments of Term Loans shall be allocated ratably between the Term Loans and the Other Term Loans, if any, and shall be applied against the remaining scheduled installments of principal due in respect of the Term Loans and the Other Term Loans, if any, under Section 2.11 in a manner determined at the discretion of the Borrower.

     (c) Each notice of prepayment shall be substantially in the form of Exhibit F or such other form as shall be acceptable to the Administrative Agent, shall specify the prepayment date and the principal amount of each Borrowing (or portion thereof) to be prepaid, shall be irrevocable and shall commit the Borrower to prepay such Borrowing by the amount stated therein on the date stated therein. All prepayments under this Section shall be subject to Section 2.16, but otherwise shall be without premium or penalty, and shall be accompanied by accrued and unpaid interest on the principal amount to be prepaid to but excluding the date of payment; provided, however, that in the case of a prepayment of an ABR Revolving Loan or a Swingline Loan that is not made in connection with a termination of the Revolving Credit Commitments, the accrued and unpaid interest on the principal amount prepaid to but excluding the date of prepayment shall be payable on the next scheduled Interest Payment Date with respect to such ABR Revolving Loan or Swingline Loan.

     SECTION 2.13. Mandatory Prepayments. (a) In the event of the termination of all the Revolving Credit Commitments by the Borrower pursuant to Section 2.09, the Borrower shall, on the date of such termination, repay or prepay all outstanding Revolving Credit Borrowings and all outstanding Swingline Loans and replace or cause to be canceled (or make other arrangements satisfactory to the Administrative Agent and the Issuing Bank with respect to) all outstanding Letters of Credit. If, after giving effect to any partial reduction of the Revolving Credit Commitments by the Borrower pursuant to Section 2.09, the Aggregate Revolving Credit Exposure would exceed the Total Revolving Credit Commitment, then the Borrower shall, on the date of such reduction, repay or prepay Revolving Credit Borrowings or Swingline Loans (or a combination thereof), and, after the Revolving Credit Borrowings and Swingline Loans shall have been repaid or prepaid in full, replace or cause to be canceled (or make other arrangements satisfactory to the Administrative Agent and the Issuing Bank with respect to) Letters of Credit, in an amount sufficient to eliminate such excess.

     (b) Not later than the fifth Business Day following any receipt of Net Cash Proceeds in respect of any Asset Sale, the Borrower shall apply 100% of the Net Cash Proceeds received with respect thereto to prepay outstanding Term Loans and Other Term Loans, if any, in accordance with paragraph (f) of this Section.

     (c) In the event and on each occasion that an Equity Issuance occurs, the Borrower shall, substantially simultaneously with (and in any event not later than the third Business Day next following) the occurrence of such Equity Issuance, apply 50% (or, if at the time of, and after giving effect to the use of proceeds of, such Equity Issuance the Leverage Ratio shall have been less than 2.0 to 1.0, 25%) of the Net Cash Proceeds therefrom to prepay outstanding Term Loans and Other Term Loans, if any, in accordance with paragraph (f) of this Section.

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     (d) No later than the earlier of (i) 90 days after the end of each fiscal year of the Borrower, commencing with the fiscal year ending on September 30, 2005, and (ii) the third Business Day after the date on which the financial statements with respect to such fiscal year are delivered pursuant to Section 5.04(a), the Borrower shall prepay outstanding Term Loans and Other Term Loans, if any, in accordance with paragraph (f) of this Section in an aggregate principal amount equal to 50% (or, if the Leverage Ratio at the end of such fiscal year shall have been less than 2.0 to 1.0, 25%) of Excess Cash Flow for such fiscal year.

     (e) In the event that any Loan Party or any subsidiary of a Loan Party shall receive Net Cash Proceeds from the issuance or other disposition of Indebtedness for money borrowed of any Loan Party or any subsidiary of a Loan Party (other than any cash proceeds from the issuance of Indebtedness for money borrowed permitted pursuant to Section 6.01), the Borrower shall, substantially simultaneously with (and in any event not later than the third Business Day next following) the receipt of such Net Cash Proceeds by such Loan Party or such subsidiary, apply an amount equal to 100% of such Net Cash Proceeds to prepay outstanding Term Loans and Other Term Loans, if any, in accordance with paragraph (f) of this Section.

     (f) Mandatory prepayments of outstanding Term Loans under this Agreement shall be allocated ratably between the Term Loans and the Other Term Loans, if any, and shall be applied first, in chronological order to the installments of principal in respect of the Term Loans and Other Term Loans, if any, scheduled to be paid within 24 months after such mandatory prepayment and second, pro rata against the remaining scheduled installments of principal due in respect of the Term Loans and Other Term Loans, if any, under Section 2.11.

     (g) The Borrower shall deliver to the Administrative Agent, at the time of each prepayment required under this Section, (i) a certificate signed by a Financial Officer of the Borrower setting forth in reasonable detail the calculation of the amount of such prepayment and (ii) to the extent practicable, at least three days prior written notice of such prepayment. Each notice of prepayment shall specify the prepayment date, the Type of each Loan being prepaid and the principal amount of each Loan (or portion thereof) to be prepaid and shall be substantially in the form of Exhibit F or such other form as shall be acceptable to the Administrative Agent. All prepayments of Borrowings under this Section shall be subject to Section 2.16, but otherwise shall be without premium or penalty, and shall be accompanied by accrued and unpaid interest on the principal amount to be prepaid to but excluding the date of payment.

     SECTION 2.14. Reserve Requirements; Change in Circumstances. (a) Notwithstanding any other provision of this Agreement, if any Change in Law shall impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of or credit extended by any Lender or the Issuing Bank (except any such reserve requirement which is reflected in the Adjusted LIBO Rate) or shall impose on such Lender or the Issuing Bank or the London interbank market any other condition affecting this Agreement or Eurodollar Loans made by such Lender or any Letter of Credit or participation therein, and the result of any of the

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foregoing shall be to increase the cost to such Lender or the Issuing Bank of making or maintaining any Eurodollar Loan or increase the cost to any Lender of issuing or maintaining any Letter of Credit or purchasing or maintaining a participation therein or to reduce the amount of any sum received or receivable by such Lender or the Issuing Bank hereunder (whether of principal, interest or otherwise) by an amount deemed by such Lender or the Issuing Bank to be material, then the Borrower will pay to such Lender or the Issuing Bank, as the case may be, upon demand such additional amount or amounts as will compensate such Lender or the Issuing Bank, as the case may be, for such additional costs incurred or reduction suffered.

     (b) If any Lender or the Issuing Bank shall have determined that any Change in Law regarding capital adequacy has or would have the effect of reducing the rate of return on such Lender’s or the Issuing Bank’s capital or on the capital of such Lender’s or the Issuing Bank’s holding company, if any, as a consequence of this Agreement or the Loans made or participations in Letters of Credit purchased by such Lender pursuant hereto or the Letters of Credit issued by the Issuing Bank pursuant hereto to a level below that which such Lender or the Issuing Bank or such Lender’s or the Issuing Bank’s holding company could have achieved but for such Change in Law (taking into consideration such Lender’s or the Issuing Bank’s policies and the policies of such Lender’s or the Issuing Bank’s holding company with respect to capital adequacy) by an amount deemed by such Lender or the Issuing Bank to be material, then from time to time the Borrower shall pay to such Lender or the Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or the Issuing Bank or such Lender’s or the Issuing Bank’s holding company for any such reduction suffered.

     (c) A certificate of a Lender or the Issuing Bank setting forth the amount or amounts necessary to compensate such Lender or the Issuing Bank or its holding company, as applicable, as specified in paragraph (a) or (b) of this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender or the Issuing Bank the amount shown as due on any such certificate delivered by it within 10 Business Days after its receipt of the same.

     (d) Failure or delay on the part of any Lender or the Issuing Bank to demand compensation for any increased costs or reduction in amounts received or receivable or reduction in return on capital shall not constitute a waiver of such Lender’s or the Issuing Bank’s right to demand such compensation; provided that the Borrower shall not be under any obligation to compensate any Lender or the Issuing Bank under paragraph (a) or (b) of this Section with respect to increased costs or reductions with respect to any period prior to the date that is 120 days prior to such request if such Lender or the Issuing Bank knew or could reasonably have been expected to know of the circumstances giving rise to such increased costs or reductions and of the fact that such circumstances would result in a claim for increased compensation by reason of such increased costs or reductions; provided further that the foregoing limitation shall not apply to any increased costs or reductions arising out of the retroactive application of any Change in Law within such 120-day period. The protection of this Section shall be available to each Lender and the Issuing Bank regardless of any possible contention of the invalidity or inapplicability of the Change in Law that shall have occurred or been imposed.

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     SECTION 2.15. Change in Legality. (a) Notwithstanding any other provision of this Agreement, if any Change in Law shall make it unlawful for any Lender to make or maintain any Eurodollar Loan or to give effect to its obligations as contemplated hereby with respect to any Eurodollar Loan, then, by written notice to the Borrower and to the Administrative Agent:

     (i) such Lender may declare that Eurodollar Loans will not thereafter (for the duration of such unlawfulness) be made by such Lender hereunder (or be continued for additional Interest Periods and ABR Loans will not thereafter (for such duration) be converted into Eurodollar Loans), whereupon any request for a Eurodollar Borrowing (or to convert an ABR Borrowing to a Eurodollar Borrowing or to continue a Eurodollar Borrowing for an additional Interest Period) shall, as to such Lender only, be deemed a request for an ABR Loan (or a request to continue an ABR Loan as such for an additional Interest Period or to convert a Eurodollar Loan into an ABR Loan, as the case may be), unless such declaration shall be subsequently withdrawn; and

     (ii) such Lender may require that all outstanding Eurodollar Loans made by it be converted to ABR Loans, in which event all such Eurodollar Loans shall be automatically converted to ABR Loans as of the effective date of such notice as provided in paragraph (b) of this Section.

In the event any Lender shall exercise its rights under clause (i) or (ii) above, all payments and prepayments of principal that would otherwise have been applied to repay the Eurodollar Loans that would have been made by such Lender or the converted Eurodollar Loans of such Lender shall instead be applied to repay the ABR Loans made by such Lender in lieu of, or resulting from the conversion of, such Eurodollar Loans.

     (b) For purposes of this Section, a notice to the Borrower by any Lender shall be effective as to each Eurodollar Loan made by such Lender, if lawful, on the last day of the Interest Period then applicable to such Eurodollar Loan; in all other cases such notice shall be effective on the date of receipt by the Borrower.

     SECTION 2.16. Indemnity. The Borrower shall indemnify each Lender against any loss or expense that such Lender may sustain or incur as a consequence (other than as a result of the gross negligence or willful misconduct of such Lender) of (a) any event, other than a default by such Lender in the performance of its obligations hereunder, which results in (i) such Lender receiving or being deemed to receive any amount on account of the principal of any Eurodollar Loan prior to the end of the Interest Period in effect therefor, (ii) the conversion of any Eurodollar Loan to an ABR Loan, or the conversion of the Interest Period with respect to any Eurodollar Loan, in each case other than on the last day of the Interest Period in effect therefor, or (iii) any Eurodollar Loan to be made by such Lender (including any Eurodollar Loan to be made pursuant to a conversion or continuation under Section 2.10) not being made after notice of such Loan shall have been given by the Borrower hereunder (any of the events referred to in this clause (a) being called a “Breakage Event”) or (b) any default in the making of any payment or prepayment required to be made hereunder. In the case of any Breakage

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Event, such loss shall include an amount equal to the excess, as reasonably determined by such Lender, of (i) its cost of obtaining funds for the Eurodollar Loan that is the subject of such Breakage Event for the period from the date of such Breakage Event to the last day of the Interest Period in effect (or that would have been in effect) for such Loan over (ii) the amount of interest likely to be realized by such Lender in redeploying the funds released or not utilized by reason of such Breakage Event for such period. A certificate of any Lender setting forth any amount or amounts which such Lender is entitled to receive pursuant to this Section shall be delivered to the Borrower and shall be conclusive absent manifest error.

     SECTION 2.17. Pro Rata Treatment. Except as provided below in this Section with respect to Swingline Loans and as required under Section 2.15, each Borrowing, each payment or prepayment of principal of any Borrowing, each payment of interest on the Loans, each payment of the Commitment Fees, each reduction of the Term Loan Commitments or the Revolving Credit Commitments and each conversion of any Borrowing to or continuation of any Borrowing as a Borrowing of any Type shall be allocated pro rata among the Lenders in accordance with their respective applicable Commitments (or, if such Commitments shall have expired or been terminated, in accordance with the respective principal amounts of their outstanding Loans). For purposes of determining the available Revolving Credit Commitments of the Lenders at any time, each outstanding Swingline Loan shall be deemed to have utilized the Revolving Credit Commitments of the Lenders (including those Lenders which shall not have made Swingline Loans) pro rata in accordance with such respective Revolving Credit Commitments. Each Lender agrees that in computing such Lender’s portion of any Borrowing to be made hereunder, the Administrative Agent may, in its discretion, round each Lender’s percentage of such Borrowing to the next higher or lower whole dollar amount.

     SECTION 2.18. Sharing of Setoffs. Each Lender agrees that if it shall, through the exercise of a right of banker’s lien, setoff or counterclaim against the Borrower or any other Loan Party, or pursuant to a secured claim under Section 506 of Title 11 of the United States Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable bankruptcy, insolvency or other similar law or otherwise, or by any other means, obtain payment (voluntary or involuntary) in respect of any Loan or Loans or L/C Disbursement as a result of which the unpaid principal portion of its Loans and participations in L/C Disbursements shall be proportionately less than the unpaid principal portion of the Loans and participations in L/C Disbursements of any other Lender, it shall be deemed simultaneously to have purchased from such other Lender at face value, and shall promptly pay to such other Lender the purchase price for, a participation in the Loans and L/C Exposure of such other Lender, so that the aggregate unpaid principal amount of the Loans and L/C Exposure and participations in Loans and L/C Exposure held by each Lender shall be in the same proportion to the aggregate unpaid principal amount of all Loans and L/C Exposure then outstanding as the principal amount of its Loans and L/C Exposure prior to such exercise of banker’s lien, setoff or counterclaim or other event was to the principal amount of all Loans and L/C Exposure outstanding prior to such exercise of banker’s lien, setoff or counterclaim or other event; provided, however, that if any such purchase

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or purchases or adjustments shall be made pursuant to this Section and the payment giving rise thereto shall thereafter be recovered, such purchase or purchases or adjustments shall be rescinded to the extent of such recovery and the purchase price or prices or adjustment restored without interest. The Borrower expressly consents to the foregoing arrangements and agrees that any Lender holding a participation in a Loan or L/C Disbursement deemed to have been so purchased may exercise any and all rights of banker’s lien, setoff or counterclaim in accordance with the terms and conditions of this Agreement and applicable law with respect to any and all moneys owing by the Borrower to such Lender by reason thereof as fully as if such Lender had made a Loan directly to the Borrower in the amount of such participation.

     SECTION 2.19. Payments. (a) The Borrower shall make each payment (including principal of or interest on any Borrowing or any L/C Disbursement or any Fees or other amounts) hereunder and under any other Loan Document not later than 12:00 noon (New York City time) on the date when due in immediately available dollars, without setoff, defense or counterclaim. Each such payment (other than (i) Issuing Bank Fees, which shall be paid directly to the Issuing Bank, and (ii) principal of and interest on Swingline Loans, which shall be paid directly to the Swingline Lender except as otherwise provided in Section 2.21(e)) shall be made to the Administrative Agent at its offices at Eleven Madison Avenue, New York, New York 10010. The Administrative Agent shall distribute any such payments received by it for the account of any other person to the appropriate recipient following receipt thereof.

     (b) Except as otherwise expressly provided herein, whenever any payment (including principal of or interest on any Borrowing or any Fees or other amounts) hereunder or under any other Loan Document shall become due, or otherwise would occur, on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of interest or Fees, if applicable, up to but excluding the day of payment.

     SECTION 2.20. Taxes. (a) Any and all payments by or on account of any obligation of the Borrower or any other Loan Party hereunder or under any other Loan Document shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that if the Borrower or any other Loan Party shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent, Lender or Issuing Bank (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower or such Loan Party shall make such deductions and (iii) the Borrower or such Loan Party shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law.

     (b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law.

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     (c) The Borrower shall indemnify the Administrative Agent, each Lender and the Issuing Bank, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes paid by the Administrative Agent, such Lender or the Issuing Bank, as the case may be, on or with respect to any payment by or on account of any obligation of the Borrower or any other Loan Party hereunder or under any other Loan Document (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by a Lender or the Issuing Bank, or by the Administrative Agent on behalf of itself or a Lender, shall be conclusive absent manifest error.

     (d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower or any other Loan Party to a Governmental Authority, the Borrower shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent.

     (e) Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which the Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law or reasonably requested by the Borrower as will permit such payments to be made without withholding or at a reduced rate.

     (f) If the Administrative Agent or a Lender determines that it has received a refund of any Taxes or Other Taxes as to which it has been indemnified by the Borrower or with respect to which the Borrower has paid additional amounts pursuant to this Section 2.20, it shall pay over such refund to the Borrower (but only to the extent of indemnity payments made, or additional amounts paid, by the Borrower under this Section 2.20 with respect to the Taxes or Other Taxes giving rise to such refund), net of all reasonable out-of-pocket expenses of the Administrative Agent or such Lender and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund); provided that the Borrower, upon the request of the Administrative Agent or such Lender, agrees to repay the amount paid over to the Borrower (plus any penalties, interest or other charges imposed by the relevant Governmental Authority unless the Governmental Authority assessed such penalties, interest or other charges due to the gross negligence or willful misconduct of the Administrative Agent or such Lender) to the Administrative Agent or such Lender in the event the Administrative Agent or such Lender is required to repay such refund to Governmental Authority. This Section shall not be construed to require the Administrative Agent or any Lender to make available its tax returns (or any other

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information relating to its taxes which it deems confidential) to the Borrower or any other person.

     SECTION 2.21. Assignment of Commitments Under Certain Circumstances; Duty to Mitigate. (a) In the event (i) any Lender or the Issuing Bank delivers a certificate requesting compensation pursuant to Section 2.14, (ii) any Lender or the Issuing Bank delivers a notice described in Section 2.15, (iii) the Borrower is required to pay any additional amount to any Lender or the Issuing Bank or any Governmental Authority on account of any Lender or the Issuing Bank pursuant to Section 2.20 or (iv) any Lender refuses to consent to any amendment, waiver or other modification of any Loan Document requested by the Borrower that requires the consent of a greater percentage of the Lenders than the Required Lenders and such amendment, waiver or other modification is consented to by the Required Lenders, the Borrower may, at its sole expense and effort (including with respect to the processing and recordation fee referred to in Section 9.04(b)), upon notice to such Lender or the Issuing Bank and the Administrative Agent, require such Lender or the Issuing Bank to transfer and assign, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all of its interests, rights and obligations under this Agreement (or, in the case of clause (iv) above, all of its interests, rights and obligation with respect to the Class of Loans or Commitments that is the subject of the related consent, amendment, waiver or other modification) to an assignee that shall assume such assigned obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (x) such assignment shall not conflict with any law, rule or regulation or order of any court or other Governmental Authority having jurisdiction, (y) the Borrower shall have received the prior written consent of the Administrative Agent (and, if a Revolving Credit Commitment is being assigned, of the Issuing Bank and the Swingline Lender), which consent shall not unreasonably be withheld, and (z) the Borrower or such assignee shall have paid to the affected Lender or the Issuing Bank in immediately available funds an amount equal to the sum of the principal of and interest accrued to the date of such payment on the outstanding Loans or L/C Disbursements of such Lender or the Issuing Bank, respectively, plus all Fees and other amounts accrued for the account of such Lender or the Issuing Bank hereunder (including any amounts under Sections 2.14 and 2.16); provided further that, if prior to any such transfer and assignment the circumstances or event that resulted in such Lender’s or the Issuing Bank’s claim for compensation under Section 2.14, notice under Section 2.15 or the amounts paid pursuant to Section 2.20, as the case may be, cease to cause such Lender or the Issuing Bank to suffer increased costs or reductions in amounts received or receivable or reduction in return on capital, cease to have the consequences specified in Section 2.15 or cease to result in amounts being payable under Section 2.20, as the case may be (including as a result of any action taken by such Lender or the Issuing Bank pursuant to paragraph (b) of this Section), or if such Lender or the Issuing Bank shall waive its right to claim further compensation under Section 2.14 in respect of such circumstances or event, shall withdraw its notice under Section 2.15 or shall waive its right to further payments under Section 2.20 in respect of such circumstances or event or shall consent to the proposed amendment, waiver, consent or other modification, as the case may be, then such Lender or the Issuing Bank shall not thereafter be required to make any such transfer and assignment hereunder. Each Lender hereby grants to the Administrative Agent an

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irrevocable power of attorney (which power is coupled with an interest) to execute and deliver, on behalf of such Lender as assignor, any Assignment and Acceptance necessary to effectuate any assignment of such Lender’s interests hereunder in the circumstances contemplated by this paragraph.

     (b) If (i) any Lender or the Issuing Bank shall request compensation under Section 2.14, (ii) any Lender or the Issuing Bank delivers a notice described in Section 2.15 or (iii) the Borrower is required to pay any additional amount to any Lender or the Issuing Bank or any Governmental Authority on account of any Lender or the Issuing Bank, pursuant to Section 2.20, then such Lender or the Issuing Bank shall use reasonable efforts (which shall not require such Lender or the Issuing Bank to incur an unreimbursed loss or unreimbursed cost or expense or otherwise take any action inconsistent with its internal policies or legal or regulatory restrictions or suffer any disadvantage or burden deemed by it to be significant) (x) to file any certificate or document reasonably requested in writing by the Borrower or (y) to assign its rights and delegate and transfer its obligations hereunder to another of its offices, branches or affiliates, if such filing or assignment would reduce its claims for compensation under Section 2.14, enable it to withdraw its notice pursuant to Section 2.15 or would reduce amounts payable pursuant to Section 2.20, as the case may be, in the future. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender or the Issuing Bank in connection with any such filing or assignment, delegation and transfer.

     SECTION 2.22. Swingline Loans. (a) Swingline Commitment. Subject to the terms and conditions and relying upon the representations and warranties herein set forth, the Swingline Lender agrees to make loans to the Borrower at any time and from time to time on and after the Closing Date and until the earlier of the Revolving Credit Maturity Date and the termination of the Revolving Credit Commitments, in an aggregate principal amount at any time outstanding that will not result in (i) the aggregate principal amount of all Swingline Loans exceeding $5,000,000 in the aggregate or (ii) the Aggregate Revolving Credit Exposure, after giving effect to any Swingline Loan, exceeding the Total Revolving Credit Commitment. Each Swingline Loan shall be in a principal amount that is an integral multiple of $50,000. The Swingline Commitment may be terminated or reduced from time to time as provided herein. Within the foregoing limits, the Borrower may borrow, pay or prepay and reborrow Swingline Loans hereunder, subject to the terms, conditions and limitations set forth herein.

     (b) Swingline Loans. The Borrower shall notify the Swingline Lender by fax, or by telephone (promptly confirmed by fax), not later than 12:00 noon (New York City time) on the day of a proposed Swingline Loan. Such notice shall be delivered on a Business Day, shall be irrevocable and shall refer to this Agreement and shall specify the requested date (which shall be a Business Day) and amount of such Swingline Loan and the wire transfer instructions for the account of the Borrower to which the proceeds of the Swingline Loan should be transferred. The Swingline Lender shall make each Swingline Loan by wire transfer to the account specified in such request.

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     (c) Prepayment. The Borrower shall have the right at any time and from time to time to prepay any Swingline Loan, in whole or in part, upon giving written or fax notice (or telephone notice promptly confirmed by written, or fax notice) to the Swingline Lender before 12:00 noon (New York City time) on the date of prepayment at the Swingline Lender’s address for notices specified herein.

     (d) Interest. Each Swingline Loan shall be an ABR Loan and, subject to the provisions of Section 2.07, shall bear interest as provided in Section 2.06(a).

     (e) Participations. The Swingline Lender may by written notice given to the Administrative Agent not later than 12:00 noon (New York City time) on any Business Day require the Revolving Credit Lenders to acquire participations on such Business Day in all or a portion of the Swingline Loans outstanding. Such notice shall specify the aggregate amount of Swingline Loans in which Revolving Credit Lenders will participate. The Administrative Agent will, promptly upon receipt of such notice, give notice to each Revolving Credit Lender, specifying in such notice such Lender’s Pro Rata Percentage of such Swingline Loan or Loans. In furtherance of the foregoing, each Revolving Credit Lender hereby absolutely and unconditionally agrees, upon receipt of notice as provided above, to pay to the Administrative Agent, for the account of the Swingline Lender, such Revolving Credit Lender’s Pro Rata Percentage of such Swingline Loan or Loans. Each Revolving Credit Lender acknowledges and agrees that its obligation to acquire participations in Swingline Loans pursuant to this paragraph is absolute and unconditional and shall not be affected by any circumstance whatsoever, including the occurrence and continuance of a Default or an Event of Default, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. Each Revolving Credit Lender shall comply with its obligation under this paragraph by wire transfer of immediately available funds, in the same manner as provided in Section 2.02(c) with respect to Loans made by such Lender (and Section 2.02(c) shall apply, mutatis mutandis, to the payment obligations of the Lenders) and the Administrative Agent shall promptly pay to the Swingline Lender the amounts so received by it from the Lenders. The Administrative Agent shall notify the Borrower of any participations in any Swingline Loan acquired pursuant to this paragraph and thereafter payments in respect of such Swingline Loan shall be made to the Administrative Agent and not to the Swingline Lender. Any amounts received by the Swingline Lender from the Borrower (or other party on behalf of the Borrower) in respect of a Swingline Loan after receipt by the Swingline Lender of the proceeds of a sale of participations therein shall be promptly remitted to the Administrative Agent; any such amounts received by the Administrative Agent shall be promptly remitted by the Administrative Agent to the Lenders that shall have made their payments pursuant to this paragraph and to the Swingline Lender, as their interests may appear. The purchase of participations in a Swingline Loan pursuant to this paragraph shall not relieve the Borrower (or other party liable for obligations of the Borrower) of any default in the payment thereof.

     SECTION 2.23. Letters of Credit. (a) General. The Borrower may request the issuance of a Letter of Credit for its own account or for the account of any of its Subsidiaries (in which case the Borrower and such Subsidiary shall be co-applicants with

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respect to such Letter of Credit), in a form reasonably acceptable to the Administrative Agent and the Issuing Bank, at any time and from time to time while the L/C Commitment remains in effect; provided that the Issuing Bank shall not be required to issue, extend or renew any Letter of Credit after the date that is 30 days prior to the Revolving Credit Maturity Date. On the Closing Date, each Existing Letter of Credit will automatically, without any action on the part of any person, be deemed to be a Letter of Credit issued hereunder for all purposes of this Agreement and the other Loan Documents. This Section shall not be construed to impose an obligation upon the Issuing Bank to issue any Letter of Credit that is inconsistent with the terms and conditions of this Agreement.

     (b) Notice of Issuance, Amendment, Renewal, Extension; Certain Conditions. In order to request the issuance of a Letter of Credit (or to amend, renew or extend an existing Letter of Credit), the Borrower shall hand deliver or fax to the Issuing Bank and the Administrative Agent (reasonably in advance of the requested date of issuance, amendment, renewal or extension) a notice requesting the issuance of a Letter of Credit, or identifying the Letter of Credit to be amended, renewed or extended, the date of issuance, amendment, renewal or extension, the date on which such Letter of Credit is to expire (which shall comply with paragraph (c) of this Section), the amount of such Letter of Credit, the name and address of the beneficiary thereof and such other information as shall be necessary to prepare such Letter of Credit. A Letter of Credit shall be issued, amended, renewed or extended only if, and upon issuance, amendment, renewal or extension of each Letter of Credit the Borrower shall be deemed to represent and warrant that, after giving effect to such issuance, amendment, renewal or extension (i) the L/C Exposure shall not exceed $5,000,000 and (ii) the Aggregate Revolving Credit Exposure shall not exceed the Total Revolving Credit Commitment.

     (c) Expiration Date. Each Letter of Credit shall expire at the close of business on the earlier of the date one year after the date of the issuance of such Letter of Credit and the date that is five Business Days prior to the Revolving Credit Maturity Date, unless such Letter of Credit expires by its terms on an earlier date; provided, however, that a Letter of Credit may, upon the request of the Borrower, include a provision whereby such Letter of Credit shall be renewed automatically for additional consecutive periods of 12 months or less (but not beyond the date that is five Business Days prior to the Revolving Credit Maturity Date) unless the Issuing Bank notifies the beneficiary thereof at least 30 days prior to the then-applicable expiration date that such Letter of Credit will not be renewed.

     (d) Participations. By the issuance of a Letter of Credit and without any further action on the part of the Issuing Bank or the Lenders, the Issuing Bank hereby grants to each Revolving Credit Lender, and each such Lender hereby acquires from the Issuing Bank, a participation in such Letter of Credit equal to such Lender’s Pro Rata Percentage of the aggregate amount available to be drawn under such Letter of Credit, effective upon the issuance of such Letter of Credit (or, in the case of the Existing Letters of Credit, effective upon the Closing Date). In consideration and in furtherance of the foregoing, each Revolving Credit Lender hereby absolutely and unconditionally agrees to pay to the Administrative Agent, for the account of the Issuing Bank, such Lender’s Pro Rata

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Percentage of each L/C Disbursement made by the Issuing Bank and not reimbursed by the Borrower (or, if applicable, another party pursuant to its obligations under any other Loan Document) forthwith on the date due as provided in paragraph (e) below. Each Revolving Credit Lender acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including the occurrence and continuance of a Default or an Event of Default, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever.

     (e) Reimbursement. If the Issuing Bank shall make any L/C Disbursement in respect of a Letter of Credit, the Borrower shall reimburse such L/C Disbursement by paying to the Administrative Agent an amount equal to such L/C Disbursement not later than 12:00 noon, New York City time, on the Business Day following the date that such L/C Disbursement is made; provided that (i) if notice of such L/C Disbursement is received by the Borrower later than 10:00 a.m., New York City time, on the Business Day on which such L/C Disbursement is made, then such reimbursement shall not be required until the second Business Day following the date such L/C Disbursement is made and (ii) the Borrower may, subject to the conditions to borrowing set forth herein, request in accordance with Section 2.03 or 2.22 that such payment be financed with an ABR Revolving Borrowing or a Swingline Loan in an equivalent amount and, to the extent so financed, the Borrower’s obligation to make such payment shall be discharged and replaced by the resulting ABR Revolving Borrowing or Swingline Loan. If the Borrower fails to make such payment when due, the Administrative Agent shall notify each Revolving Credit Lender of the applicable L/C Disbursement, the payment then due from the Borrower in respect thereof and such Lender’s Pro Rata Percentage thereof. Promptly following receipt of such notice, each Revolving Credit Lender shall pay to the Administrative Agent its Pro Rata Percentage of the payment then due from the Borrower, in the same manner as provided in Section 2.02 with respect to Loans made by such Lender (and Section 2.02 shall apply, mutatis mutandis, to the payment obligations of the Revolving Credit Lenders), and the Administrative Agent shall promptly pay to the Issuing Bank the amounts so received by it from the Revolving Credit Lenders. Promptly following receipt by the Administrative Agent of any payment from the Borrower pursuant to this paragraph, the Administrative Agent shall distribute such payment to the Issuing Bank or, to the extent that Revolving Credit Lenders have made payments pursuant to this paragraph to reimburse the Issuing Bank, then to such Revolving Credit Lenders and the Issuing Bank as their interests may appear. Any payment made by a Revolving Credit Lender pursuant to this paragraph to reimburse the Issuing Bank for any L/C Disbursement (other than the funding of ABR Revolving Loans or a Swingline Loan as contemplated above) shall not constitute a Loan and shall not relieve the Borrower of its obligation to reimburse such L/C Disbursement.

     (f) Obligations Absolute. The Borrower’s obligations to reimburse L/C Disbursements as provided in paragraph (e) of this Section shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement, under any and all circumstances whatsoever, and irrespective of:

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     (i) any lack of validity or enforceability of any Letter of Credit or any Loan Document, or any term or provision therein;

     (ii) any amendment or waiver of or any consent to departure from all or any of the provisions of any Letter of Credit or any Loan Document;

     (iii) the existence of any claim, setoff, defense or other right that the Borrower, any other party guaranteeing, or otherwise obligated with, the Borrower, any Subsidiary or other Affiliate thereof or any other person may at any time have against the beneficiary under any Letter of Credit, the Issuing Bank, the Administrative Agent or any Lender or any other person, whether in connection with this Agreement, any other Loan Document or any other related or unrelated agreement or transaction;

     (iv) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect;

     (v) payment by the Issuing Bank under a Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit; and

     (vi) any other act or omission to act or delay of any kind of the Issuing Bank, any Lender, the Administrative Agent or any other person or any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of the Borrower’s obligations hereunder.

Without limiting the generality of the foregoing, it is expressly understood and agreed that the absolute and unconditional obligation of the Borrower hereunder to reimburse L/C Disbursements will not be excused by the gross negligence or willful misconduct of the Issuing Bank. The foregoing shall not, however, be construed to excuse the Issuing Bank from liability to the Borrower to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Borrower to the extent permitted by applicable law) suffered by the Borrower that are caused by the Issuing Bank’s gross negligence or willful misconduct in determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof. It is understood that the Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary and, in making any payment under any Letter of Credit (i) the Issuing Bank’s exclusive reliance on the documents presented to it under such Letter of Credit as to any and all matters set forth therein, including reliance on the amount of any draft presented under such Letter of Credit, whether or not the amount due to the beneficiary thereunder equals the amount of such draft and whether or not any document presented pursuant to such Letter of Credit proves to be insufficient in any respect, if such document on its face appears to be in order, and whether or not any other statement or any other document presented pursuant to such Letter of Credit proves to be forged or

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invalid or any statement therein proves to be inaccurate or untrue in any respect whatsoever and (ii) any noncompliance in any immaterial respect of the documents presented under such Letter of Credit with the terms thereof shall, in each case, be deemed not to constitute gross negligence or willful misconduct of the Issuing Bank.

     (g) Disbursement Procedures. The Issuing Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. The Issuing Bank shall as promptly as possible give telephonic notification, confirmed by fax, to the Administrative Agent and the Borrower of such demand for payment and whether the Issuing Bank has made or will make an L/C Disbursement thereunder; provided that (i) the Issuing Bank shall use reasonable efforts to notify the Borrower prior to making payment on a standby letter of credit and (ii) any failure to give or delay in giving any notice referred to in this paragraph shall not relieve the Borrower of its obligation to reimburse the Issuing Bank and the Revolving Credit Lenders with respect to any such L/C Disbursement.

     (h) Interim Interest. If the Issuing Bank shall make any L/C Disbursement in respect of a Letter of Credit, then, unless the Borrower shall reimburse such L/C Disbursement in full on such date, the unpaid amount thereof shall bear interest for the account of the Issuing Bank, for each day from and including the date of such L/C Disbursement, to but excluding the earlier of the date of payment by the Borrower or the date on which such L/C Disbursement is refinanced with a Revolving Loan or a Swingline Loan pursuant to paragraph (e) above, at the rate per annum that would apply to such amount if such amount were an ABR Revolving Loan.

     (i) Resignation or Removal of the Issuing Bank. The Issuing Bank may resign at any time by giving 45 days’ prior written notice to the Administrative Agent, the Lenders and the Borrower, and may be removed at any time by the Borrower by notice to the Issuing Bank, the Administrative Agent and the Lenders. Upon the acceptance of any appointment as the Issuing Bank hereunder by a Lender that shall agree to serve as successor Issuing Bank, such successor shall succeed to and become vested with all the interests, rights and obligations of the retiring Issuing Bank and the retiring Issuing Bank shall be discharged from its obligations to issue additional Letters of Credit hereunder. At the time such removal or resignation shall become effective, the Borrower shall pay all unpaid fees accrued pursuant to clause (ii) of Section 2.05(c). The acceptance of any appointment as the Issuing Bank hereunder by a successor Lender shall be evidenced by an agreement entered into by such successor, in a form satisfactory to the Borrower and the Administrative Agent, and, from and after the effective date of such agreement, (i) such successor Lender shall have all the rights and obligations of the previous Issuing Bank under this Agreement and the other Loan Documents and (ii) references herein and in the other Loan Documents to the term “Issuing Bank” shall be deemed to refer to such successor or to any previous Issuing Bank, or to such successor and all previous Issuing Banks, as the context shall require. After the resignation or removal of the Issuing Bank hereunder, the retiring Issuing Bank shall remain a party hereto and shall continue to have all the rights and obligations of an Issuing Bank under this Agreement and the other Loan Documents with respect to Letters of Credit issued by it prior to such resignation or removal, but shall not be required to issue additional Letters of Credit.

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     (j) Cash Collateralization. If any Event of Default shall occur and be continuing, the Borrower shall, on the Business Day it receives notice from the Administrative Agent or the Required Lenders (or, if the maturity of the Loans has been accelerated, Revolving Credit Lenders holding participations in outstanding Letters of Credit representing greater than 50% of the aggregate undrawn amount of all outstanding Letters of Credit) thereof and of the amount to be deposited, deposit in an account with the Collateral Agent, for the benefit of the Revolving Credit Lenders, an amount in cash equal to the L/C Exposure as of such date. Such deposit shall be held by the Collateral Agent as collateral for the payment and performance of the Obligations. The Collateral Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account. Other than any interest earned on the investment of such deposits in Permitted Investments, which investments shall be made at the option and sole discretion of the Collateral Agent, such deposits shall not bear interest. Interest or profits, if any, on such investments shall accumulate in such account. Moneys in such account shall (i) automatically be applied by the Administrative Agent to reimburse the Issuing Bank for L/C Disbursements for which it has not been reimbursed, (ii) be held for the satisfaction of the reimbursement obligations of the Borrower for the L/C Exposure at such time and (iii) if the maturity of the Loans has been accelerated (but subject to the consent of Revolving Credit Lenders holding participations in outstanding Letters of Credit representing greater than 50% of the aggregate undrawn amount of all outstanding Letters of Credit), be applied to satisfy the Obligations. If the Borrower is required to provide cash collateral hereunder as a result of the occurrence of an Event of Default, the amount remaining on deposit in the account as described above (to the extent not applied as aforesaid) shall be returned to the Borrower within three Business Days after all Events of Default have been cured or waived.

     (k) Additional Issuing Banks. The Borrower may, at any time and from time to time with the consent of the Administrative Agent (which consent shall not be unreasonably withheld) and such Lender, designate one or more additional Lenders to act as an issuing bank under the terms of this Agreement. Any Lender designated as an issuing bank pursuant to this paragraph shall be deemed to be an “Issuing Bank” (in addition to being a Lender) in respect of Letters of Credit issued or to be issued by such Lender, and, with respect to such Letters of Credit, such term shall thereafter apply to the other Issuing Bank and such Lender.

     SECTION 2.24. Increase in Term Loan Commitments. (a) The Borrower may, by written notice to the Administrative Agent from time to time, request Incremental Term Commitments in an amount not to exceed the Incremental Term Loan Amount from one or more Incremental Term Lenders, which may include any existing Lender; provided that each Incremental Term Lender, if not already a Lender hereunder, shall be subject to the approval of the Administrative Agent (which approval shall not be unreasonably withheld or delayed). Such notice shall set forth (i) the amount of the Incremental Term Commitments being requested (which shall be in integral multiple of $1,000,000 and a minimum amount of $5,000,000 or in an amount equal to the remaining Incremental Term Loan Amount), (ii) the date on which such Incremental Term Commitments are requested to become effective (which shall not be less than 10 Business Days after the date of such notice) and (iii) whether such Incremental Term

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Commitments are to be Term Loan Commitments or commitments to make term loans with terms different from the Term Loans (“Other Term Loans”). For the avoidance of doubt, (i) no Lender shall have any obligation to make an Incremental Term Loan and (ii) no approval from the Administrative Agent or the Lenders shall be required with regard to, and neither the Administrative Agent nor any Lender, shall have the right to object to, challenge or obstruct, any request by the Borrower to the Administrative Agent to arrange for the making of any Incremental Term Loan.

     (b) The Borrower and each Incremental Term Lender shall execute and deliver to the Administrative Agent an Incremental Term Loan Assumption Agreement and such other documentation as the Administrative Agent shall reasonably specify to evidence the Incremental Term Commitment of such Incremental Term Lender. Each Incremental Term Loan Assumption Agreement shall specify the terms of the Incremental Term Loans to be made thereunder; provided, however, that, without the prior written consent of the Required Lenders, (i) the final maturity date of any Other Term Loans shall be no earlier than (A) the final maturity date of any other Class of Term Loans and (B) if the initial yield (determined as provided below) on such Other Term Loans exceeds the Applicable Percentage then in effect for Eurodollar Term Loans of any Class, the date falling six months after the final maturity date of each such adversely affected Class; (ii) the average life to maturity of any Other Term Loans shall be no shorter than (A) the average life to maturity of any other Class of Term Loans and (B) if the initial yield (determined as provided below) on such Other Term Loans exceeds the Applicable Percentage then in effect for Eurodollar Term Loans of any Class, six months longer than the average life to maturity of each such adversely affected Class; and (iii) if the initial yield on any Other Term Loans (as determined by the Administrative Agent to be equal to the sum of (A) the margin over the Adjusted LIBO Rate applicable to the Other Term Loans and (B) if the Other Term Loans are initially made at a discount or the lenders making the same receive an “upfront” fee (as opposed to an “arrangement” or similar fee paid solely to the arranger or arrangers of such Other Term Loans) from the Borrower or any Subsidiary for doing so (the amount of such discount or fee, expressed as a percentage of the Other Term Loans, being referred to herein as “OID”), the amount of such OID divided by the lesser of (A) the average life to maturity of such Other Term Loans and (B) four) exceeds by more than 50 basis points (the amount of such excess above 50 basis points being referred to herein as the “Yield Differential”) the Applicable Percentage for Eurodollar Term Loans of any Class, then the Applicable Percentage for each adversely affected Class of Term Loans shall automatically be increased by the Yield Differential, effective upon the making of the Other Term Loans. The Administrative Agent shall promptly notify each Lender as to the effectiveness of each Incremental Term Loan Assumption Agreement. Each of the parties hereto hereby agrees that, upon the effectiveness of any Incremental Term Loan Assumption Agreement, this Agreement shall be deemed amended to the extent (but only to the extent) necessary to reflect the existence and terms of the Incremental Term Commitment evidenced thereby and any increase to the Applicable Percentages required by the foregoing provisions of this Section 2.24(b). Any such deemed amendment may be memorialized in writing by the Administrative Agent with the Borrower’s consent (not to be unreasonably withheld or delayed) and furnished to the other parties hereto.

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     (c) Notwithstanding the foregoing, no Incremental Term Commitment shall become effective under this Section 2.24 unless (i) on or before the date of such effectiveness, the conditions set forth in paragraphs (b) and (c) of Section 4.01 shall be satisfied and the Administrative Agent shall have received a certificate to that effect dated as of such date and executed by a Financial Officer of the Borrower, (ii) the Administrative Agent shall have received (with sufficient copies for each of the Incremental Term Lenders) legal opinions, board resolutions and other closing certificates and documentation consistent with those delivered on the Closing Date under Section 4.02 and (iii) the Borrower would be in Pro Forma Compliance after giving effect to such Incremental Term Commitment and the Loans to be made thereunder and the application of the proceeds therefrom as if made and applied on such date.

     (d) Each of the parties hereto hereby agrees that the Administrative Agent may take any and all action as may be reasonably necessary to ensure that all Incremental Term Loans (other than Other Term Loans), when originally made, are included in each Borrowing of outstanding Term Loans on a pro rata basis, and the Borrower agrees that Section 2.16 shall apply to any conversion of Eurodollar Term Loans to ABR Term Loans reasonably required by the Administrative Agent to effect the foregoing. In addition, to the extent any Incremental Term Loans are not Other Term Loans, the scheduled amortization payments under Section 2.11(a) required to be made after the making of such Incremental Term Loans shall be ratably increased by the aggregate principal amount of such Incremental Term Loans.

ARTICLE III

Representations and Warranties

     The Borrower represents and warrants to the Administrative Agent, the Collateral Agent, the Issuing Bank and each Lender that:

     SECTION 3.01. Organization; Powers. The Borrower and each of the Subsidiaries (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has all requisite power and authority to own its property and assets and to carry on its business as now conducted and as proposed to be conducted, (c) is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required, except where the failure so to qualify could not reasonably be expected to result in a Material Adverse Effect, and (d) has the power and authority to execute, deliver and perform its obligations under each of the Loan Documents and each other agreement or instrument contemplated thereby to which it is or will be a party and, in the case of the Borrower, to borrow hereunder.

     SECTION 3.02. Authorization. The Transactions (a) have been duly authorized by all requisite corporate and, if required, stockholder action and (b) will not (i) violate (A) any provision of law, statute, rule or regulation, or of the certificate or articles of incorporation or other constitutive documents or by-laws of the Borrower or any Subsidiary Guarantor, (B) any order of any Governmental Authority or (C) any provision of any indenture, agreement or other instrument to which the Borrower or any Subsidiary

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is a party or by which any of them or any of their property is or may be bound, (ii) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under, or give rise to any right to accelerate or to require the prepayment, repurchase or redemption of any obligation under any such indenture, agreement or other instrument or (iii) result in the creation or imposition of any Lien upon or with respect to any property or assets now owned or hereafter acquired by the Borrower or any Subsidiary (other than Liens created under the Security Documents).

     SECTION 3.03. Enforceability. This Agreement has been duly executed and delivered by the Borrower and constitutes, and each other Loan Document when executed and delivered by each Loan Party thereto will constitute, a legal, valid and binding obligation of such Loan Party enforceable against such Loan Party in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting generally the enforcement of creditors’ rights and except to the extent that availability of the remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding thereof may be brought.

     SECTION 3.04. Governmental Approvals. (a) No action, consent or approval of, registration or filing with or any other action by any Governmental Authority is or will be required in connection with the Transactions, except for (i) the filing of Uniform Commercial Code financing statements and filings with the United States Patent and Trademark Office and the United States Copyright Office, (ii) filings under the Assignment of Claims Act and (iii) such as have been made or obtained and are in full force and effect.

     (b) No notice of suspension, debarment or termination for default has been received by the Borrower or any Subsidiary and no cure notice has been received by the Borrower or any Subsidiary in connection with any Government Contract or other contract pursuant to which the Borrower or any Subsidiary is directly or indirectly acting as a subcontractor under or in connection with a Government Contract. Each Material Contract existing on the Closing Date is listed on Schedule 3.04(b), and documentation necessary for compliance with the Assignment of Claims Act has been executed and delivered to the Collateral Agent by the Borrower or any Subsidiary, as applicable, with respect to each such Material Contract.

     SECTION 3.05. Financial Statements. (a) The Borrower has heretofore furnished to the Lenders (i) the consolidated balance sheets and related statements of operations, shareholders’ equity and cash flows of the Borrower and its consolidated subsidiaries as of and for the fiscal years ended September 30, 2002 and 2003, each audited by and accompanied by the unqualified opinion of KPMG LLP, independent public accountants, (ii) the unaudited consolidated balance sheet and related statements of operations and cash flows of the Borrower and its consolidated subsidiaries as of and for (A) each fiscal quarter subsequent to September 30, 2003 ended at least 45 days before the Closing Date and (B) each fiscal month subsequent to the date of the most recent unaudited quarterly financial statements furnished under clause (A) ended at least 30 days before the Closing Date. Such financial statements were prepared in accordance with

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GAAP and present fairly in all material respects the financial condition and results of operations and cash flows of the Borrower and its consolidated subsidiaries as of such dates and for such periods, subject to normal year-end adjustments in the case of the documents provided pursuant to clause (ii). Such balance sheets and the notes thereto disclose all material liabilities, direct or contingent, of the Borrower and its consolidated Subsidiaries as of the dates thereof.

     (b) The Borrower has heretofore delivered to the Lenders its unaudited pro forma consolidated balance sheet and related statements of operations, shareholders’ equity and cash flows as of and for the 12-month period ended June 30, 2004, prepared giving effect to the Transactions as if they had occurred, with respect to such balance sheet, as of such date and, with respect to such other financial statements, as of the first day of the 12-month period ending on such date. Such pro forma financial statements have been prepared in good faith by the Borrower, based on the assumptions used to prepare the pro forma financial information contained in the Confidential Information Memorandum (which assumptions were, at the time made and at the time such financial statements were delivered, believed by the Borrower to be reasonable), are based on information available to the Borrower as of the date of delivery thereof, accurately reflect in all material respects adjustments required to be made to give effect to the Transactions and present fairly in all material respects on a pro forma basis the estimated consolidated financial position of the Borrower and its consolidated Subsidiaries as of such date and for such period, assuming that the Transactions had actually occurred at such date or at the beginning of such period, as the case may be.

     SECTION 3.06. No Material Adverse Change. No event, change or condition has occurred that, individually or in the aggregate, has caused, or could reasonably be expected to cause, a material adverse effect on the business, assets, liabilities, operations or financial condition of the Borrower and the Subsidiaries, taken as a whole, since September 30, 2003.

     SECTION 3.07. Title to Properties; Possession Under Leases. (a) Each of the Borrower and the Subsidiaries has good and marketable title to, or valid leasehold interests in, all its material properties and assets, except for minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties and assets for their intended purposes. All such material properties and assets are free and clear of Liens, other than Liens expressly permitted by Section 6.02.

     (b) Each of the Borrower and the Subsidiaries has complied with all obligations under all material leases to which it is a party and all such leases are in full force and effect. Each of the Borrower and the Subsidiaries enjoys peaceful and undisturbed possession under all such material leases, subject to rights reserved by lessors under such leases.

     SECTION 3.08. Subsidiaries. Schedule 3.08 sets forth as of the Closing Date a list of all Subsidiaries and the percentage ownership interest of the Borrower or any Subsidiary therein. The shares of capital stock or other ownership interests so indicated on Schedule 3.08 are fully paid and non-assessable and are owned by the Borrower or

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any Subsidiary, directly or indirectly, free and clear of all Liens (other than Liens created under the Security Documents).

     SECTION 3.09. Litigation; Compliance with Laws. (a) Except as set forth on Schedule 3.09, there are no actions, suits or proceedings at law or in equity or by or before any Governmental Authority now pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any Subsidiary or any business, property or rights of any such person (i) that involve any Loan Document or the Transactions or (ii) as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect.

     (b) Since the date of this Agreement, there has been no change in the status of the matters disclosed on Schedule 3.09 that, individually or in the aggregate, has resulted in, or materially increased the likelihood of, a Material Adverse Effect.

     (c) None of the Borrower or any of the Subsidiaries or any of their respective material properties or assets is in violation of, nor will the continued operation of their material properties and assets as currently conducted violate, any law, rule or regulation (including any zoning, building, Environmental Law, ordinance, code or approval or any building permits), or is in default with respect to any judgment, writ, injunction, decree or order of any Governmental Authority, where such violation or default could reasonably be expected to result in a Material Adverse Effect.

     (d) To the Borrower’s knowledge, neither the ESOP Fiduciary nor the ESOT Trustee has made any assertion with respect to the ESOP or the ESOT contrary to or inconsistent with the accuracy of any representation or warranty set forth herein that could reasonably be expected to result in a Material Adverse Effect.

     SECTION 3.10. Agreements. Neither the Borrower nor any Subsidiary is in default in any manner under any provision of any indenture or other agreement or instrument evidencing Material Indebtedness, or any other material agreement or instrument to which it is a party or by which it or any of its properties or assets are or may be bound, where such default could reasonably be expected to result in a Material Adverse Effect.

     SECTION 3.11. Federal Reserve Regulations. (a) Neither the Borrower nor any Subsidiary is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of buying or carrying Margin Stock.

     (b) No part of the proceeds of any Loan or any Letter of Credit will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, for any purpose that entails a violation of, or that is inconsistent with, the provisions of the Regulations of the Board, including Regulation T, U or X.

     SECTION 3.12. Investment Company Act; Public Utility Holding Company Act. Neither the Borrower nor any Subsidiary is (a) an “investment company” as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a “holding

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company” as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935.

     SECTION 3.13. Use of Proceeds. The Borrower will use the proceeds of the Loans (other than any Incremental Term Loans) and will request the issuance of Letters of Credit only for the purposes specified in the preliminary statement to this Agreement. The Borrower will use the proceeds of any Incremental Term Loans solely as set forth in the applicable Incremental Term Loan Assumption Agreement.

     SECTION 3.14. Tax Returns. Each of the Borrower and the Subsidiaries has filed or caused to be filed all Federal, state, local and foreign tax returns or materials required to have been filed by it and has paid or caused to be paid all taxes due and payable by it and all assessments received by it, except for immaterial filings and amounts and taxes that are being contested in good faith by appropriate proceedings and for which the Borrower or such Subsidiary, as applicable, shall have set aside on its books adequate reserves.

     SECTION 3.15. No Material Misstatements. None of the Confidential Information Memorandum, or reports, financial statements, exhibits and schedules, taken as a whole, furnished by or on behalf of the Borrower to the Administrative Agent or any Lender in connection with the negotiation of any Loan Document or included therein or delivered pursuant thereto contained, contain or will contain any material misstatement of fact or omitted, omit or will omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were, are or will be made, not misleading; provided that to the extent any such information, report, financial statement, exhibit or schedule was based upon or constitutes a forecast or projection, the Borrower represents only that it acted in good faith and utilized reasonable assumptions and due care in the preparation of such information, report, financial statement, exhibit or schedule.

     SECTION 3.16. Employee Benefit Plans. Each of the Borrower and its ERISA Affiliates is in compliance in all material respects with the applicable provisions of ERISA and the Code and the regulations and published interpretations thereunder. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events, could reasonably be expected to result in material liability of the Borrower or any of its ERISA Affiliates. The present value of all benefit liabilities under each Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the last annual valuation date applicable thereto, exceed by more than $1,000,000 the fair market value of the assets of such Plan, and the present value of all benefit liabilities of all underfunded Plans (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the last annual valuation dates applicable thereto, exceed by more than $1,000,000 the fair market value of the assets of all such underfunded Plans.

     SECTION 3.17. Environmental Matters. (a) Except as set forth in Schedule 3.17 and except with respect to any other matters that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect,

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neither the Borrower nor any Subsidiary (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (ii) has become subject to any Environmental Liability, (iii) has received notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for any Environmental Liability.

     (b) Since the date of this Agreement, there has been no change in the status of the matters disclosed on Schedule 3.17 that, individually or in the aggregate, has resulted in, or materially increased the likelihood of, a Material Adverse Effect.

     SECTION 3.18. Insurance. Schedule 3.18 sets forth a true, complete and correct description of all insurance maintained by the Borrower or by the Borrower for its Subsidiaries as of the date hereof and the Closing Date. As of each such date, such insurance is in full force and effect and all premiums have been duly paid. The Borrower and the Subsidiaries have insurance in such amounts and covering such risks and liabilities as are in accordance with normal industry practice.

     SECTION 3.19. Security Documents. (a) The Guarantee and Collateral Agreement, upon execution and delivery thereof by the parties thereto, will create in favor of the Collateral Agent, for the ratable benefit of the Secured Parties, a legal, valid and enforceable security interest in the Collateral (as defined in the Guarantee and Collateral Agreement) and the proceeds thereof and (i) when the Pledged Collateral (as defined in the Guarantee and Collateral Agreement) is delivered to the Collateral Agent, the Lien created under the Guarantee and Collateral Agreement shall constitute a fully perfected first-priority Lien on, and security interest in, all right, title and interest of the Loan Parties in such Pledged Collateral, in each case prior and superior in right to any other person, and (ii) when financing statements in appropriate form are filed in the offices specified on Schedule 3.19(a), the Lien created under the Guarantee and Collateral Agreement will constitute a fully perfected Lien on, and security interest in, all right, title and interest of the Loan Parties in such Collateral (other than Intellectual Property, as defined in the Guarantee and Collateral Agreement), in which a security interest may be perfected by filing in the United States of America and its territories and possessions, in each case prior and superior in right to any other person, other than with respect to Liens expressly permitted by Section 6.02.

     (b) Upon the recordation of the Guarantee and Collateral Agreement with the United States Patent and Trademark Office and the United States Copyright Office, together with the financing statements in appropriate form filed in the offices specified on Schedule 3.19(a), the Lien created under the Guarantee and Collateral Agreement shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the Loan Parties in the Intellectual Property (as defined in the Guarantee and Collateral Agreement) in which a security interest may be perfected by filing in the United States of America and its territories and possessions, in each case prior and superior in right to any other person (it being understood that subsequent recordings in the United States Patent and Trademark Office and the United States Copyright Office may be necessary to perfect a Lien on registered trademarks and patents, trademark and patent applications and registered copyrights acquired by the Loan Parties after the date hereof).

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     SECTION 3.20. Location of Real Property and Leased Premises. (a) Schedule 3.20(a) lists completely and correctly as of the Closing Date all real property owned by the Borrower and the Subsidiaries and the addresses thereof. The Borrower and the Subsidiaries own in fee all the real property set forth on Schedule 3.20(a).

     (b) Schedule 3.20(b) lists completely and correctly as of the Closing Date all real property leased by the Borrower and the Subsidiaries and the addresses thereof. The Borrower and the Subsidiaries have valid leases in all the real property set forth on Schedule 3.20(b).

     SECTION 3.21. Labor Matters. As of the date hereof and the Closing Date, there are no strikes, lockouts or slowdowns against the Borrower or any Subsidiary pending or, to the knowledge of the Borrower, threatened. The hours worked by and payments made to employees of the Borrower and the Subsidiaries have not been in material violation of the Fair Labor Standards Act or any other applicable Federal, state, local or foreign law dealing with such matters. All material payments due from the Borrower or any Subsidiary, or for which any claim may be made against the Borrower or any Subsidiary, on account of wages and employee health and welfare insurance and other benefits, have been paid or accrued as a liability on the books of the Borrower or such Subsidiary. The consummation of the Transactions will not give rise to any right of termination or right of renegotiation on the part of any union under any collective bargaining agreement to which the Borrower or any Subsidiary is bound.

     SECTION 3.22. Solvency. Immediately after the consummation of the Transactions to occur on the Closing Date and immediately following the making of each Loan and after giving effect to the application of the proceeds of each Loan, (a) the fair value of the assets of each Loan Party, at a fair valuation, will exceed its debts and liabilities, subordinated, contingent or otherwise; (b) the present fair saleable value of the property of each Loan Party will be greater than the amount that will be required to pay the probable liability of its debts and other liabilities, subordinated, contingent or otherwise, as such debts and other liabilities become absolute and matured; (c) each Loan Party will be able to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured; and (d) each Loan Party will not have unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted following the Closing Date.

     SECTION 3.23. Subchapter S Corporation Status; ESOT Tax-Exempt Status. As of the Closing Date, the Borrower is taxable as a Subchapter S corporation. The ESOT is not subject to tax imposed under the Code with respect to any item of income or loss of the Borrower or any Subsidiary of the Borrower.

     SECTION 3.24. ESOP. (a) As of the Closing Date and, to the best of Borrower’s knowledge at all times thereafter, the ESOT has been duly organized and is a validly existing trust. Except as set forth on Schedule 3.24, each of the ESOP Plan Documents is in full force and effect and no term or condition thereof has been amended, modified or waived from the terms and conditions contained in the ESOP Plan

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Documents delivered to the Administrative Agent without the consent of the Administrative Agent (which consent shall not be unreasonably withheld), except to the extent such amendment, modification or waiver could not reasonably be anticipated to have a material adverse effect upon the Administrative Agent or any of the Lenders or otherwise have a Material Adverse Effect. As of the Closing Date and, to the best of Borrower’s knowledge at all times thereafter, the ESOT has performed and complied with all the material terms, provisions, agreements and conditions set forth therein and required to be performed or complied with by the ESOT, and no unmatured default, default or breach of any covenant by any such party exists thereunder.

     (b) As of the Closing Date and, to the best of the Borrower’s knowledge at all times thereafter, the execution, delivery and performance of each of the ESOP Plan Documents to which the ESOT is a party do not (i) conflict with the ESOP Plan Documents, (ii) conflict with any requirement of law, or (iii) other than with respect to ordinary course ESOP operations, require a registration with, consent or approval of, or notices to, or other action to, with or by any Governmental Authority.

     (c) As of the Closing Date and, to the best of the Borrower’s knowledge, at all times thereafter, none of the assets of the Borrower constitute, for any purpose of ERISA or Section 4975 of the Code, assets of the ESOP or any other “plan” as defined in Section 3(3) of ERISA or Section 4975 of the Code.

     (d) As of the Closing Date and, to the best of the Borrower’s knowledge, at all times thereafter, no non-exempt prohibited transaction described in Section 406 of ERISA or Section 4975 of the Code has occurred with respect to the ESOP, and no Loan hereunder constitutes or shall constitute or give rise to any such non-exempt prohibited transaction.

     (e) The ESOP is qualified under Section 401(a) of the Code, and the ESOP includes two components, one of which is a stock bonus plan that constitutes an employee stock ownership plan as defined in Section 4975(e)(7) of the Code, and the other is a profit sharing plan that includes a cash or deferred arrangement under Section 401(k) of the Code.

     (f) The Borrower has provided the Administrative Agent with a complete and true copy of each of the ESOP Plan Documents pursuant to which the ESOP and the ESOT are maintained by the Borrower, or which concern the Borrower’s obligations with respect to the ESOP and ESOT, as of the Closing Date and has not subsequently amended or in any other way modified or replaced such ESOP Plan Documents in any material manner without the prior written consent of the Administrative Agent, except for any amendment, modification or replacement required by the IRS or by applicable law (and the Borrower shall use its best efforts to deliver a copy of any such amendment, modification or replacement to the Administrative Agent prior to the execution thereof).

     (g) To the Borrower’s knowledge, no Loan hereunder is (for any purpose of Section 406 of ERISA or Section 4975 of the Code) a direct or indirect loan or other transaction between the Administrative Agent or any of the Lenders and the ESOT

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which, if it is assumed that the Administrative Agent and the Lenders are “parties in interest” and “disqualified persons” (as defined in Section 3(14) of ERISA and Section 4975 of the Code), is a non-exempt prohibited transaction described in Section 406 of ERISA or Section 4975 of the Code.

     (h) Neither the Borrower nor any of its Subsidiaries is or shall be subject to the tax imposed by Section 4978 of the Code with respect to any “disposition” by the ESOT of any shares of Equity Interests of the Borrower.

     (i) To the Borrower’s knowledge, there is no investigation or review by any Governmental Agency, or action, suit, proceeding or arbitration, pending or concluded, concerning any matter with respect to the ESOP or the ESOT relevant as to whether any representation set forth herein was, or has or will at any time become, inaccurate or breached or, if it were to be made at any time prior to the satisfaction of all Obligations, would be inaccurate when made (other than in respect of (i) periodic requests to the IRS to issue a favorable determination letter to the effect that the ESOP is and continues to be a qualified plan and an employee stock ownership plan, (ii) Annual Reports (IRS Form 5500 Series) for the ESOP and (iii) routine claims for ESOP benefits), and neither the ESOP Fiduciary nor, to the best of the Borrower’s knowledge, the ESOT Trustee has made any assertion with respect to the ESOP or the ESOT contrary to or inconsistent with the accuracy of any such representation which assertion could reasonably be expected to have a Material Adverse Effect.

     SECTION 3.25. Subordinated Indebtedness. (a) The Loans and other Obligations constitute “Senior Debt” for all purposes of the Mezzanine Notes, the Seller Subordinated Notes and the Securities Purchase Agreements, and the subordination provisions of the Mezzanine Notes, the Seller Subordinated Notes and the Securities Purchase Agreements are enforceable by the Lenders against the holders thereof, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting generally the enforcement of creditors’ rights and except to the extent that availability of the remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding thereof may be brought.

     (b) On the Closing Date, to the Borrower’s knowledge, IIT is the sole holder of each of the Mezzanine Notes and the Seller Subordinated Notes.

ARTICLE IV

Conditions of Lending

     The obligations of the Lenders to make Loans and of the Issuing Bank to issue Letters of Credit hereunder are subject to the satisfaction of the following conditions:

     SECTION 4.01. All Credit Events. On the date of each Borrowing, including each Borrowing of a Swingline Loan and on the date of each issuance, amendment,

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extension or renewal of a Letter of Credit (each such event being called a "Credit Event”):

     (a) The Administrative Agent shall have received a notice of such Borrowing as required by Section 2.03 (or such notice shall have been deemed given in accordance with Section 2.03) or, in the case of the issuance, amendment, extension or renewal of a Letter of Credit, the Issuing Bank and the Administrative Agent shall have received a notice requesting the issuance, amendment, extension or renewal of such Letter of Credit as required by Section 2.23(b) or, in the case of the Borrowing of a Swingline Loan, the Swingline Lender and the Administrative Agent shall have received a notice requesting such Swingline Loan as required by Section 2.22(b).

     (b) The representations and warranties set forth in Article III and in each other Loan Document shall be true and correct in all material respects on and as of the date of such Credit Event with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date.

     (c) The Borrower and each other Loan Party shall be in compliance with all the terms and provisions set forth herein and in each other Loan Document on its part to be observed or performed, and at the time of and immediately after such Credit Event, no Default or Event or Default shall have occurred and be continuing.

     Each Credit Event shall be deemed to constitute a representation and warranty by the Borrower on the date of such Credit Event as to the matters specified in paragraphs (b) and (c) of this Section.

     SECTION 4.02. First Credit Event. On the Closing Date:

     (a) The Administrative Agent shall have received, on behalf of itself, the Lenders, the Swingline Lender and the Issuing Bank, a favorable written opinion of Baker & McKenzie LLP, counsel for the Borrower, substantially to the effect set forth in Exhibit G, which opinion shall be (i) dated the Closing Date and (ii) addressed to the Issuing Bank, the Administrative Agent and the Lenders. The Borrower hereby requests such counsel to deliver such opinions.

     (b) All legal matters incident to this Agreement, the Borrowings and extensions of credit hereunder and the other Loan Documents shall be satisfactory to the Lenders, to the Issuing Bank and to the Administrative Agent.

     (c) The Administrative Agent shall have received (i) a copy of the certificate or articles of incorporation, including all amendments thereto, of each Loan Party, certified as of a recent date by the Secretary of State of the State of its organization, and a certificate as to the good standing of each Loan Party as of a recent date, from such Secretary of State; (ii) a certificate of the Secretary or Assistant Secretary of each Loan Party dated the Closing Date and certifying (A) that attached thereto is a true and complete copy of the by-laws of such Loan Party as in effect on the Closing Date and at all times since a date prior to the date of the resolutions described in clause (B) below, (B) that attached thereto is a true and complete copy of resolutions duly adopted by the

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Board of Directors of such Loan Party authorizing the execution, delivery and performance of the Loan Documents to which such person is a party and, in the case of the Borrower, the borrowings hereunder, and that such resolutions have not been modified, rescinded or amended and are in full force and effect, (C) that the certificate or articles of incorporation of such Loan Party have not been amended since the date of the last amendment thereto shown on the certificate of good standing furnished pursuant to clause (i) above, and (D) as to the incumbency and specimen signature of each officer executing any Loan Document or any other document delivered in connection herewith on behalf of such Loan Party; and (iii) a certificate of another officer as to the incumbency and specimen signature of the Secretary or Assistant Secretary executing the certificate pursuant to clause (ii) above.

     (d) The Administrative Agent shall have received a certificate, dated the Closing Date and signed by a Financial Officer of the Borrower, confirming compliance with the conditions precedent set forth in paragraphs (b) and (c) of Section 4.01.

     (e) The Administrative Agent shall have received all Fees and other amounts due and payable on or prior to the Closing Date, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrower hereunder or under any other Loan Document.

     (f) The Security Documents shall have been duly executed by each Loan Party that is to be a party thereto and shall be in full force and effect and each document (including each Uniform Commercial Code financing statement and, subject to the proviso to the first sentence of Section 5.09, each Assignment of Claims Act notice) required by law or reasonably requested by the Administrative Agent or the Collateral Agent to be filed, registered or recorded in order to create in favor of the Collateral Agent for the benefit of the Secured Parties a valid, legal and perfected first-priority (except to the extent otherwise provided therein) security interest in and lien on the Collateral (subject to any Lien expressly permitted by Section 6.02) described in the Security Documents shall have been prepared and delivered to the Collateral Agent on the Closing Date.

     (g) The Collateral Agent shall have received a Perfection Certificate with respect to the Loan Parties dated the Closing Date and duly executed by a Responsible Officer of the Borrower, and shall have obtained the results of a search of the Uniform Commercial Code filings (or equivalent filings) made with respect to the Loan Parties in the States (or other jurisdictions) of formation of such persons, in which the chief executive office of each such person is located and in the other jurisdictions in which such persons maintain property, in each case as indicated on such Perfection Certificate, together with copies of the financing statements (or similar documents) disclosed by such search, and accompanied by evidence satisfactory to the Collateral Agent that the Liens indicated in any such financing statement (or similar document) would be permitted under Section 6.02 or have been or will be contemporaneously released or terminated.

     (h) The Administrative Agent shall have received a copy of, or a certificate as to coverage under, the insurance policies required by Section 5.02 and the applicable

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provisions of the Security Documents, each of which shall be endorsed or otherwise amended to include a customary lender’s loss payable endorsement and to name the Collateral Agent as additional insured, in form and substance satisfactory to the Administrative Agent.

     (i) All principal, premium, if any, interest, fees and other amounts due or outstanding under the Existing Credit Agreement shall have been, or substantially simultaneously with the initial funding of Loans on the Closing Date shall be, paid in full, the commitments thereunder terminated and all guarantees and security in support thereof discharged and released, and the Administrative Agent shall have received reasonably satisfactory evidence thereof. Immediately after giving effect to the Transactions and the other transactions contemplated hereby, the Borrower and the Subsidiaries shall have outstanding no Indebtedness or preferred stock other than (a) Indebtedness outstanding under this Agreement and (b) Indebtedness set forth on Schedule 6.01.

     (j) The Lenders shall have received the financial statements and opinion referred to in Section 3.05, which financial statements shall not be materially inconsistent with the financial statements or forecasts previously provided to the Lenders.

     (k) The Lenders shall have received a certificate from the chief financial officer of the Borrower certifying that the Borrower and the Subsidiaries, on a consolidated basis after giving effect to the Transactions to occur on the Closing Date, are solvent.

     (l) All Indebtedness in respect of the Mezzanine Notes and the Seller Subordinated Notes shall have been fully subordinated to the Obligations and each obligee in respect of the Mezzanine Notes and the Seller Subordinated Notes shall have entered into subordination agreements in form and substance reasonably acceptable to the Administrative Agent effecting such subordination.

     (m) There shall not be any pending or threatened litigation, governmental, administrative or judicial action that could reasonably be expected to restrain, prevent or impose burdensome conditions on the Transactions or the other transactions contemplated hereby.

     (n) The Lenders shall have received, to the extent requested, all documentation and other information required by regulatory authorities under applicable “know your customer” and anti-money laundering rules and regulations, including the USA Patriot Act.

ARTICLE V

Affirmative Covenants

     The Borrower covenants and agrees with each Lender that so long as this Agreement shall remain in effect and until the Commitments have been terminated and the principal of and interest on each Loan, all Fees and all other expenses or amounts payable under any Loan Document shall have been paid in full and all Letters of Credit have been canceled or have expired and all amounts drawn thereunder have been

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reimbursed in full, unless the Required Lenders shall otherwise consent in writing, the Borrower will, and will cause each Subsidiary to:

     SECTION 5.01. Existence; Businesses and Properties. (a) Do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence, except as otherwise expressly permitted under clause (b) below or Section 6.05; provided that, subject to Sections 5.06 and 5.09, the Borrower and any Subsidiary may convert the form of legal entity and change the jurisdiction of incorporation or formation to any other jurisdiction within the United States except that the Borrower shall not effect any conversion which would prevent the Borrower from retaining the tax benefits associated with being a disregarded entity for U.S. federal income tax purposes.

     (b) Do or cause to be done all things necessary to obtain, preserve, renew, extend and keep in full force and effect the rights, licenses, permits, franchises, authorizations, patents, copyrights, trademarks and trade names material to the conduct of its business; maintain and operate such business in substantially the manner in which it is presently conducted and operated (provided that nothing herein shall prevent the Board of Directors of the Borrower or any Subsidiary from expanding or reducing a line of business that it deems in its business judgment to be in the best interest of the Borrower or such Subsidiary); comply in all material respects with all applicable laws, rules, regulations and decrees and orders of any Governmental Authority, whether now in effect or hereafter enacted; and at all times maintain and preserve all property material to the conduct of such business and keep such property in good repair, working order and condition and from time to time make, or cause to be made, all needful and proper repairs, renewals, additions, improvements and replacements thereto necessary in order that the business carried on in connection therewith may be properly conducted at all times; provided, however, that the foregoing shall not prevent the Borrower from dissolving a Subsidiary or discontinuing the operation or maintenance of any of its or any Subsidiary’s property if such discontinuance is, in the judgment of the Borrower, desirable in the conduct of its business and could not reasonably be expected to result in a Material Adverse Effect.

     SECTION 5.02. Insurance. (a) Keep its insurable properties adequately insured at all times by financially sound and reputable insurers; maintain such other insurance, to such extent and against such risks, including fire and other risks insured against by extended coverage, as is customary with companies in the same or similar businesses operating in the same or similar locations, including public liability insurance against claims for personal injury or death or property damage occurring upon, in, about or in connection with the use of any properties owned, occupied or controlled by it; and maintain such other insurance as may be required by law.

     (b) Cause all such policies covering any Collateral to be endorsed or otherwise amended to include a customary lender’s loss payable endorsement, in form and substance satisfactory to the Administrative Agent and the Collateral Agent, which endorsement shall provide that, from and after the Closing Date, if the insurance carrier shall have received written notice from the Administrative Agent or the Collateral Agent

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of the occurrence of an Event of Default, the insurance carrier shall pay all proceeds otherwise payable to the Borrower or any other Loan Party under such policies directly to the Collateral Agent; cause all such policies to provide that neither the Borrower, the Administrative Agent, the Collateral Agent nor any other party shall be a coinsurer thereunder and to contain a “Replacement Cost Endorsement”, without any deduction for depreciation, and such other provisions as the Administrative Agent or the Collateral Agent may reasonably require from time to time to protect their interests; deliver original or certified copies of all such policies to the Collateral Agent; cause each such policy to provide that it shall not be canceled, materially modified or not renewed (i) by reason of nonpayment of premium upon not less than 10 days’ prior written notice thereof by the insurer to the Administrative Agent and the Collateral Agent (giving the Administrative Agent and the Collateral Agent the right to cure defaults in the payment of premiums) or (ii) for any other reason upon not less than 30 days’ prior written notice thereof by the insurer to the Administrative Agent and the Collateral Agent; deliver to the Administrative Agent and the Collateral Agent, prior to the cancellation, material modification or nonrenewal of any such policy of insurance, a copy of a renewal or replacement policy (or other evidence of renewal of a policy previously delivered to the Administrative Agent and the Collateral Agent) together with evidence satisfactory to the Administrative Agent and the Collateral Agent of payment of the premium therefor.

     (c) Notify the Administrative Agent and the Collateral Agent immediately whenever any separate insurance concurrent in form or contributing in the event of loss with that required to be maintained under this Section is taken out by the Borrower; and promptly deliver to the Administrative Agent and the Collateral Agent a duplicate original copy of such policy or policies.

     SECTION 5.03. Obligations and Taxes. Pay its Material Indebtedness and other material obligations promptly and in accordance with their terms and pay and discharge promptly when due all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property, before the same shall become delinquent or in default, as well as all lawful claims for labor, materials and supplies or otherwise that, if unpaid, might give rise to a Lien upon such properties or any part thereof; provided, however, that such payment and discharge shall not be required with respect to any such tax, assessment, charge, levy or claim so long as the validity or amount thereof shall be contested in good faith by appropriate proceedings and the Borrower shall have set aside on its books adequate reserves with respect thereto in accordance with GAAP and such contest operates to suspend collection of the contested obligation, tax, assessment or charge and enforcement of a Lien.

     SECTION 5.04. Financial Statements, Reports, etc. In the case of the Borrower, furnish to the Administrative Agent for each Lender:

     (a) within 90 days after the end of each fiscal year, its consolidated balance sheet and related statements of operations, shareholders’ equity and cash flows showing the financial condition of the Borrower and its consolidated Subsidiaries as of the close of such fiscal year and the results of its operations and the operations of such Subsidiaries during such year, together with comparative

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figures for the immediately preceding fiscal year, all audited by KPMG LLP or other independent public accountants of recognized national standing and accompanied by an opinion of such accountants (which shall not be qualified in any material respect) to the effect that such consolidated financial statements fairly present in all material respects the financial condition and results of operations of the Borrower and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP;

     (b) within 45 days after the end of each of the first three fiscal quarters of each fiscal year, its unaudited consolidated balance sheet and related statements of operations and cash flows showing the financial condition of the Borrower and its consolidated Subsidiaries as of the close of such fiscal quarter and the results of its operations and the operations of such Subsidiaries during such fiscal quarter and the then elapsed portion of the fiscal year, and comparative figures for the same periods in the immediately preceding fiscal year, all certified by a Financial Officer of the Borrower as fairly presenting the financial condition and results of operations of the Borrower and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP, subject to normal year-end audit adjustments;

     (c) concurrently with any delivery of financial statements under paragraph (a) or (b) of this Section, a certificate of a Financial Officer of the Borrower (i) certifying that no Default or Event of Default has occurred or, if such a Default or an Event of Default has occurred, specifying the nature and extent thereof and any corrective action taken or proposed to be taken with respect thereto and (ii) setting forth computations in reasonable detail satisfactory to the Administrative Agent demonstrating compliance with the covenants contained in Sections 6.12 and 6.13 and, in the case of a certificate delivered with the financial statements required by paragraph (a) of this Section, setting forth the Borrower’s calculation of Excess Cash Flow;

     (d) within 90 days after the beginning of each fiscal year of the Borrower, a detailed consolidated budget for such fiscal year (including a projected consolidated balance sheet and related statements of projected operations and cash flows as of the end of and for such fiscal year and setting forth the assumptions used for purposes of preparing such budget) and, promptly when available, any significant revisions of such budget;

     (e) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by the Borrower or any Subsidiary with the Securities and Exchange Commission, or any Governmental Authority succeeding to any or all of the functions of said Commission, or with any national securities exchange, or distributed to its shareholders, as the case may be;

     (f) promptly after the receipt thereof by the Borrower or any Subsidiary, a copy of any “management letter” received by any such person from its certified public accountants and the management’s response thereto;

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     (g) as soon as practicable and in any event (i) within 10 Business Days after the receipt by the Borrower of the annual valuation report prepared for the ESOP for each fiscal year, commencing with the fiscal year ending September 30, 2004, deliver to the Administrative Agent a copy of such report, and (ii) on the date that is the earlier of (x) 180 days after the date of any Permitted Acquisition with a purchase price in excess of $20,000,000 or for which the Acquired Entity shall have 300 or more employees and (y) the second anniversary of the delivery of the most recent repurchase liability study of the Borrower prepared for the ESOP, deliver to the Administrative Agent (with sufficient copies for each of the Lenders) copies of a repurchase liability study of the Borrower prepared for the ESOP as of a recent date, in each case in form and substance reasonably acceptable to the Administrative Agent.

     (h) within 45 days after the end of the first and third fiscal quarters of the Borrower, a certificate of a Financial Officer of the Borrower listing each new Material Contract entered into since the Closing Date;

     (i) promptly after the request by any Lender, all documentation and other information that such Lender reasonably requests in order to comply with its ongoing obligations under applicable “know your customer” and anti-money laundering rules and regulations, including the USA Patriot Act; and

     (j) promptly, from time to time, such other information regarding the operations, business affairs and financial condition of the Borrower or any Subsidiary, or compliance with the terms of any Loan Document, as the Administrative Agent or any Lender (acting through the Administrative Agent) may reasonably request.

     SECTION 5.05. Litigation and Other Notices. Furnish to the Administrative Agent, the Issuing Bank and each Lender prompt written notice of the following:

     (a) any Default or Event of Default, specifying the nature and extent thereof and the corrective action, if any, taken or proposed to be taken with respect thereto;

     (b) the filing or commencement of, or any threat or notice of intention of any person to file or commence, any action, suit or proceeding, whether at law or in equity or by or before any Governmental Authority, against the Borrower or any Affiliate thereof that could reasonably be expected to result in a Material Adverse Effect;

     (c) the occurrence of any ERISA Event that, alone or together with any other ERISA Events that have occurred, could reasonably be expected to result in liability of the Borrower and the Subsidiaries in an aggregate amount exceeding $1,000,000, together with a statement of a Financial Officer of the Borrower setting forth the details of such ERISA Event and the corrective action, if any, taken or proposed to be taken with respect thereto;

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     (d) the occurrence of a material non-exempt prohibited transaction (defined in Section 406 of ERISA and Section 4975 of the Code) with respect to the ESOP or to any other Plan, or knowledge that the IRS or any other Governmental Authority is investigating whether any such material non-exempt prohibited transaction might have occurred, and a statement of a Financial Officer of the Borrower describing such transaction and the corrective action, if any, taken or proposed to be taken with respect thereto;

     (e) the receipt of written notice (whether preliminary, final or otherwise but excluding any notice of any proposed amendments) of any unfavorable determination letter from the IRS regarding the qualification of a Plan under Section 401(a) of the Code or the status of the ESOP as an employee stock ownership plan (as defined in Section 4975(e)(7) of the Code), together with copies of each such letter;

     (f) the receipt by the Borrower or any of its Subsidiaries of notice of any audit, investigation, litigation or inquiry by the IRS or any other Governmental Authority relating to the ESOP or the ESOT, which could reasonably be expected to subject the Borrower or any of its Subsidiaries to liability, individually or in the aggregate, in excess of $1,000,000, together with copies of each such notice and copies of all subsequent correspondence relating thereto;

     (g) the occurrence of any amendment to any of the ESOP Plan Documents;

     (h) the Borrower’s knowledge that at any time on or after the Closing Date the Borrower is not taxable as a Subchapter S corporation as such term is defined in Section 1361 of the Code or that the ESOT is subject to tax imposed under the Code with respect to any item of income or loss of the Borrower or any Subsidiary of the Borrower; and

     (i) any development that has resulted in, or could reasonably be expected to result in, a Material Adverse Effect.

For purposes of this Section 5.05, the Borrower and the Subsidiaries shall be deemed to know all facts known by the administrator of any Plan of which the Borrower or any Subsidiary is the plan sponsor.

     SECTION 5.06. Information Regarding Collateral. (a) Furnish to the Administrative Agent prompt written notice of any change in (i) any Loan Party’s corporate name, (ii) the jurisdiction of organization or formation of any Loan Party, (iii) any Loan Party’s identity or corporate structure or (iv) any Loan Party’s Federal Taxpayer Identification Number. The Borrower agrees not to effect or permit any change referred to in the preceding sentence unless all filings have been made under the Uniform Commercial Code or otherwise that are required in order for the Collateral Agent to continue at all times following such change to have a valid, legal and perfected security interest in all the Collateral.

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     (b) In the case of the Borrower, each year, at the time of delivery of the annual financial statements with respect to the preceding fiscal year pursuant to Section 5.04(a), deliver to the Administrative Agent a certificate of a Financial Officer of the Borrower supplementing the information required pursuant to the Perfection Certificate or confirming that there has been no change in such information since the date of the Perfection Certificate delivered on the Closing Date or the date of the most recent certificate delivered pursuant to this Section.

     SECTION 5.07. Maintaining Records; Access to Properties and Inspections; Maintenance of Ratings. (a) Keep proper books of record and account in which full, true and correct entries in conformity with GAAP and all requirements of law are made of all dealings and transactions in relation to its business and activities. Each Loan Party will, and will cause each of its subsidiaries to, permit any representatives designated by the Administrative Agent or any Lender to visit and inspect the financial records and the properties of such person at reasonable times and as often as reasonably requested (but no more than twice per fiscal year of the Borrower, unless an Event of Default has occurred and is continuing) and to make extracts from and copies of such financial records, and permit any representatives designated by the Administrative Agent or any Lender to discuss the affairs, finances and condition of such person with the officers thereof and independent accountants therefor.

     (b) In the case of the Borrower, use commercially reasonable efforts to cause the Credit Facilities to be continuously rated by S&P and Moody’s.

     SECTION 5.08. Use of Proceeds. Use the proceeds of the Loans and request the issuance of Letters of Credit only for the purposes set forth in the preliminary statement to this Agreement (or, in the case of the Incremental Term Loans, as set forth in the applicable Incremental Term Loan Assumption Agreement); provided that, if the Borrower shall have irrevocably called the Mezzanine Notes for redemption prior to the expiration of the Delayed Draw Availability Period, but the redemption of the Mezzanine Notes would occur after the expiration of the Delayed Draw Availability Period, then, subject to the satisfaction of the conditions set forth in Section 4.01, the Borrower may, prior to the expiration of the Delayed Draw Availability Period, request Delayed Draw Term Loans sufficient to fund such redemption and deposit the proceeds of such Delayed Draw Term Loans in a cash collateral account with the Administrative Agent pending such redemption.

     SECTION 5.09. Further Assurances. Execute any and all further documents, financing statements, agreements and instruments, and take all further action (including filing Uniform Commercial Code and other financing statements, fixture filings, mortgages and deeds of trust and preparing all documentation relating to filings under the Assignment of Claims Act) that may be required under applicable law, or that the Required Lenders, the Administrative Agent or the Collateral Agent may reasonably request, in order to effectuate the transactions contemplated by the Loan Documents and in order to grant, preserve, protect and perfect the validity and first priority of the security interests created or intended to be created by the Security Documents; provided, however, that notwithstanding anything else to the contrary in the Loan Documents, none of the

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Loan Parties shall be required to make filings under the Assignment of Claims Act for the assignment of Government Contracts to the Collateral Agent unless (a) such Government Contract constitutes a Material Contract and (b) the Collateral Agent shall have requested, in its reasonable discretion, that a filing under the Assignment of Claims Act be made with respect to such Government Contract. The Borrower will cause each subsequently acquired or organized Domestic Subsidiary (excluding any Insignificant Subsidiary) to become a Loan Party by executing the Guarantee and Collateral Agreement and each other applicable Security Document in favor of the Collateral Agent. In addition, from time to time, the Borrower will, at its cost and expense, promptly secure the Obligations by pledging or creating, or causing to be pledged or created, perfected security interests with respect to such of its assets and properties as the Administrative Agent or the Required Lenders shall designate (it being understood that it is the intent of the parties that the Obligations shall be secured by substantially all the assets of the Borrower and the Subsidiary Guarantors (other than any Insignificant Subsidiary) (including real and other properties acquired subsequent to the Closing Date)). Such security interests and Liens will be created under the Security Documents and other security agreements, mortgages, deeds of trust and other instruments and documents in form and substance satisfactory to the Collateral Agent, and the Borrower shall deliver or cause to be delivered to the Lenders all such instruments and documents (including legal opinions, title insurance policies and lien searches) as the Collateral Agent shall reasonably request to evidence compliance with this Section. The Borrower agrees to provide such evidence as the Collateral Agent shall reasonably request as to the perfection and priority status of each such security interest and Lien. In furtherance of the foregoing, the Borrower will give prompt notice to the Administrative Agent of the acquisition by it or any Subsidiary of any real property (or any interest in real property) having a value in excess of $500,000.

     SECTION 5.10. Interest Rate Protection. No later than 180 days after the Closing Date, the Borrower shall enter into, and for a minimum of two years thereafter maintain, Hedging Agreements acceptable to the Administrative Agent that result in at least 40% of the aggregate principal amount of its funded long-term Indebtedness being effectively subject to a fixed or maximum interest rate acceptable to the Administrative Agent.

     SECTION 5.11. Mezzanine Note Redemption. Cause the Mezzanine Note Redemption to occur on or before December 31, 2004.

ARTICLE VI

Negative Covenants

     The Borrower covenants and agrees with each Lender that, so long as this Agreement shall remain in effect and until the Commitments have been terminated and the principal of and interest on each Loan, all Fees and all other expenses or amounts payable under any Loan Document have been paid in full and all Letters of Credit have been cancelled or have expired and all amounts drawn thereunder have been reimbursed

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in full, unless the Required Lenders shall otherwise consent in writing, the Borrower will not, nor will it cause or permit any Subsidiary to:

     SECTION 6.01. Indebtedness. Incur, create, assume or permit to exist any Indebtedness, except:

     (a) Indebtedness existing on the date hereof and set forth in Schedule 6.01;

     (b) Indebtedness created hereunder and under the other Loan Documents;

     (c) intercompany Indebtedness of the Borrower and the Subsidiaries to the extent permitted by Section 6.04(a);

     (d) Indebtedness incurred to extend, renew or refinance any Indebtedness described in Section 6.01(a), (d), (e), (f), (h), (j) or (m) (“Refinancing Indebtedness”); provided, however, that (i) such Refinancing Indebtedness is in an aggregate principal amount not greater than the aggregate principal amount of the Indebtedness being extended, renewed or refinanced, plus the amount of any interest, premiums or penalties required to be paid thereon plus fees and expenses associated therewith, (ii) such Refinancing Indebtedness has a later or equal final maturity and a longer or equal weighted average life to maturity than the Indebtedness being extended, renewed or refinanced, (iii) if the Indebtedness being extended, renewed or refinanced is subordinated to the Obligations, the Refinancing Indebtedness is subordinated to the Obligations on terms no less favorable to the Lenders than the Indebtedness being extended, renewed or refinanced, (iv) neither the Borrower nor any Subsidiary Guarantor may become obligated in respect of such Refinancing Indebtedness unless it was obligated in respect of the Indebtedness being extended, renewed or refinanced and (v) the non-economic covenants, events of default, remedies and other provisions of the Refinancing Indebtedness, when taken as a whole, shall be materially no less favorable to the Lenders than those contained in the Indebtedness being extended, renewed or refinanced;

     (e) Indebtedness of the Borrower or any Subsidiary incurred to finance the acquisition, construction or improvement of any fixed or capital assets, and extensions, renewals and replacements of any such Indebtedness that do not increase the outstanding principal amount thereof; provided that (i) such Indebtedness is incurred prior to or within 90 days after such acquisition or the completion of such construction or improvement and (ii) the aggregate principal amount of Indebtedness permitted by this paragraph, when combined with the aggregate principal amount of all Capital Lease Obligations and Synthetic Lease Obligations incurred pursuant to paragraph (e) of this Section shall not exceed $10,000,000 at any time outstanding;

     (f) Capital Lease Obligations and Synthetic Lease Obligations in an aggregate principal amount, when combined with the aggregate principal amount

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of all Indebtedness incurred pursuant to paragraph (d) of this Section, not in excess of $10,000,000 at any time outstanding;

     (g) Indebtedness of the Borrower or any Subsidiary incurred under any Hedging Agreement of the Borrower or any Subsidiary to the extent relating to Indebtedness of the Borrower or such Subsidiary, as the case may be (which Indebtedness (i) bears interest at fluctuating interest rates and (ii) is otherwise permitted to be incurred pursuant to this Agreement);

     (h) Indebtedness of any person that becomes a Subsidiary after the date hereof; provided that (i) such Indebtedness exists at the time such person becomes a Subsidiary and is not created in contemplation of or in connection with such person becoming a Subsidiary and (ii) the aggregate principal amount of Indebtedness permitted by this paragraph shall not exceed $5,000,000 at any time outstanding;

     (i) endorsements for collection, deposit or negotiation and warranties of products or services, in each case incurred in the ordinary course of business;

     (j) unsecured subordinated Indebtedness of the Borrower (which may be Guaranteed by any Loan Party on a subordinated basis) the proceeds of which are used to finance the cash consideration payable in a Permitted Acquisition (including the refinancing of Indebtedness of the Acquired Entity and the payment of related fees and expenses) in an aggregate principal amount, when combined with the aggregate principal amount of all Indebtedness incurred pursuant to Section 6.01(f), not in excess of $150,000,000 at any time outstanding; provided that such Indebtedness (i) matures after the first anniversary of the Term Loan Maturity Date, (ii) requires no scheduled payment of principal prior to its maturity, (iii) does not require the Borrower to maintain any specified financial condition (other than as a condition to the taking of certain actions) and (iv) contains subordination provisions, non-economic covenants, events of default, remedies and other provisions, and is in form and substance, reasonably satisfactory to the Administrative Agent;

     (k) Indebtedness under performance bonds or with respect to workers’ compensation claims, in each case incurred in the ordinary course of business;

     (l) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently drawn against insufficient funds in the ordinary course of business, so long as such Indebtedness is extinguished within three Business Days of the Borrower’s knowledge of such incurrence; and

     (m) Indebtedness arising as a result of (i) the redemption or repurchase of any Equity Interests of the Borrower as a result of distributions by the ESOT to participants in the ESOP pursuant to the ESOP Plan Documents subsequent to their termination of employment with the Borrower or any Controlled Group

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member or (ii) the requirements of Section 401(a)(28) of the Code or any substantially similar requirement of law; and

     (n) other unsecured Indebtedness of the Borrower or the Subsidiaries in an aggregate principal amount not exceeding $10,000,000 at any time outstanding.

     (o) the Mezzanine Notes (subject to Section 5.11), the Seller Subordinated Notes and the Officer Note;

     (p) Indebtedness of Foreign Subsidiaries in an aggregate principal amount not to exceed $2,500,000 at any time outstanding; and

     (q) Borrower’s deferred compensation agreements.

     SECTION 6.02. Liens. Create, incur, assume or permit to exist any Lien on any property or assets (including Equity Interests or other securities of any person, including any Subsidiary) now owned or hereafter acquired by it or on any income or revenues or rights in respect of any thereof, except:

     (a) Liens on property or assets of the Borrower and its Subsidiaries existing on the date hereof and set forth in Schedule 6.02; provided that such Liens shall secure only those obligations which they secure on the date hereof;

     (b) any Lien created under the Loan Documents;

     (c) any Lien existing on any property or asset prior to the acquisition thereof by the Borrower or any Subsidiary or existing on any property or asset of any person that becomes a Subsidiary after the date hereof prior to the time such person becomes a Subsidiary, as the case may be; provided that (i) such Lien is not created in contemplation of or in connection with such acquisition or such person becoming a Subsidiary, as the case may be, (ii) such Lien does not apply to any other property or assets of the Borrower or any Subsidiary and (iii) such Lien secures only those obligations which it secures on the date of such acquisition or the date such person becomes a Subsidiary, as the case may be;

     (d) Liens for taxes not yet due or which are being contested in compliance with Section 5.03;

     (e) carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s or other like Liens arising in the ordinary course of business and securing obligations that are not due and payable or which are being contested in compliance with Section 5.03;

     (f) pledges and deposits made in the ordinary course of business in compliance with workmen’s compensation, unemployment insurance and other social security laws or regulations;

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     (g) deposits to secure the performance of bids, trade contracts (other than for Indebtedness), leases (other than Capital Lease Obligations), statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business;

     (h) zoning restrictions, easements, rights-of-way, restrictions on use of real property and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, do not materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of the Borrower or any Subsidiary;

     (i) purchase money security interests in real property, improvements thereto or equipment and other personal property hereafter acquired (or, in the case of improvements, constructed) by the Borrower or any Subsidiary; provided that (i) such security interests secure Indebtedness permitted by Section 6.01, (ii) such security interests are incurred, and the Indebtedness secured thereby is created, within 90 days after such acquisition (or construction), (iii) the Indebtedness secured thereby does not exceed 90% of the lesser of the cost or the fair market value of such real property, improvements or equipment at the time of such acquisition (or construction) and (iv) such security interests do not apply to any other property or assets of the Borrower or any Subsidiary;

     (j) Liens arising out of judgments or awards in respect of which the Borrower or any Subsidiary shall in good faith be prosecuting an appeal or proceedings for review in respect of which there shall be secured a subsisting stay of execution pending such appeal or proceedings; provided that the aggregate amount of all such judgments or awards (and any cash and the fair market value of any property subject to such Liens) does not exceed $5,000,000 at any time outstanding;

     (k) any interest or title of a licensor, lessor or sublessor under any license or lease agreement pursuant to which rights are granted to the Borrower or any Subsidiary;

     (l) licenses, leases or subleases granted by the Borrower or any Subsidiary to third persons in the ordinary course of business not interfering in any material respect with the business of the Borrower or any Subsidiary;

     (m) Liens in favor of customs or revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods;

     (n) Liens in favor of any Governmental Authority in respect of (i) any liability under Environmental Law or (ii) damages arising from, or costs incurred by such Governmental Authority in response to, a Release or a threatened Release of a Hazardous Material into the environment; provided that the aggregate amount

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of such liabilities secured by such Liens does not exceed $1,000,000 at any one time; and

     (o) Liens that do not, individually or in the aggregate, secure obligations (or encumber property with a fair market value) in excess of $2,500,000 at any one time.

     SECTION 6.03. Sale and Lease-Back Transactions. Enter into any arrangement, directly or indirectly, with any person whereby it shall sell or transfer any property, real or personal, used or useful in its business, whether now owned or hereafter acquired, and thereafter rent or lease such property or other property which it intends to use for substantially the same purpose or purposes as the property being sold or transferred unless (a) the sale of such property is permitted by Section 6.05 and (b) any Capital Lease Obligations, Synthetic Lease Obligations or Liens arising in connection therewith are permitted by Sections 6.01 and 6.02, as the case may be.

     SECTION 6.04. Investments, Loans and Advances. Purchase, hold or acquire any Equity Interests, evidences of indebtedness or other securities of, make or permit to exist any loans or advances to, or make or permit to exist any investment or any other interest in, any other person, except:

     (a) (i) investments by the Borrower and the Subsidiaries existing on the date hereof in the Equity Interests of the Subsidiaries and (ii) additional investments by the Borrower and the Subsidiaries in the Equity Interests of the Subsidiaries; provided that (A) any such Equity Interests held by a Loan Party shall be pledged to the Collateral Agent for the ratable benefit of the Secured Parties pursuant to the Guarantee and Collateral Agreement or each other applicable Security Document (subject to the limitations applicable to voting stock of a Foreign Subsidiary referred to therein) and (B) the aggregate amount of investments by Loan Parties in, and loans and advances by Loan Parties to, Subsidiaries that are not Loan Parties (determined without regard to any write-downs or write-offs of such investments, loans and advances) shall not exceed $2,500,000 at any time outstanding;

     (b) Permitted Investments;

     (c) loans or advances made by the Borrower to any Subsidiary and made by any Subsidiary to the Borrower or any other Subsidiary; provided that (i) any such loans and advances made by a Loan Party shall be evidenced by a promissory note pledged to the Collateral Agent for the ratable benefit of the Secured Parties pursuant to the Guarantee and Collateral Agreement and (ii) the amount of such loans and advances made by Loan Parties to Subsidiaries that are not Loan Parties shall be subject to the limitation set forth in paragraph (a) of this Section;

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     (d) investments received in connection with the bankruptcy or reorganization of, or settlement of delinquent accounts and disputes with, customers and suppliers, in each case in the ordinary course of business;

     (e) to the extent permitted by applicable law, the Borrower and the Subsidiaries may make loans and advances in the ordinary course of business to their respective directors, officers and employees so long as the aggregate principal amount thereof at any time outstanding (determined without regard to any write-downs or write-offs of such loans and advances) shall not exceed $1,000,000;

     (f) the Borrower may enter into Hedging Agreements that (i) are required by Section 5.10 or (ii) are not speculative in nature;

     (g) the Borrower or any Subsidiary may acquire all or substantially all the assets of a person or line of business of such person, or not less than 100% of the Equity Interests of a person (referred to herein as the “Acquired Entity”); provided that (i) such acquisition was not preceded by an unsolicited tender offer for such Equity Interests by, or proxy contest initiated by, the Borrower or any Subsidiary; (ii) the Acquired Entity shall be a going concern, shall be in a similar line of business as that of the Borrower and the Subsidiaries as conducted during the current and most recent calendar year; (iii) except for the Specified U.K. Company, the Acquired Entity is located, and substantially all of its operations are conducted, in the United States of America; (iv) at the time of such transaction (A) both before and after giving effect thereto, no Default or Event of Default shall have occurred and be continuing, (B) the Borrower would be in Pro Forma Compliance (assuming, for purposes of making such determination with respect to the covenant set forth in Section 6.14, that the maximum Leverage Ratio then permitted by such covenant is 0.25 to 1.00 lower than the Leverage Ratio actually set forth therein and in effect at the time such determination is made) and (C) after giving effect to such acquisition, there must be at least $5,000,000 of unused and available Revolving Credit Commitments, and (v) the Borrower shall have delivered to the Administrative Agent a certificate of a Financial Officer of the Borrower confirming compliance with clauses (i) through (iv) above, together with all relevant financial information for the Acquired Entity and reasonably detailed calculations demonstrating satisfaction of the requirements set forth in clause (v) above (any acquisition of an Acquired Entity meeting all the criteria of this paragraph being referred to herein as a “Permitted Acquisition”);

     (h) the Borrower and its Subsidiaries may acquire and hold non-cash consideration issued by the purchaser of assets in connection with a sale of such assets to the extent permitted by Section 6.05;

     (i) investments, loans and advances existing on the date hereof and set forth in Schedule 6.04;

     (j) the Specified U.K. Investment; and

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     (k) in addition to investments permitted by paragraphs (a) through (j) of this Section, additional investments, loans and advances by the Borrower and the Subsidiaries so long as the aggregate amount invested, loaned or advanced pursuant to this clause (determined without regard to any write-downs or write-offs of such investments, loans and advances) does not exceed $7,500,000 in the aggregate, and none of (i) any investment specifically consented to by the Required Lenders, (ii) any investment in a person that subsequently becomes a wholly-owned Subsidiary in a transaction constituting a Permitted Acquisition or (iii) any investment that is subsequently sold (to the extent of the net cash proceeds of such sale) shall count toward such $7,500,000 amount.

     SECTION 6.05. Mergers, Consolidations, Sales of Assets and Acquisitions. (a) Merge into or consolidate with any other person, or permit any other person to merge into or consolidate with it, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) all or substantially all the assets (whether now owned or hereafter acquired) of the Borrower or less than all the Equity Interests of any Subsidiary, or purchase, lease or otherwise acquire (in one transaction or a series of transactions) all or any substantial part of the assets of any other person, except that (i) the Borrower and any Subsidiary may purchase and sell inventory in the ordinary course of business and (ii) if at the time thereof and immediately after giving effect thereto no Default or Event of Default shall have occurred and be continuing (x) any wholly owned Subsidiary may merge into the Borrower in a transaction in which the Borrower is the surviving corporation, (y) any wholly owned Subsidiary may merge into or consolidate with any other wholly owned Subsidiary in a transaction in which the surviving entity is a wholly owned Subsidiary and no person other than the Borrower or a wholly owned Subsidiary receives any consideration (provided that if any party to any such transaction is a Loan Party, the surviving entity of such transaction shall be a Loan Party) and (z) the Borrower and the Subsidiaries may make Permitted Acquisitions.

     (b) Engage in any Asset Sale otherwise permitted under paragraph (a) of this Section unless (i) such Asset Sale is for consideration at least 75% of which is cash, (ii) such consideration is at least equal to the fair market value of the assets being sold, transferred, leased or disposed of and (iii) the fair market value of all assets sold, transferred, leased or disposed of pursuant to this paragraph shall not exceed (i) $5,000,000 in any fiscal year or (ii) $10,000,000 in the aggregate.

     SECTION 6.06. Restricted Payments; Restrictive Agreements. (a) Declare or make, or agree to declare or make, directly or indirectly, any Restricted Payment (including pursuant to any Synthetic Purchase Agreement), or incur any obligation (contingent or otherwise) to do so; provided, however, that (i) any Subsidiary may declare and pay dividends or make other distributions ratably to its equity holders, (ii) the Borrower may pay, satisfy and discharge the Mezzanine Warrant Put Right if, when and to the extent exercised, (iii) so long as no Default or Event of Default shall have occurred and be continuing or would result therefrom, the Borrower may repurchase its Equity Interests owned by directors, officers and employees of the Borrower or the Subsidiaries or make payments to directors, officers and employees of the Borrower or the Subsidiaries in connection with Warrants, stock options, stock appreciation rights,

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“phantom” stock plans or similar equity incentives or equity based incentives pursuant to management or other incentive plans or in connection with the death or disability of such directors, officers and employees in an aggregate amount not to exceed $10,000,000 and (iv) so long as no Default or Event of Default shall have occurred and be continuing or would result therefrom (except with respect to subclauses (A), (B) and (D) below), Restricted Payments may be made (A) in connection with the redemption or repurchase for value of any Equity Interests of the Borrower as a result of distributions by the ESOT of such Equity Interests to participants in the ESOP pursuant to the ESOP Plan Documents subsequent to their termination of employment with the Borrower or any Controlled Group member, (B) as required by Section 401(a)(28) of the Code or any substantially similar requirement of law, (C) in the form of administrative fees or expenses of the ESOP or the ESOT, including the fees of the ESOT Trustee, or (D) as contributions to the ESOT as required under the ESOP Plan Documents.

     (b) Enter into, incur or permit to exist any agreement or other arrangement that prohibits, restricts or imposes any condition upon (i) the ability of the Borrower or any Subsidiary to create, incur or permit to exist any Lien upon any of its property or assets to secure the Obligations, or (ii) the ability of any Subsidiary to pay dividends or other distributions with respect to any of its Equity Interests or to make or repay loans or advances to any Loan Party or to Guarantee Indebtedness of any Loan Party; provided that (A) the foregoing shall not apply to restrictions and conditions imposed by law or by any Loan Document, any Securities Purchase Agreement, the Warrants or the Rights Agreement, (B) the foregoing shall not apply to customary restrictions and conditions contained in agreements relating to the sale of a Subsidiary pending such sale, provided such restrictions and conditions apply only to the Subsidiary that is to be sold and such sale is permitted hereunder, (C) clause (i) of the foregoing shall not apply to restrictions or conditions imposed by any agreement relating to secured Indebtedness permitted by this Agreement if such restrictions or conditions apply only to the property or assets securing such Indebtedness, and (D) clause (i) of the foregoing shall not apply to customary provisions in leases and other contracts restricting the assignment thereof.

     SECTION 6.07. Transactions with Affiliates. Except for transactions by or among Loan Parties, sell or transfer any property or assets to, or purchase or acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except that (a) the Borrower or any Subsidiary may engage in any of the foregoing transactions in the ordinary course of business at prices and on terms and conditions not less favorable to the Borrower or such Subsidiary than could be obtained on an arm’s-length basis from unrelated third parties, (b) Restricted Payments may be made to the extent provided in Section 6.06, (c) loans, investments and advances may be made to the extent permitted by Sections 6.01(c) and 6.04(a), (c) and (e), (d) officers may be compensated as and in the manner they historically have been compensated and officers hired after the Closing Date may be compensated in a manner commensurate with the office held, and (e) so long as no Default or Event of Default shall have occurred and be continuing or would result therefrom, reasonable and customary fees may be paid to non-officer directors of the Borrower in an aggregate amount not to exceed $250,000 in any fiscal year, it being understood that payments to non-officer directors in connection with stock options, stock appreciation rights, “phantom” stock plans or

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similar equity incentives or equity based incentives shall not count toward such $250,000 limitation.

     SECTION 6.08. Business of the Borrower and Subsidiaries. Engage at any time in any business or business activity other than the business currently conducted by the Borrower and the Subsidiaries and business activities reasonably related thereto.

     SECTION 6.09. Other Indebtedness and Agreements. (a) Permit any waiver, supplement, modification, amendment, termination or release of any indenture, instrument or agreement pursuant to which any Material Indebtedness of the Borrower or any Subsidiary is outstanding if the effect of such waiver, supplement, modification, amendment, termination or release would materially increase the obligations of the obligor or confer additional material rights on the holder of such Indebtedness in a manner materially adverse to the Borrower, any of the Subsidiaries or the Lenders.

     (b) Permit any waiver, supplement, modification or amendment of any ESOP Plan Document in a manner materially adverse to the Lenders.

     (c) (i) Make any distribution, whether in cash, property, securities or a combination thereof, other than regular scheduled payments of principal and interest as and when due (to the extent not prohibited by applicable subordination provisions), in respect of, or pay, or offer or commit to pay, or directly or indirectly (including pursuant to any Synthetic Purchase Agreement) redeem, repurchase, retire or otherwise acquire for consideration, or set apart any sum for the aforesaid purposes, any subordinated Indebtedness (other than the Mezzanine Note Redemption), or (ii) pay in cash any amount in respect of any Indebtedness or preferred Equity Interests that may at the obligor’s option be paid in kind or in other securities, except that in either case the Borrower may pay, satisfy and discharge the Mezzanine Warrant Put Right if, when and to the extent exercised.

     SECTION 6.10. Assets as Plan Assets. Permit any of the assets of the Borrower or any Subsidiary to constitute, for any purpose of ERISA or Section 4975 of the Code, assets of the ESOP or any other “plan” as defined in Section 3(3) of ERISA or Section 4975 of the Code.

     SECTION 6.11. Prohibited Transaction. Permit any material non-exempt prohibited transaction described in Section 406 of ERISA or Section 4975 of the Code to occur with respect to the ESOP.

     SECTION 6.12. Interest Coverage Ratio. Permit the Interest Coverage Ratio for any period of four consecutive fiscal quarters, in each case taken as one accounting period, ending during any period set forth below to be less than the ratio set forth opposite such date or period below:

Date or Period	Ratio
Closing Date through September 30, 2005		3.75 to 1.00
Thereafter		4.00 to 1.00

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     SECTION 6.13. Maximum Leverage Ratio. Permit the Leverage Ratio at the end of any fiscal quarter during a period set forth below to be greater than the ratio set forth opposite such period below:

Period	Ratio
Closing Date through March 31, 2005		3.85 to 1.00
April 1, 2005 through June 30, 2005		3.75 to 1.00
July 1, 2005 through March 31, 2006		3.50 to 1.00
April 1, 2006 through March 31, 2007		3.25 to 1.00
April 1, 2007 through March 31, 2008		2.75 to 1.00
Thereafter		2.25 to 1.00

     SECTION 6.14. Fiscal Year. With respect to the Borrower, change its fiscal year-end to a date other than September 30.

ARTICLE VII

Events of Default

     In case of the happening of any of the following events (“Events of Default”):

     (a) any representation or warranty made or deemed made in or in connection with any Loan Document or the borrowings or issuances of Letters of Credit hereunder, or any representation, warranty, statement or information contained in any report, certificate, financial statement or other instrument furnished in connection with or pursuant to any Loan Document, shall prove to have been false or misleading in any material respect when so made, deemed made or furnished;

     (b) default shall be made in the payment of any principal of any Loan or the reimbursement with respect to any L/C Disbursement when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof or otherwise;

     (c) default shall be made in the payment of any interest on any Loan or any Fee or any other amount (other than an amount referred to in paragraph (b) of this Article) due under any Loan Document, when and as the same shall become due and payable, and such default shall continue unremedied for a period of three Business Days with regard to interest and ten Business Days with regard to Fees and other amounts;

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     (d) default shall be made in the due observance or performance by the Borrower or any Subsidiary of any covenant, condition or agreement contained in Section 5.01(a), 5.05, 5.08 or 5.11 or in Article VI;

     (e) default shall be made in the due observance or performance by the Borrower or any Subsidiary of any covenant, condition or agreement contained in any Loan Document (other than those specified in paragraph (b), (c) or (d) of this Article) and such default shall continue unremedied for a period of 30 days after notice thereof from the Administrative Agent or any Lender to the Borrower;

     (f) (i) the Borrower or any Subsidiary shall fail to pay any principal or interest, regardless of amount, due in respect of any Material Indebtedness, when and as the same shall become due and payable, or (ii) any other event or condition occurs (and all relevant grace periods have expired) that results in any Material Indebtedness becoming due prior to its scheduled maturity or that enables or permits the holder or holders of any Material Indebtedness or any trustee or agent on its or their behalf to cause any Material Indebtedness to become due, or to require the prepayment, repurchase, redemption or defeasance thereof, prior to its scheduled maturity; provided that this clause (ii) shall not apply to secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness;

     (g) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of the Borrower or any Subsidiary (other than an Insignificant Subsidiary), or of a substantial part of the property or assets of the Borrower or any Subsidiary (other than an Insignificant Subsidiary), under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal, state or foreign bankruptcy, insolvency, receivership or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Subsidiary (other than an Insignificant Subsidiary) or for a substantial part of the property or assets of the Borrower or a Subsidiary (other than an Insignificant Subsidiary) or (iii) the winding-up or liquidation of the Borrower or any Subsidiary (other than an Insignificant Subsidiary); and such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered;

     (h) the Borrower or any Subsidiary (other than an Insignificant Subsidiary) shall (i) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal, state or foreign bankruptcy, insolvency, receivership or similar law, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in paragraph (g) of this Article, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Subsidiary (other than an Insignificant Subsidiary) or for a substantial part of the property or assets of the Borrower or

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any Subsidiary (other than an Insignificant Subsidiary), (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) become unable, admit in writing its inability or fail generally to pay its debts as they become due or (vii) take any action for the purpose of effecting any of the foregoing;

     (i) one or more judgments shall be rendered against the Borrower, any Subsidiary (other than an Insignificant Subsidiary) or any combination thereof and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to levy upon assets or properties of the Borrower or any Subsidiary (other than an Insignificant Subsidiary) to enforce any such judgment and such judgment either (i) is for the payment of money in an aggregate amount in excess of $5,000,000 or (ii) is for injunctive relief and could reasonably be expected to result in a Material Adverse Effect;

     (j) an ERISA Event shall have occurred that, in the opinion of the Required Lenders, when taken together with all other such ERISA Events, could reasonably be expected to result in liability of the Borrower and its ERISA Affiliates in an aggregate amount exceeding $5,000,000;

     (k) any Guarantee under the Guarantee and Collateral Agreement for any reason shall cease to be in full force and effect (other than in accordance with its terms), or any Subsidiary Guarantor shall deny in writing that it has any further liability under the Guarantee and Collateral Agreement (other than as a result of the discharge of such Subsidiary Guarantor in accordance with the terms of the Loan Documents);

     (l) any security interest purported to be created by any Security Document shall cease to be, or shall be asserted by the Borrower or any other Loan Party not to be, a valid, perfected, first priority (except as otherwise expressly provided in this Agreement or such Security Document) security interest in the securities, assets or properties covered thereby, except to the extent that any such loss of perfection or priority results from the failure of the Collateral Agent to maintain possession of certificates representing securities pledged under the Guarantee and Collateral Agreement or other applicable Security Document and except to the extent that such loss is covered by a lender’s title insurance policy and the related insurer promptly after such loss shall have acknowledged in writing that such loss is covered by such title insurance policy;

     (m) the Indebtedness under the Seller Subordinated Notes, the Mezzanine Notes and/or any Guarantees thereof shall cease, for any reason other than the repayment thereof as permitted by this Agreement, to be validly subordinated to the Obligations, as provided in the relevant agreements, or any Loan Party or any Affiliate of any Loan Party shall so assert;

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     (n) there shall have occurred a Change in Control;

     (o) (i) a notice of debarment, notice of suspension or notice of termination for default shall have been issued under any Material Contract; (ii) the Borrower is barred or suspended from contracting with any part of the Government; (iii) a Government investigation shall have resulted in a criminal or civil liability of the Borrower or any Subsidiary in excess of $5,000,000; (iv) the actual termination of any Material Contract due to alleged fraud, willful misconduct, neglect, default or any other wrongdoing; or (v) a cure notice issued under any Material Contract shall remain uncured (subject to expiration of extensions that may have been received) beyond (A) the expiration of the time period available to the Borrower pursuant to such Material Contract and/or such cure notice to cure the noticed default or (B) the date on which the other contracting party exercises its rights and remedies under the Material Contract as a consequence of such default;

     (p) The ESOT shall be subject to tax imposed under the Code with respect to any item of income or loss of the Borrower or any Subsidiary of the Borrower at any time on or after the Closing Date that could reasonably be expected to result in tax liability to the ESOT, the Borrower or any of its Subsidiaries in an amount in excess of $5,000,000;

     (q) Any Loan hereunder shall, for any purpose of Section 406 of ERISA or Section 4975 of the Code, be found to be a direct or indirect loan or other transaction between the Administrative Agent or any of the Lenders and the ESOT which, if it is assumed that the Administrative Agent and the Lenders are “parties in interest” and “disqualified persons” (as defined in Section 3(14) of ERISA and Section 4975 of the Code), is a non-exempt prohibited transaction described in Section 406 of ERISA or Section 4975 of the Code;

     (r) There shall be a finding, holding, ruling or other determination not subject to cure made by any court or Governmental Authority, or an assertion by the ESOP Fiduciary or the ESOT Trustee, concerning any matter with respect to the ESOP or the ESOT contrary to or inconsistent with any representation, warranty or covenant set forth herein, which holding, ruling, determination or assertion could reasonably be expected to have a Material Adverse Effect;

     (s) the IRS shall notify the Borrower in writing that it has made a final determination not subject to cure that the ESOP is not a qualified plan and an employee stock ownership plan within the meanings of Section 401(a) and 4975(e)(7), respectively, of the Code; or

     (t) the Borrower shall fail to be qualified as a Subchapter S corporation, as such term is defined in Section 1361 of the Code.

then, and in every such event (other than an event with respect to the Borrower described in paragraph (g) or (h) of this Article), and at any time thereafter during the continuance of such event, the Administrative Agent may, and at the request of the Required Lenders

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shall, by notice to the Borrower, take either or both of the following actions, at the same or different times: (i) terminate forthwith the Commitments and (ii) declare the Loans then outstanding to be forthwith due and payable in whole or in part, whereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrower accrued hereunder and under any other Loan Document, shall become forthwith due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrower, anything contained herein or in any other Loan Document to the contrary notwithstanding; and in any event with respect to the Borrower described in paragraph (g) or (h) of this Article, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrower accrued hereunder and under any other Loan Document, shall automatically become due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrower, anything contained herein or in any other Loan Document to the contrary notwithstanding.

ARTICLE VIII

The Administrative Agent and the Collateral Agent

     Each of the Lenders and the Issuing Bank hereby irrevocably appoints the Administrative Agent and the Collateral Agent (for purposes of this Article, the Administrative Agent and the Collateral Agent are referred to collectively as the “Agents”) its agent and authorizes the Agents to take such actions on its behalf and to exercise such powers as are delegated to such Agent by the terms of the Loan Documents, together with such actions and powers as are reasonably incidental thereto. Without limiting the generality of the foregoing, the Agents are hereby expressly authorized to execute any and all documents (including releases) with respect to the Collateral and the rights of the Secured Parties with respect thereto, as contemplated by and in accordance with the provisions of this Agreement and the Security Documents.

     The bank serving as the Administrative Agent and/or the Collateral Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not an Agent, and such bank and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Borrower or any Subsidiary or other Affiliate thereof as if it were not an Agent hereunder.

     Neither Agent shall have any duties or obligations except those expressly set forth in the Loan Documents. Without limiting the generality of the foregoing, (a) neither Agent shall be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) neither Agent shall have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby that such Agent is instructed in writing to exercise by the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.08), and (c) except as

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expressly set forth in the Loan Documents, neither Agent shall have any duty to disclose, nor shall it be liable for the failure to disclose, any information relating to the Borrower or any Subsidiary that is communicated to or obtained by the bank serving as Administrative Agent and/or Collateral Agent or any of its Affiliates in any capacity. Neither Agent shall be liable for any action taken or not taken by it with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.08) or in the absence of its own gross negligence or willful misconduct. Neither Agent shall be deemed to have knowledge of any Default unless and until written notice thereof is given to such Agent by the Borrower or a Lender, and neither Agent shall be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with any Loan Document, (ii) the contents of any certificate, report or other document delivered thereunder or in connection therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth in any Loan Document, (iv) the validity, enforceability, effectiveness or genuineness of any Loan Document or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Article IV or elsewhere in any Loan Document, other than to confirm receipt of items expressly required to be delivered to such Agent.

     Each Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing believed by it to be genuine and to have been signed or sent by the proper person. Each Agent may also rely upon any statement made to it orally or by telephone and believed by it to have been made by the proper person, and shall not incur any liability for relying thereon. Each Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts.

     Each Agent may perform any and all its duties and exercise its rights and powers by or through any one or more sub-agents appointed by it. Each Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers by or through their respective Related Parties. The exculpatory provisions of the preceding paragraphs shall apply to any such sub-agent and to the Related Parties of each Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Agent.

     Subject to the appointment and acceptance of a successor Agent as provided below, either Agent may resign at any time by notifying the Lenders, the Issuing Bank and the Borrower. Upon any such resignation, the Required Lenders shall have the right, in consultation with the Borrower, to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Agent gives notice of its resignation, then the retiring Agent may, on behalf of the Lenders and the Issuing Bank, appoint a successor Agent which shall be a bank with an office in New York, New York, or an Affiliate of any such bank. Upon the acceptance of its appointment as Agent hereunder by a successor, such

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successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. The fees payable by the Borrower to a successor Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After an Agent’s resignation hereunder, the provisions of this Article and Section 9.05 shall continue in effect for the benefit of such retiring Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while acting as Agent.

     Each Lender acknowledges that it has, independently and without reliance upon the Agents or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Agents or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement or any other Loan Document, any related agreement or any document furnished hereunder or thereunder.

     None of the Lenders or other persons identified on the facing page of this Agreement as a “syndication agent” or “documentation agent” shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Lenders. Without limiting the foregoing, none of the Lenders or other persons so identified shall have or be deemed to have any fiduciary relationship with any Lender. Each Lender acknowledges that it has not relied, and will not rely, on any of the Lenders or other persons so identified in deciding to enter into this Agreement or in taking or not taking action hereunder.

ARTICLE IX

Miscellaneous

     SECTION 9.01. Notices. Notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by fax, as follows:

     (a) if to the Borrower, to it at 1750 Tysons Boulevard, Suite 1300, McLean, Virginia 22102, Attention of John M. Hughes (Fax No. (703) 714-6508 or (703) 714-6511);

     (b) if to the Administrative Agent, the Collateral Agent, the Swingline Lender or the Issuing Bank, to Credit Suisse First Boston, Eleven Madison Avenue, New York, New York 10010, Attention of Agency Group (Fax No. (212) 325-8304); and

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     (c) if to a Lender or an Issuing Bank, to it at its address (or fax number) set forth in its Administrative Questionnaire or in the Assignment and Acceptance pursuant to which such Lender shall have become a party hereto.

     All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt if delivered by hand or overnight courier service or sent by fax or on the date five Business Days after dispatch by certified or registered mail if mailed, in each case delivered, sent or mailed (properly addressed) to such party as provided in this Section or in accordance with the latest unrevoked direction from such party given in accordance with this Section. As agreed to among the Borrower, the Administrative Agent and the applicable Lenders from time to time, notices and other communications may also be delivered by e-mail to the e-mail address of a representative of the applicable person provided from time to time by such person.

     SECTION 9.02. Survival of Agreement. All covenants, agreements, representations and warranties made by the Borrower herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by the Lenders and the Issuing Bank and shall survive the making by the Lenders of the Loans and the issuance of Letters of Credit by the Issuing Bank, regardless of any investigation made by the Lenders or the Issuing Bank or on their behalf, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any Fee or any other amount payable under this Agreement or any other Loan Document is outstanding and unpaid or any Letter of Credit is outstanding and so long as the Commitments have not been terminated. The provisions of Sections 2.14, 2.16, 2.20 and 9.05 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the expiration of the Commitments, the expiration of any Letter of Credit, the invalidity or unenforceability of any term or provision of this Agreement or any other Loan Document, or any investigation made by or on behalf of the Administrative Agent, the Collateral Agent, any Lender or the Issuing Bank.

     SECTION 9.03. Binding Effect. This Agreement shall become effective when it shall have been executed by the Borrower and the Administrative Agent and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto.

     SECTION 9.04. Successors and Assigns. (a) Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the permitted successors and assigns of such party; and all covenants, promises and agreements by or on behalf of the Borrower, the Administrative Agent, the Collateral Agent, the Issuing Bank or the Lenders that are contained in this Agreement shall bind and inure to the benefit of their respective successors and assigns.

     (b) Each Lender may assign to one or more assignees all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its

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Commitments and the Loans at the time owing to it), with the prior written consent of the Administrative Agent and, in the case of any assignment of a Revolving Credit Commitment, the Issuing Bank and the Swingline Lender (in each case, not to be unreasonably withheld or delayed); provided, however, that (i) except in the case of an assignment to a Lender or an Affiliate or Related Fund of a Lender, (A) unless an Event of Default shall have occurred and be continuing, the Borrower must also give its prior written consent to such assignment (not to be unreasonably withheld or delayed, it being understood that the consent of the Borrower shall not be necessary in connection with any assignment during the primary syndication of the Loans to any person on the allocation list previously agreed to by the Administrative Agent and the Borrower), and (B) the amount of the Commitments and/or Loans of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is recorded by the Administrative Agent) shall not be less than $1,000,000 (or, if less, the entire remaining amount of such Lender’s Commitment and/or Loans of the relevant Class; provided that such minimum assignment amount shall be aggregated for two or more simultaneous assignments by or to two or more Related Funds), (ii) the parties to each such assignment shall (A) electronically execute and deliver to the Administrative Agent an Assignment and Acceptance via an electronic settlement system acceptable to the Administrative Agent (which initially shall be ClearPar, LLC) or (B) if no such system shall then be specified by the Administrative Agent, manually execute and deliver to the Administrative Agent an Assignment and Acceptance, together with a processing and recordation fee of $3,500 (unless such fee is waived at the discretion of the Administrative Agent) and (iii) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire and all applicable tax forms. Upon acceptance and recording pursuant to paragraph (e) of this Section, from and after the effective date specified in each Assignment and Acceptance, (A) the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement and (B) the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.14, 2.16, 2.20 and 9.05).

     (c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the assignee thereunder shall be deemed to confirm to and agree with each other and the other parties hereto as follows: (i) such assigning Lender warrants that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim and that its Term Loan Commitment and Revolving Credit Commitment, and the outstanding balances of its Term Loans and Revolving Loans, in each case without giving effect to assignments thereof which have not become effective, are as set forth in such Assignment and Acceptance, (ii) except as set forth in clause (i) above, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement, or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, any other Loan Document or any

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other instrument or document furnished pursuant hereto, or the financial condition of the Borrower or any Subsidiary or the performance or observance by the Borrower or any Subsidiary of any of its obligations under this Agreement, any other Loan Document or any other instrument or document furnished pursuant hereto; (iii) such assignee represents and warrants that it is legally authorized to enter into such Assignment and Acceptance; (iv) such assignee confirms that it has received a copy of this Agreement, together with copies of the most recent financial statements referred to in Section 3.05(a) or delivered pursuant to Section 5.04 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (v) such assignee will independently and without reliance upon the Administrative Agent, the Collateral Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (vi) such assignee appoints and authorizes the Administrative Agent and the Collateral Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent and the Collateral Agent, respectively, by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all the obligations which by the terms of this Agreement are required to be performed by it as a Lender.

     (d) The Administrative Agent, acting for this purpose as an agent of the Borrower, shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the “Register”). The entries in the Register shall be conclusive absent manifest error, and the Borrower, the Administrative Agent, the Issuing Bank, the Collateral Agent and the Lenders may treat each person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower, the Issuing Bank, the Collateral Agent and any Lender, at any reasonable time and from time to time upon reasonable prior notice.

     (e) Upon its receipt of, and consent to, a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, an Administrative Questionnaire completed in respect of the assignee (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) of this Section, if applicable, the written consent of the Administrative Agent and, if required, the Borrower, the Swingline Lender and/or the Issuing Bank to such assignment and any applicable tax forms, the Administrative Agent shall (i) accept such Assignment and Acceptance and (ii) record the information contained therein in the Register. No assignment shall be effective unless it has been recorded in the Register as provided in this paragraph.

     (f) Each Lender may without the consent of the Borrower, the Swingline Lender, the Issuing Bank or the Administrative Agent sell participations to one or more banks or

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other entities in all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided, however, that (i) such Lender’s obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the participating banks or other entities shall be entitled to the benefit of the cost protection provisions contained in Sections 2.14, 2.16 and 2.20 to the same extent as if they were Lenders (but, with respect to any particular participant, to no greater extent than the Lender that sold the participation to such participant) and (iv) the Borrower, the Administrative Agent, the Collateral Agent, the Issuing Bank and the Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement, and such Lender shall retain the sole right to enforce the obligations of the Borrower relating to the Loans or L/C Disbursements and to approve any amendment, modification or waiver of any provision of this Agreement (other than amendments, modifications or waivers decreasing any fees payable hereunder or the amount of principal of or the rate at which interest is payable on the Loans, extending any scheduled principal payment date or date fixed for the payment of interest on the Loans, increasing or extending the Commitments or releasing any Subsidiary Guarantor or all or any substantial part of the Collateral).

     (g) Any Lender or participant may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section, subject to Section 9.16(b), disclose to the assignee or participant or proposed assignee or participant any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower; provided that, prior to any such disclosure of information designated by the Borrower as confidential, each such assignee or participant or proposed assignee or participant shall execute an agreement whereby such assignee or participant shall agree (subject to customary exceptions) to preserve the confidentiality of such confidential information on terms no less restrictive than those applicable to the Lenders pursuant to Section 9.16.

     (h) Any Lender may at any time assign all or any portion of its rights under this Agreement to secure extensions of credit to such Lender or in support of obligations owed by such Lender; provided that no such assignment shall release a Lender from any of its obligations hereunder or substitute any such assignee for such Lender as a party hereto.

     (i) Notwithstanding anything to the contrary contained herein, any Lender (a “Granting Lender”) may grant to a special purpose funding vehicle (an "SPC”), identified as such in writing from time to time by the Granting Lender to the Administrative Agent and the Borrower, the option to provide to the Borrower all or any part of any Loan that such Granting Lender would otherwise be obligated to make to the Borrower pursuant to this Agreement; provided that (i) nothing herein shall constitute a commitment by any SPC to make any Loan and (ii) if an SPC elects not to exercise such option or otherwise fails to provide all or any part of such Loan, the Granting Lender shall be obligated to make such Loan pursuant to the terms hereof. The making of a Loan by an SPC hereunder shall utilize the Commitment of the Granting Lender to the same extent, and as if, such Loan were made by such Granting Lender. Each party hereto

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hereby agrees that no SPC shall be liable for any indemnity or similar payment obligation under this Agreement (all liability for which shall remain with the Granting Lender). In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper or other senior indebtedness of any SPC, it will not institute against, or join any other person in instituting against, such SPC any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings under the laws of the United States of America or any State thereof. In addition, notwithstanding anything to the contrary contained in this Section, any SPC may (i) with notice to, but without the prior written consent of, the Borrower and the Administrative Agent and without paying any processing fee therefor, assign all or a portion of its interests in any Loans to the Granting Lender or to any financial institutions (consented to by the Borrower and Administrative Agent) providing liquidity and/or credit support to or for the account of such SPC to support the funding or maintenance of Loans and (ii) subject to Section 9.16(b), disclose on a confidential basis any non-public information relating to its Loans to any rating agency, commercial paper dealer or provider of any surety, guarantee or credit or liquidity enhancement to such SPC.

     (j) The Borrower shall not assign or delegate any of its rights or duties hereunder without the prior written consent of the Administrative Agent, the Issuing Bank and each Lender, and any attempted assignment without such consent shall be null and void.

     (k) In the event that (a) any Revolving Credit Lender shall become a Defaulting Lender, (b) S&P, Moody’s and Thompson’s BankWatch (or InsuranceWatch Ratings Service, in the case of Lenders that are insurance companies (or Best’s Insurance Reports, if such insurance company is not rated by Insurance Watch Ratings Service)) shall, after the date that any Lender becomes a Revolving Credit Lender, downgrade the long-term certificate deposit ratings of such Lender, and the resulting ratings shall be below BBB-, Baa3 and C (or BB, in the case of a Lender that is an insurance company (or B, in the case of an insurance company not rated by InsuranceWatch Ratings Service)), or (c) with respect to any Lender that is not rated by any such ratings service or provider, the Issuing Banks or the Swingline Lender shall have reasonably determined that there has occurred a material adverse change in the financial condition of any such Lender, or a material impairment of the ability of any such Lender to perform its obligations hereunder, as compared to such condition or ability as of the date that any such Lender became a Revolving Credit Lender, then the Issuing Banks shall have the right, but not the obligation, at its own expense, upon notice to such Lender and the Administrative Agent, to replace (or to request the Borrower to use its reasonable efforts to replace) such Lender with an assignee (in accordance with and subject to the restrictions contained in paragraph (b) of this Section), and such Lender hereby agrees to transfer and assign without recourse (in accordance with and subject to the restrictions contained in paragraph (b) of this Section) all its interests, rights and obligations in respect of its Revolving Credit Commitment to such assignee; provided, however, that (i) no such assignment shall conflict with any law, rule and regulation or order of any Governmental Authority and (ii) the Issuing Banks or such assignee, as the case may be, shall pay to such Lender in immediately available funds on the date of such assignment

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the principal of and interest accrued to the date of payment on the Loans made by such Lender hereunder and all other amounts accrued for such Lender’s account or owed to it hereunder.

     SECTION 9.05. Expenses; Indemnity. (a) The Borrower agrees to pay all out-of-pocket expenses incurred by the Administrative Agent, the Collateral Agent, the Issuing Bank and the Swingline Lender in connection with the syndication of the Credit Facilities and the preparation and administration of this Agreement and the other Loan Documents or in connection with any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions hereby or thereby contemplated shall be consummated) or incurred by the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender in connection with the enforcement or protection of its rights in connection with this Agreement and the other Loan Documents or in connection with the Loans made or Letters of Credit issued hereunder, including the reasonable fees, charges and disbursements of Cravath, Swaine & Moore LLP, counsel for the Administrative Agent and the Collateral Agent, and, in connection with any such enforcement or protection, the reasonable fees, charges and disbursements of any other counsel for the Administrative Agent, the Collateral Agent or any Lender.

     (b) The Borrower agrees to indemnify the Administrative Agent, the Collateral Agent, each Lender, the Issuing Bank and each Related Party of any of the foregoing persons (each such person being called an “Indemnitee”) against, and to hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable counsel fees, charges and disbursements, incurred by or asserted against any Indemnitee arising out of, in any way connected with, or as a result of (i) the execution or delivery of this Agreement or any other Loan Document or any agreement or instrument contemplated thereby, the performance by the parties thereto of their respective obligations thereunder or the consummation of the Transactions and the other transactions contemplated thereby, (ii) the use of the proceeds of the Loans or issuance of Letters of Credit, (iii) any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any Indemnitee is a party thereto, or (iv) any actual or alleged presence or Release of Hazardous Materials on any property currently or formerly owned or operated by the Borrower or any Subsidiary, or any Environmental Liability related in any way to the Borrower or the Subsidiaries; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted primarily from the gross negligence or willful misconduct of such Indemnitee.

     (c) To the extent that the Borrower fails to pay any amount required to be paid by them to the Administrative Agent, the Collateral Agent, the Issuing Bank or the Swingline Lender under paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the Administrative Agent, the Collateral Agent, the Issuing Bank or the Swingline Lender, as the case may be, such Lender’s pro rata share (determined, in the manner provided below, as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may

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be, was incurred by or asserted against the Administrative Agent, the Collateral Agent, the Issuing Bank or the Swingline Lender in its capacity as such. For purposes hereof, a Lender’s “pro rata share” shall be determined based upon its share of the sum of the Aggregate Revolving Credit Exposure, outstanding Term Loans and unused Commitments at the time.

     (d) To the extent permitted by applicable law, the Borrower shall not assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement or any agreement or instrument contemplated hereby, the Transactions, any Loan or Letter of Credit or the use of the proceeds thereof.

     (e) The provisions of this Section shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the expiration of the Commitments, the expiration of any Letter of Credit, the invalidity or unenforceability of any term or provision of this Agreement or any other Loan Document, or any investigation made by or on behalf of the Administrative Agent, the Collateral Agent, any Lender or the Issuing Bank. All amounts due under this Section shall be payable on written demand therefor.

     SECTION 9.06. Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender is hereby authorized at any time and from time to time, except to the extent prohibited by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Borrower against any of and all the obligations of the Borrower now or hereafter existing under this Agreement and other Loan Documents held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement or such other Loan Document and although such obligations may be unmatured. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which such Lender may have.

     SECTION 9.07. Applicable Law. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (OTHER THAN LETTERS OF CREDIT AND AS EXPRESSLY SET FORTH IN OTHER LOAN DOCUMENTS) SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. EACH LETTER OF CREDIT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED IN ACCORDANCE WITH, THE LAWS OR RULES DESIGNATED IN SUCH LETTER OF CREDIT, OR IF NO SUCH LAWS OR RULES ARE DESIGNATED, THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS MOST RECENTLY PUBLISHED AND IN EFFECT, ON THE DATE SUCH LETTER OF CREDIT WAS ISSUED, BY THE INTERNATIONAL CHAMBER OF COMMERCE (THE “UNIFORM CUSTOMS”) AND, AS TO MATTERS NOT GOVERNED BY THE UNIFORM CUSTOMS, THE LAWS OF THE STATE OF NEW YORK.

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     SECTION 9.08. Waivers; Amendment. (a) No failure or delay of the Administrative Agent, the Collateral Agent, any Lender or the Issuing Bank in exercising any power or right hereunder or under any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent, the Collateral Agent, the Issuing Bank and the Lenders hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or any other Loan Document or consent to any departure by the Borrower or any other Loan Party therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances.

     (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrower and the Required Lenders; provided, however, that (i) the Borrower and the Administrative Agent may enter into an amendment to effect the provisions of Section 2.24(b) upon the effectiveness of any Incremental Term Loan Assumption Agreement (and any such amendment shall in any event be deemed to have occurred upon such effectiveness), (ii) no such agreement shall (A) decrease the principal amount of, or extend the maturity of or any scheduled principal payment date or date for the payment of any interest on any Loan or any date for reimbursement of an L/C Disbursement, or waive or excuse any such payment or any part thereof, or decrease the rate of interest on any Loan or L/C Disbursement, without the prior written consent of each Lender affected thereby, (B) increase or extend the Commitment or decrease or extend the date for payment of any Fees of any Lender without the prior written consent of such Lender, (C) amend or modify the pro rata requirements of Section 2.17, the provisions of Section 9.04(j) or the provisions of this Section or release any Subsidiary Guarantor or all or substantially all of the Collateral, without the prior written consent of each Lender, (D) change the provisions of any Loan Document in a manner that by its terms adversely affects the rights in respect of payments due to Lenders holding Loans of one Class differently from the rights of Lenders holding Loans of any other Class without the prior written consent of Lenders holding a majority in interest of the outstanding Loans and unused Commitments of each adversely affected Class, (E) modify the protections afforded to an SPC pursuant to the provisions of Section 9.04(i) without the written consent of such SPC, or (F) reduce the percentage contained in the definition of the term “Required Lenders” without the prior written consent of each Lender (it being understood that with the consent of the Required Lenders, additional extensions of credit pursuant to this Agreement may be included in the determination of the Required Lenders on substantially the same basis as the Term Loan Commitments and Revolving Credit Commitments on the date hereof) and (iii) any waiver, amendment or other modification referred to in subclauses (ii)(A) or (B) above with respect to the Loans or Commitments of any Lender may be made with the prior written consent of such Lender; provided further that no such agreement shall amend, modify or otherwise affect the rights or

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duties of the Administrative Agent, the Collateral Agent, the Issuing Bank or the Swingline Lender hereunder or under any other Loan Document without the prior written consent of the Administrative Agent, the Collateral Agent, the Issuing Bank or the Swingline Lender.

     SECTION 9.09. Interest Rate Limitation. Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan or participation in any L/C Disbursement, together with all fees, charges and other amounts which are treated as interest on such Loan or participation in such L/C Disbursement under applicable law (collectively the “Charges”), shall exceed the maximum lawful rate (the “Maximum Rate”) which may be contracted for, charged, taken, received or reserved by the Lender holding such Loan or participation in accordance with applicable law, the rate of interest payable in respect of such Loan or participation hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan or participation but were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or participations or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by such Lender.

     SECTION 9.10. Entire Agreement. This Agreement, the Fee Letter and the other Loan Documents constitute the entire contract between the parties relative to the subject matter hereof. Any other previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement and the other Loan Documents. Nothing in this Agreement or in the other Loan Documents, expressed or implied, is intended to confer upon any person (other than the parties hereto and thereto, their respective successors and assigns permitted hereunder (including any Affiliate of the Issuing Bank that issues any Letter of Credit) and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent, the Collateral Agent, the Issuing Bank and the Lenders) any rights, remedies, obligations or liabilities under or by reason of this Agreement or the other Loan Documents.

     SECTION 9.11. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.

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     SECTION 9.12. Severability. In the event any one or more of the provisions contained in this Agreement or in any other Loan Document should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby (it being understood that the invalidity of a particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction). The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions.

     SECTION 9.13. Counterparts. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original but all of which when taken together shall constitute a single contract, and shall become effective as provided in Section 9.03. Delivery of an executed signature page to this Agreement by facsimile transmission shall be as effective as delivery of a manually signed counterpart of this Agreement.

     SECTION 9.14. Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement.

     SECTION 9.15. Jurisdiction; Consent to Service of Process. The Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender may otherwise have to bring any action or proceeding relating to this Agreement or the other Loan Documents against the Borrower or its properties in the courts of any jurisdiction.

     (a) The Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the other Loan Documents in any New York State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

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     (b) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law.

     SECTION 9.16. Confidentiality. (a) Each of the Administrative Agent, the Collateral Agent, the Issuing Bank and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates’ officers, directors, employees and agents, including accountants, legal counsel and other advisors (it being understood that the persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority or quasi-regulatory authority (such as the National Association of Insurance Commissioners), (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) in connection with the exercise of any remedies hereunder or under the other Loan Documents or any suit, action or proceeding relating to the enforcement of its rights hereunder or thereunder, (e) subject to an agreement containing provisions substantially the same as those of this Section, to (i) any actual or prospective assignee of or participant in any of its rights or obligations under this Agreement and the other Loan Documents or (ii) any actual or prospective counterparty (or its advisors) to any swap or derivative transaction relating to the Borrower or any Subsidiary or any of their respective obligations, (f) with the consent of the Borrower or (g) to the extent such Information becomes publicly available other than as a result of a breach of this Section. For the purposes of this Section, “Information” shall mean all information received from the Borrower and related to the Borrower or its business, other than any such information that was available to the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender on a nonconfidential basis prior to its disclosure by the Borrower; provided that, in the case of Information received from the Borrower after the date hereof, such information is clearly identified at the time of delivery as confidential.

     (b) The Administrative Agent, the Lenders and all other persons who are or who may become party to this Agreement or who may participate in the Loans pursuant to Section 9.04(f) or are SPCs acknowledge that the Borrower and its Subsidiaries perform classified contracts funded by or for the benefit of the United States Federal government, and, accordingly, notwithstanding any other provision of this Agreement, neither the Borrower nor any Subsidiary will be obligated to release, disclose or otherwise make available: (i) any classified information to any person including the Administrative Agent, the Lenders or any other person not in possession of a valid security clearance and authorized by the appropriate agency of the United States Federal government to receive such material, or (ii) any material whatsoever to any person including the Administrative Agent, the Lenders or any other person if such release, disclosure or availability would not comply with the National Industrial Security Program Operating Manual and associated laws and regulations. The Administrative Agent and the Lenders agree that, in connection with any exercise of a right or remedy, the United States Federal government may remove classified information or government-issued property prior to any remedial action implicating such classified information or government-issued property. Upon

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notice from the Borrower, the Administrative Agent and the Lenders shall take such steps in accordance with this Agreement as may reasonably be requested by the Borrower to enable the Borrower or any Subsidiary to comply with the Foreign Ownership Control or Influence requirements of the United States government imposed from time to time.

     SECTION 9.17. USA Patriot Act Notice. Each Lender and the Administrative Agent (for itself and not on behalf of any Lender) hereby notifies the Borrower that pursuant to the requirements of the USA Patriot Act, it is required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow such Lender or the Administrative Agent, as applicable, to identify the Borrower in accordance with the USA Patriot Act.

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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.

ALION SCIENCE AND TECHNOLOGY CORPORATION,
	By	/s/ John M. Hughes
		Name: John M. Hughes
		Title: Chief Financial Officer
CREDIT SUISSE FIRST BOSTON, acting through its Cayman Islands Branch, individually and as Administrative Agent, Collateral Agent, Swingline Lender and Issuing Bank,
	By	/s/ Jay Chah
		Name: Jay Chah
		Title: Director
	By	/s/ Vanessa Gomez
		Name:
		Title:
LASALLE BANK NATIONAL ASSOCIATION, as a Lender and Issuing Bank
	By	/s/ Robert W. Bolt
		Name: Robert W. Bolt
		Title: Senior Vice President

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EX-10.37

Exhibit 10.37

THE FIRST AMENDMENT TO THE MEZZANINE WARRANT
AGREEMENT

     THIS FIRST AMENDMENT TO THE MEZZANINE WARRANT AGREEMENT (the “Amendment”) is made effective as of December 16, 2004, between Alion Science and Technology Corporation, a Delaware corporation (the “Company”), and Illinois Institute of Technology, an Illinois not-for-profit corporation (“IIT”).

     WHEREAS, the Company, IIT Research Institute, an Illinois not-for-profit corporation affiliated with and controlled by IIT (“IITRI”), and Alion Science and Technology Corporation Employee Ownership, Savings and Investment Trust (the “Trust”) entered into that certain Mezzanine Warrant Agreement dated as of the 20^th day of December 2002 (the “Mezzanine Warrant Agreement”), pursuant to which the Company issued to IITRI warrants to purchase Five Hundred Twenty-Four Thousand Two Hundred Twenty-Eight and Nine-Tenths (524,228.9) shares of the Company’s $0.01 par value per share common stock (“Common Stock”), of which warrants to purchase Five Hundred Four Thousand Nine Hundred One and Nine-Tenths (504,901.9) shares of Common Stock remain outstanding as of the date of this Amendment;

     WHEREAS, as of July 1, 2004, IITRI transferred to IIT all its rights and interests in the Mezzanine Warrant Agreement;

     WHEREAS, the Company and IIT desire to amend Sections 3(l)(v) and 16(e) of the Mezzanine Warrant Agreement;

     WHEREAS, the Trust is a party to the Mezzanine Warrant Agreement only for the purposes of Sections 6, 7, 15 and 17 through 25 of the Mezzanine Warrant Agreement, and pursuant to Section 18 of the Mezzanine Warrant Agreement, Sections 3(l)(v) and 16(e) may be amended by the mutual written agreement of the Company and IIT, without the need to obtain the Trust’s consent; and

     WHEREAS, the Company and IIT desire to amend the Mezzanine Warrant Agreement as set forth herein.

     NOW, THEREFORE, in consideration of the premises set forth above and the respective covenants and agreements contained in this Amendment, and for other good and valuable consideration, the receipt and sufficiency of which is hereby mutually acknowledged, and intending to be legally bound, the parties hereto hereby agree as follows:

     1. Amendments to the Mezzanine Warrant Agreement.

First Amendment to the Mezzanine Warrant Agreement

          (a) Section 3(l)(v) of the Mezzanine Warrant Agreement is hereby amended by deleting the entire text of Section 3(l)(v) and substituting in lieu thereof:

“interests or rights designated as phantom stock issued or granted by the Company to employees, consultants, officers or directors of the Company or any of its Subsidiaries in accordance with a phantom stock plan to be adopted by the Company’s board of directors after the Effective Date, except for such amount of phantom stock that, at the time of issuance or grant, would cause the aggregate number of shares of phantom stock then outstanding (excluding any shares of phantom stock that have (x) expired, terminated unexercised or become unexercisable, or (y) been forfeited or otherwise terminated, surrendered or cancelled) to be in excess of 225,000 shares of phantom stock.”

          (b) Section 16(e) of the Mezzanine Warrant Agreement is hereby amended by deleting the entire text of Section 16(e) and substituting in lieu thereof:

“The Company will not issue shares of phantom stock that cause the number of shares of outstanding phantom stock (excluding any shares of phantom stock that have expired, terminated unexercised, or become unexercisable, or that have been forfeited or otherwise terminated, surrendered or cancelled), at the time of issuance, to be in excess of 225,000 shares of phantom stock.”

     2. Waiver. IIT hereby irrevocably waives (i) any and all breaches by the Company of the Company’s covenants set forth in Section 16(e) of the Mezzanine Warrant Agreement, and (ii) any and all adjustments to the Exercise Price (as defined in the Mezzanine Warrant Agreement), in each case based upon or arising out of the issuance by the Company of shares of phantom stock on or before the effective date of this Amendment, and hereby fully and forever, effective as of the effective date of this Amendment, releases, discharges and acquits the Company from any and all claims, demands, causes of action, and/or damages, which IIT may now or hereafter have or claim to have against the Company, based in whole or in part upon, or which may arise from the issuance by the Company of shares of phantom stock on or before the effective date of this Amendment.

     3. Remainder of the Mezzanine Warrant Agreement Not Affected. Except as set forth in Section 1 hereof, the terms and provisions of the Mezzanine Warrant Agreement remain in full force and effect without change, amendment, waiver or modification.

     4. Ratification. As modified hereby, the Mezzanine Warrant Agreement and its terms and provisions are hereby ratified for all purposes and in all respects.

     5. Counterparts. This Amendment may be executed in one or more counterparts, all of which taken together shall constitute one instrument.

     6. References. From and after the date provided above, all references to the Mezzanine Warrant Agreement shall be deemed to be references to the Mezzanine Warrant Agreement as modified hereby.

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     7. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the conflict of laws principles thereof.

     8. Conflict. In the event of any conflict between the terms of this Amendment and the Mezzanine Warrant Agreement, the terms of this Amendment shall govern.

[Signatures follow on next page]

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     IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by its officers thereunto duly authorized as of the date hereof.

Alion Science and Technology Corporation	Illinois Institute of Technology
By: /s/ Bahman Atefi	By:/s/ Lew Collens
Name: Bahman Atefi	Name: Lew Collens
Title: Chief Executive Officer	Title: President

EX-10.38

     Exhibit 10.38

FIRST AMENDMENT TO THE SELLER WARRANT AGREEMENT

     THIS FIRST AMENDMENT TO THE SELLER WARRANT AGREEMENT (the “Amendment”) is made effective as of December 16, 2004, between Alion Science and Technology Corporation, a Delaware corporation (the “Company”), and Illinois Institute of Technology, an Illinois not-for-profit corporation (“IIT”).

     WHEREAS, the Company, IIT Research Institute, an Illinois not-for-profit corporation affiliated with and controlled by IIT (“IITRI”), and Alion Science and Technology Corporation Employee Ownership, Savings and Investment Trust (the “Trust”) entered into that certain Seller Warrant Agreement dated as of the 20^th day of December 2002 (the “Seller Warrant Agreement”), pursuant to which the Company issued to IITRI warrants to purchase One Million Eighty Thousand Four Hundred Thirty-Six and Eight-Tenths (1,080,436.8) shares of the Company’s $0.01 par value per share common stock (“Common Stock”);

     WHEREAS, as of July 1, 2004, IITRI transferred to IIT all its rights and interests in the Seller Warrant Agreement;

     WHEREAS, the Company and IIT desire to amend Sections 3(l)(v) and 16(e) of the Seller Warrant Agreement;

     WHEREAS, the Trust is a party to the Seller Warrant Agreement only for the purposes of Sections 6, 7, 15 and 17 through 25 of the Seller Warrant Agreement, and pursuant to Section 18 of the Seller Warrant Agreement, Sections 3(l)(v) and 16(e) may be amended by the mutual written agreement of the Company and IIT, without the need to obtain the Trust’s consent; and

     WHEREAS, the Company and IIT desire to amend the Seller Warrant Agreement as set forth herein.

     NOW, THEREFORE, in consideration of the premises set forth above and the respective covenants and agreements contained in this Amendment, and for other good and valuable consideration, the receipt and sufficiency of which is hereby mutually acknowledged, and intending to be legally bound, the parties hereto hereby agree as follows:

     1. Amendments to the Seller Warrant Agreement.

          (a) Section 3(l)(v) of the Seller Warrant Agreement is hereby amended by deleting the entire text of Section 3(l)(v) and substituting in lieu thereof:

“interests or rights designated as phantom stock issued or granted by the Company to employees, consultants, officers or directors of the Company or any of its Subsidiaries in accordance with a phantom stock plan to be adopted by the Company’s board of directors after the Effective Date, except for such amount of phantom stock that, at the time of issuance or grant, would cause the aggregate

First Amendment to the Seller Warrant Agreement

number of shares of phantom stock then outstanding (excluding any shares of phantom stock that have (x) expired, terminated unexercised or become unexercisable, or (y) been forfeited or otherwise terminated, surrendered or cancelled) to be in excess of 225,000 shares of phantom stock.”

          (b) Section 16(e) of the Seller Warrant Agreement is hereby amended by deleting the entire text of Section 16(e) and substituting in lieu thereof:

“The Company will not issue shares of phantom stock that cause the number of shares of outstanding phantom stock (excluding any shares of phantom stock that have expired, terminated unexercised, or become unexercisable, or that have been forfeited or otherwise terminated, surrendered or cancelled), at the time of issuance, to be in excess of 225,000 shares of phantom stock.”

     2. Waiver. IIT hereby irrevocably waives (i) any and all breaches by the Company of the Company’s covenants set forth in Section 16(e) of the Seller Warrant Agreement, and (ii) any and all adjustments to the Exercise Price (as defined in the Seller Warrant Agreement), in each case based upon or arising out of the issuance by the Company of shares of phantom stock on or before the effective date of this Amendment, and hereby fully and forever, effective as of the effective date of this Amendment, releases, discharges and acquits the Company from any and all claims, demands, causes of action, and/or damages, which IIT may now or hereafter have or claim to have against the Company, based in whole or in part upon, or which may arise from the issuance by the Company of shares of phantom stock on or before the effective date of this Amendment.

     3. Remainder of the Seller Warrant Agreement Not Affected. Except as set forth in Section 1 hereof, the terms and provisions of the Seller Warrant Agreement remain in full force and effect without change, amendment, waiver or modification.

     4. Ratification. As modified hereby, the Seller Warrant Agreement and its terms and provisions are hereby ratified for all purposes and in all respects.

     5. Counterparts. This Amendment may be executed in one or more counterparts, all of which taken together shall constitute one instrument.

     6. References. From and after the date provided above, all references to the Seller Warrant Agreement shall be deemed to be references to the Seller Warrant Agreement as modified hereby.

     7. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the conflict of laws principles thereof.

     8. Conflict. In the event of any conflict between the terms of this Amendment and the Seller Warrant Agreement, the terms of this Amendment shall govern.

[Signatures follow on next page]

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     IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by its officers thereunto duly authorized as of the date hereof.

Alion Science and Technology Corporation	Illinois Institute of Technology
By: /s/ Bahman Atefi	By:/s/ Lew Collens
Name: Bahman Atefi	Name: Lew Collens
Title: Chief Executive Officer	Title: President

EX-10.39

Exhibit 10.39

FIRST AMENDMENT TO THE ALION MEZZANINE WARRANT
AGREEMENT BETWEEN ALION SCIENCE AND TECHNOLOGY CORPORATION,
ALION SCIENCE TECHNOLOGY EMPLOYEE OWNERSHIP, SAVINGS AND
INVESTMENT TRUST, AND BAHMAN ATEFI

     THIS FIRST AMENDMENT TO THE ALION MEZZANINE WARRANT AGREEMENT (the “Amendment”) is made effective as of December 15, 2004, between Alion Science and Technology Corporation, a Delaware corporation (the “Company”), and Bahman Atefi, an individual (“Holder”).

     WHEREAS, the Company, Holder, and Alion Science and Technology Corporation Employee Ownership, Savings and Investment Trust (the “Trust”) entered into that certain Alion Mezzanine Warrant Agreement dated as of the 20^th day of December 2002 (the “Alion Mezzanine Warrant Agreement”), pursuant to which the Company issued to Holder warrants to purchase Twenty-Two Thousand Sixty-One and Seven-Tenths (22,061.7) shares of the Company’s $0.01 par value per share common stock (“Common Stock”);

     WHEREAS, the Company and Holder desire to amend Sections 3(l)(v) and 16(c) of the Alion Mezzanine Warrant Agreement;

     WHEREAS, the Trust is a party to the Alion Mezzanine Warrant Agreement only for the purposes of Sections 6, 7, 15 and 17 through 25 of the Alion Mezzanine Warrant Agreement, and pursuant to Section 18 of the Alion Mezzanine Warrant Agreement, Sections 3(l)(v) and 16(c) may be amended by the mutual written agreement of the Company and Holder, without the need to obtain the Trust’s consent; and

     WHEREAS, the Company and Holder desire to amend the Alion Mezzanine Warrant Agreement as set forth herein.

     NOW, THEREFORE, in consideration of the premises set forth above and the respective covenants and agreements contained in this Amendment, and for other good and valuable consideration, the receipt and sufficiency of which is hereby mutually acknowledged, and intending to be legally bound, the parties hereto hereby agree as follows:

     1. Amendments to the Alion Mezzanine Warrant Agreement.

          (a) Section 3(l)(v) of the Alion Mezzanine Warrant Agreement is hereby amended by deleting the entire text of Section 3(l)(v) and substituting in lieu thereof:

“interests or rights designated as phantom stock issued or granted by the Company to employees, consultants, officers or directors of the Company or any of its Subsidiaries in accordance with a phantom stock plan to be adopted by the Company’s board of directors after the Effective Date, except for such amount of phantom stock that, at the time of issuance or grant, would cause the aggregate

  First Amendment to the Alion Mezzanine Warrant Agreement

number of shares of phantom stock then outstanding (excluding any shares of phantom stock that have (x) expired, terminated unexercised or become unexercisable, or (y) been forfeited or otherwise terminated, surrendered or cancelled) to be in excess of 225,000 shares of phantom stock.”

          (b) Section 16(c) of the Alion Mezzanine Warrant Agreement is hereby amended by deleting the entire text of Section 16(c) and substituting in lieu thereof:

“The Company will not issue shares of phantom stock that cause the number of shares of outstanding phantom stock (excluding any shares of phantom stock that have expired, terminated unexercised, or become unexercisable, or that have been forfeited or otherwise terminated, surrendered or cancelled), at the time of issuance, to be in excess of 225,000 shares of phantom stock.”

     2. Waiver. Holder hereby irrevocably waives (i) any and all breaches by the Company of the Company’s covenants set forth in Section 16(c) of the Alion Mezzanine Warrant Agreement, and (ii) any and all adjustments to the Exercise Price (as defined in the Alion Mezzanine Warrant Agreement), in each case based upon or arising out of the issuance by the Company of shares of phantom stock on or before the effective date of this Amendment, and hereby fully and forever, effective as of the effective date of this Amendment, releases, discharges and acquits the Company from any and all claims, demands, causes of action, and/or damages, which Holder may now or hereafter have or claim to have against the Company, based in whole or in part upon, or which may arise from the issuance by the Company of shares of phantom stock on or before the effective date of this Amendment.

     3. Remainder of the Alion Mezzanine Warrant Agreement Not Affected. Except as set forth in Section 1 hereof, the terms and provisions of the Alion Mezzanine Warrant Agreement remain in full force and effect without change, amendment, waiver or modification.

     4. Ratification. As modified hereby, the Alion Mezzanine Warrant Agreement and its terms and provisions are hereby ratified for all purposes and in all respects.

     5. Counterparts. This Amendment may be executed in one or more counterparts, all of which taken together shall constitute one instrument.

     6. References. From and after the date provided above, all references to the Alion Mezzanine Warrant Agreement shall be deemed to be references to the Alion Mezzanine Warrant Agreement as modified hereby.

     7. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the conflict of laws principles thereof.

     8. Conflict. In the event of any conflict between the terms of this Amendment and the Alion Mezzanine Warrant Agreement, the terms of this Amendment shall govern.

[Signatures follow on next page]

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     IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by its officers thereunto duly authorized as of the date hereof.

Alion Science and Technology Corporation

By: /s/ Jack Hughes		/s/ Bahman Atefi
Name: Jack Hughes		Bahman Atefi
Title: Senior Vice President and
	Chief Financial Officer

EX-23.1

Exhibit 23.1

Independent Auditors’ Consent

The Board of Directors of

      Alion Science and Technology Corporation:

We consent to the incorporation by reference in the registration statement (No. 333-114395) on Form S-8 of Alion Science and Technology Corporation of our report dated December 6, 2002, except as to Note 13, which is as of December 20, 2002, relating to the consolidated balance sheets of Selected Operations of IIT Research Institute as of September 30, 2001 and 2002, and the related consolidated statements of income, owner’s net investment, and cash flows for each of the years in the three-year period ended September 30, 2002, which report appears in the September 30, 2004 annual report on Form 10-K of Alion Science and Technology Corporation.

/s/ KPMG LLP
Chicago, Illinois
December 27, 2004

EX-23.2

Exhibit 23.2

Consent of Independent Registered Public Accounting Firm

The Board of Directors of

      Alion Science and Technology Corporation:

We consent to the incorporation by reference in the registration statement (No. 333-114935) on Form S-8 of Alion Science and Technology Corporation of our report dated December 10, 2004, relating to the consolidated balance sheets of Alion Science and Technology Corporation as of September 30, 2004 and 2003, and the related consolidated statements of operations, shareholder’s equity (deficit), and cash flows for the years ended September 30, 2004 and 2003 and for the period from October 10, 2001 (inception) through September 30, 2002, and the related consolidated financial statement schedule, which report appears in the September 30, 2004 annual report on Form 10-K of Alion Science and Technology Corporation.

/s/ KPMG LLP
Chicago, Illinois
December 27, 2004

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 Annual Report on Form 10-K for the fiscal year ended September 30, 2004, 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)	[Paragraph reserved in accordance with SEC transition instructions contained in SEC Release 34-47986]
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: December 22, 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 Annual Report on Form 10-K for the fiscal year ended September 30, 2004, 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)	[Paragraph reserved in accordance with SEC transition instructions contained in SEC Release 34-47986]
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: December 22, 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 Annual Report of Alion Science and Technology Corporation (the “Corporation”) on Form 10-K for the fiscal year ending September 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: December 22, 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 Annual Report of Alion Science and Technology Corporation (the “Corporation”) on Form 10-K for the fiscal year ending September 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: December 22, 2004	By: /s/ JOHN M. HUGHES
	Name:	John M. Hughes
	Title:	Chief Financial Officer