UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004.

COMMISSION FILE NUMBER 333–89756

Alion Science and Technology Corporation

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

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

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

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

The number of shares outstanding of Alion Science and Technology Corporation
common stock as of March 31, 2004, was:
Common Stock 2,923,783

ALION SCIENCE AND TECHNOLOGY CORPORATION
FORM 10-Q INDEX
FOR THE QUARTER ENDED MARCH 31, 2004

PART I – Financial Information
Item 1. Financial Statements

ALION SCIENCE AND TECHNOLOGY CORPORATION

See accompanying notes to consolidated financial statements.

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ALION SCIENCE AND TECHNOLOGY CORPORATION

See accompanying notes to consolidated financial statements.

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ALION SCIENCE AND TECHNOLOGY CORPORATION

See accompanying notes to consolidated financial statements.

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ALION SCIENCE AND TECHNOLOGY CORPORATION

See accompanying notes to consolidated financial statements.

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ALION SCIENCE AND TECHNOLOGY CORPORATION

1. Description and Formation of the Business

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

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

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

	•		$58,571 cash, consisting of $56,721 paid to IITRI and $1,517 paid for certain transaction expenses on behalf of IITRI, and $333 paid for other transaction expenses;
	•		$39,900 in seller notes to IITRI, with detachable warrants representing approximately 26% of the outstanding common stock of Alion (on a fully diluted basis). The seller notes bear interest at an effective interest rate of 6.71% per annum. See notes 6 and 8;
	•		$20,343 in mezzanine notes to IITRI, with detachable warrants representing 12% of the outstanding common stock of Alion (on a fully diluted basis). The mezzanine notes bear interest at 12% per annum. See notes 6 and 8;
	•		$2,300 in transaction costs less the $1,517 referenced above;
	•		$6,185 in assumed IITRI debt due to its bank; and
	•		$1,520 in additional amounts due to IITRI for purchase price adjustments related to the Life Sciences Operation.

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

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

2. Basis of Presentation

          The accompanying unaudited consolidated financial statements include the accounts of Alion and its wholly owned subsidiary Human Factors Applications, Inc. (HFA) and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial information. Certain information and note disclosures normally included in the annual financial statements, prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to those rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2004. For further information, refer to the consolidated financial statements and notes thereto included in the Post Effective Amendment No. 4 to the Company’s registration statement on Form S-1 (No. 333-89756) filed with the SEC on January 22, 2004.

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

3. Summary of Significant Accounting Policies

          The consolidated financial statements are prepared on the accrual basis of accounting and include the accounts of Alion prior to the Transaction and the accounts of Alion and its wholly owned subsidiary HFA subsequent to the Transaction. All significant intercompany accounts have been eliminated in consolidation.

Fiscal, Quarter and Interim Periods

          The Company’s fiscal year ends on September 30. Beginning with the fiscal year ending September 30, 2004, the Company has been operating based on a three-month quarter, four-quarter fiscal year whereas for the fiscal year ended September 30, 2003 the Company operated on a thirteen-period fiscal year that consisted of three, four-week periods in its first interim period; three, four-week periods in its second interim period; four, four-week periods in its third interim period; and the balance of the fiscal year of approximately three, four-week periods in its fourth interim period. For the three months ended March 31, 2004, there were 63 available work days (based on a standard work week of Monday through Friday and excluding designated holidays recognized by Alion) as compared to 57 available workdays for the twelve-week period ended March 14, 2003. On a fiscal year-to-date basis, through the six months ended March 31, 2004 there were 126 available workdays as compared to 114

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available workdays for the twenty-four week period ended March 14, 2003. Accordingly, comparisons between the three-month quarter ended March 31, 2004 and the twelve-week period ended March 14, 2003 will need to consider the differing lengths of time. Comparisons between the six months ended March 31, 2004 and the twenty-four week period ended March 14, 2003 will need to consider the differing lengths of time.

Reclassifications

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

Recently Issued Accounting Pronouncements

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

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

4. Earnings (Loss) Per Share

          Basic and diluted loss per share is computed by dividing net loss by the weighted average number of common shares outstanding. For the pro forma interim period ended March 14, 2003, pro forma loss per share has been computed as though the 2,575,408 shares of common stock sold by the Company to the employee stock ownership plan (ESOP) component of the Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan (KSOP) on December 20, 2002 to fund The Transaction described in Note 1, were outstanding for the entire period presented. Prior to the sale of shares of common stock to the ESOP, the Company’s capital structure consisted of 100 shares of common stock issued and outstanding. Accordingly, historical earnings per share information for periods prior to the Transaction has not been presented as it is not indicative of the Company’s ongoing capital structure.

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

5. Goodwill and Intangible Assets

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

          During the fiscal year ended September 30, 2003, the Company recorded goodwill of approximately $65.5 million, which is subject to the aforementioned annual impairment review. During the six months ended March 31, 2004, goodwill increased by $18.5 million, as a result of recording additional obligations of $6.6 million related to earnout arrangements on historical acquisitions and approximately $11.9 million for the acquisitions described in Note 10.

          In addition, the Company recorded intangible assets of approximately $30.6 million during fiscal year 2003, comprised primarily of purchased contracts from IITRI. For the acquisitions described in Note 10, the Company recorded intangible assets of approximately $0.1 million for purchased contracts. For the acquisitions described in Note 10, the Company’s allocation of purchase price is preliminary and subject to adjustment. The intangible assets have an estimated useful life of one to three years and are being amortized using the straight-line method.

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6. Redeemable Common Stock Warrants

          In connection with the issuance of the Mezzanine Note, Subordinated Note, and the Deferred Compensation Agreement described in Note 8, the Company issued 524,229, 1,080,437, and 22,062, respectively, detachable redeemable common stock warrants (the Warrants) to the holders of those instruments. The Warrants have an exercise price of $10 per share and are exercisable until December 20, 2008 for the warrants associated with the Mezzanine Note and the Deferred Compensation Agreement and until December 20, 2010 for the warrants associated with the Subordinated Note. In addition, the Warrants enable the holders to sell the warrants back to the Company, at predetermined times, at the then current fair value of the common stock less the exercise price. Accordingly, the warrants are classified as debt instruments in accordance with Emerging Issues Task Force Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. The estimated fair value of the Warrants of approximately $10.3 million on the date of issuance was recorded as a discount to the face value of the notes issued and as a liability in the accompanying consolidated balance sheet. The estimated fair value of the Warrants was $16.8 million as of March 31, 2004. Changes in the estimated fair value of the Warrants are recorded as interest expense in the accompanying consolidated statements of operations.

7. Shareholder’s Equity, Subject to Redemption

          The Company’s common stock is owned by the Alion Science and Technology Corporation Employee Ownership, Savings and Investment Trust (the Trust). The Company provides a put option to any participant or beneficiary who receives a distribution of common stock which permits the participant or beneficiary to sell such common stock to the Company during certain periods, at the then current market value per share, which was $16.56 per share as of March 31, 2004. Accordingly, all of the Company’s equity is classified as subject to redemption in the accompanying consolidated balance sheets. The per share market value is determined based upon a valuation performed by an independent, third-party firm. The Company may allow the Trust to purchase shares of common stock tendered to the Company under the put option.

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

8. Long-term Debt

          On December 20, 2002, the Company executed a senior credit agreement among LaSalle Bank National Association, US Bank, National Cooperative Bank, Orix Financial Services, Inc. and BB&T Bank to refinance and replace IITRI’s prior credit arrangements and to finance, in part, the Transaction. The senior credit facility consists of a $25.0 million revolving credit facility and a $35.0 million term loan. All principal obligations under the revolving credit facility are to be repaid in full no later than December 20, 2007. The senior credit facility is secured by a first priority, perfected security interest in all of the Company’s current and future tangible and intangible property. As of March 31, 2004, the Company had approximately $14.6 million borrowed under the revolving credit facility.

          As of March 31, 2004, the remaining principal repayments (adjusted for prepayments made through such date) of $26.75 million under the term loan will be payable in quarterly installments, yielding remaining fiscal year repayments in the following amounts:

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          For the periods until the receipt of the compliance certificate and audited financial statements for the fiscal year ended September 30, 2003, the Company’s borrowings under the senior credit facility were to bear interest at either of two floating rates: a per year rate equal to the Eurodollar rate plus 350 basis points, or LaSalle’s prime rate (base rate) plus 200 basis points.

          Effective February 14, 2003, the Company exercised its right and elected that the 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. As a result, interest under the term note was payable at the prime rate (base rate) plus 200 basis points until February 14, 2003. Thereafter, the 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 calculated and reimbursed to the Company semiannually by the senior lender pursuant to the cap agreement. This cap agreement expires February 3, 2007. As of March 31, 2004, the cap agreement had a fair value of approximately $0.047 million, which has been recorded in the accompanying consolidated balance sheet.

          On December 20, 2002, the Company paid $1.7 million to obtain its senior credit facility that includes a $35.0 million Senior Term Note and a $25.0 million revolving credit 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 six months ended March 31, 2004, the Company recognized approximately $0.2 million of interest expense related to accretion of this discount.

          The revolving credit facility bears interest at the LaSalle Bank prime rate plus 200 basis points, which has 6.0% as of March 31, 2004.

          On February 6, 2004, Amendment Number 1 to the Senior Credit Agreement was entered into, whereby the definition of “Borrowing Base (Senior Debt)” was redefined for the fiscal period ended December 31, 2003. As such, the amended definition increased the Company’s borrowing capacity under the Senior Credit Agreement for the fiscal period ended December 31, 2003.

          On March 31, 2004, Amendment Number 2 to the Senior Credit Agreement was entered into, whereby 1) certain cash payments for earn out obligations under current arrangements are to be excluded in fiscal year 2004 for purposes of calculating the minimum Fixed Price Charge Coverage Ratio, 2) the effective period of Borrowing Base Formula for “Senior Debt (ii)” is to apply for the fiscal periods ending March 31, 2004, June 30, 2004, and September 30, 2004, 3) the Borrowing Base Formula “Senior Debt (ii)” is amended to include an advance for fifty percent (50%) of the total billed receivables outstanding one-hundred and twenty-one days (121) or more from the date of original invoice, plus fifty percent (50%) of the value of the net property and equipment of the Borrower, and 4) the waiver of the requirement to have the mezzanine (and warrants) that were purchased from an officer of the Company be repurchased by a member of Alion’s senior management team. As such, the adoption of this amendment potentially increases the Company’s borrowing capacity under the Senior Credit Agreement.

          In consideration for the aforementioned amendments, the Company was required to pay a fee of $0.15 million.

          On December 20, 2002, the Company issued to IITRI a Mezzanine Note securities purchase agreement (Mezzanine Note) with a face value of approximately $20.3 million. The Mezzanine Note served as part of the consideration for the Transaction. The Company is required to pay interest on the Mezzanine Note at a rate of 12% per year, based on a 360-day year of twelve 30-day months. Interest is payable quarterly in cash. The Company is required to pay the outstanding principal amount of the Mezzanine Note in a lump sum on December 20, 2008. The Mezzanine Note is subordinate to the senior credit facility, but ranks senior to the subordinated note.

          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.

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          On February 11, 2004, the Company borrowed $750,000 from an officer of the Company and in exchange will issue a promissory note in the principal amount of $750,000 to the officer. The promissory note will bear interest at a rate of 15% per year, payable quarterly. The Company will be required to pay the outstanding principal amount of the promissory note in a lump sum on March 31, 2009. The promissory note will be subordinate to the senior credit facility and the mezzanine note.

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

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

          Under the terms of the Senior Credit Facility and Mezzanine Note, the Company is subject to covenants including financial covenants with respect to minimum fixed charge coverage, maximum total senior leverage, maximum total leverage, maximum capital expenditures, minimum EBITDAE, as defined, and other customary covenants. As of March 31, 2004, the Company was in compliance with these financial covenants.

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          In summary, for the aforementioned debt agreements, as of March 31, 2004 the remaining fiscal year repayments (at face amount before debt discount) are as follows:

Post-Transaction 8-Year Period

9. Segment Information and Customer Concentration

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

          For the six months ended March 31, 2004, revenues from services provided to various agencies of the U.S. Government represented $120.9 million or approximately 98% of revenues, and $94.6 million or approximately 98% of revenues for the twenty-four weeks ended March 14, 2003. Contract receivables from agencies of the U.S. Government represented approximately $57.3 million, or 95%, of accounts receivable at March 31, 2004 and $47.8 million, or 92%, at March 14, 2003.

          During the six months ended March 31, 2004, there were no sales by Alion to any customers within a single country (except for the United States) where the sales accounted for 10% or more of total revenue. The Company treats sales to U.S. Government customers as sales within the United States regardless of where the services are performed. Substantially all of the Company’s assets were located within the United States for the six months ended March 31, 2004.

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

          On October 31, 2003, Alion acquired 100% of the outstanding shares of Innovative Technologies Solutions Corporation (ITSC) for $4.0 million. The transaction is also subject to an earnout provision not-to-exceed $2.5 million. ITSC is a New Mexico corporation with approximately 53 employees, the majority of whom are located in New Mexico. ITSC provides nuclear safety and analysis services to the U.S. Department of Energy (DOE) as well as to the commercial nuclear power industry. While the allocation of purchase price is preliminary, the Company has recorded approximately $3.7 million of goodwill as a result of the acquisition.

          On February 13, 2004, Alion acquired 100% of outstanding stock of Identix Public Sector, Inc. (IPS) for $8.0 million in cash. In addition, 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 will be 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. While the allocation of

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purchase price is preliminary, the Company has recorded approximately $8.2 million of goodwill as a result of the 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.

          The table below sets out the 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 the first day of each fiscal year presented. This pro forma information for the twenty-four weeks ended March 31, 2004 also reflects the pro forma effects of the IITRI acquisition discussed in Note 1. The pro forma information presented below includes applicable adjustments and covers differing lengths of time as the IPS acquisition occurred in the middle of an interim period. Accordingly, period-to-period comparisons should take these differences and adjustments into account. Future actual financial performance may differ materially from the pro forma results presented.

11. Commitments and Contingencies

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

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

          Messrs. Andrews and Bewley filed a lawsuit against IITRI for breach of the AB Technologies asset purchase agreement claiming at least $8.2 million in damages. The Andrews-Bewley lawsuit was removed to federal court and consolidated into IITRI’s lawsuit. The federal court stayed the litigation and ordered both parties to submit the dispute to the independent accounting firm of Grant Thornton for arbitration.

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

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approximately $0.3 million for potential payments to employees who worked in the business units subject to this earn out.

          Through March 31, 2004, the Company recognized approximately $4.5 million in additional earn out obligations due Messrs. Andrews and Bewley for the fiscal year ended September 30, 2003 and for the six-month period ended March 31, 2004. Additionally, the Company recognized approximately $0.3 million for potential payments to employees who worked in the business units subject to this earn out. As of March 31, 2004, the Company had paid approximately $0.7 million to Messrs. Andrews and Bewley for earn outs and purchase price adjustments. The Company expects to pay Messrs. Andrews and Bewley approximately $3.5 million in the quarter ending June 30, 2004 and approximately $3.3 million in the quarter ending September 30, 2004.

12. IITRI Acquisition and Pro Forma Information

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

          The pro forma consolidated statement of operations for the twenty-four week period ended March 14, 2003 has been prepared by giving effect to the following transactions as if those transactions had been consummated on October 1, 2002:

	•		The incurrence of debt with detachable warrants to purchase common stock as described in Notes 6 and 8;
	•		The consummation of the Transaction, accounted for using the purchase method; and
	•		The purchase of common stock by the ESOP.

          For the twenty-four week period ended March 14, 2003, the pro forma consolidated statement of operations includes pro forma adjustments to reverse historical amortization expense related to pre-Transaction goodwill, to record the amortization of identifiable intangible assets, to record interest expense on debt issued to finance the Transaction, to record the amortization of debt issuance costs, and to record the accretion of debt to face value to reflect the discount for the estimated fair value of Warrants issued.

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

13. Related Party Transaction

          On February 11, 2004, the Company borrowed $750,000 from an officer of the Company. The Company will issue 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.

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14. Subsequent Event

     On April 5, 2004, the Company received approximately $2.3 million from the ESOP Trust in payment for shares to be issued by the Company to the Trust. The funds received represent employee salary deferrals and rollovers from the qualified plans of new employees used for the purchase of beneficial interests in the Company’s common stock to be held by the Trust. As discussed in Note 7, an independent appraiser has determined the fair value of a share of Alion common stock as of March 31, 2004, the Company will issue shares to the Trust in exchange for funds already received along with additional shares in satisfaction of the Company’s current ESOP contribution liability based upon this volume.

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

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

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

          Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s view only as of May 17, 2004. The Company undertakes no obligation to update any of the forward-looking statements made herein, whether as a result of new information, future events, changes in expectations or otherwise. This discussion addresses only our continuing operations.

Critical Accounting Estimates and Policies

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

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

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          Our critical accounting policies are set forth below:

Revenue Recognition, Cost Estimation and Payment

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

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

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

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

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

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

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

          Contract costs on federal government contracts, including indirect costs, are subject to audit by the federal government and adjustment pursuant to negotiations between the Company and government representatives. All of the Company’s federal government contract indirect costs have been audited and agreed upon through fiscal year 2001. Contract revenues on federal government contracts have been recorded in amounts that are expected to be realized upon final settlement. The Company has submitted its fiscal year 2002 indirect cost submission to its cognizant government audit agency; this submission is undergoing the audit process at this time. The Company submitted its fiscal year 2003 indirect cost submission on March 30, 2004.

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

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are incurred only to the extent that the Company expects it is probable that such costs will be recovered and the amount of recovery can be reliably estimated.

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

          For the six months ended March 31, 2004, we derived approximately 63%, 23% and 14% of our revenues from cost-plus, time-and-material and fixed-price contracts, respectively.

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

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

Goodwill and Identifiable Intangible Assets

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

	•		Significant underperformance relative to expected historical or projected future operating results;
	•		Significant changes in the manner of use of the acquired assets or the strategy for the overall business;
	•		Significant negative industry or economic trends; and
	•		Significant decline in Alion’s stock price for a sustained period.

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

          As of March 31, 2004, the Company has goodwill of approximately $84.0 million, which will be subject to the aforementioned annual impairment review. As of March 31, 2004, the Company has recorded approximately

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$17.8 million of intangible assets comprised primarily of the value assigned to purchased contracts. The intangible assets have an estimated useful life of one to three years and are amortized using the straight-line method.

Comparisons of Results of Operations

          The Company’s fiscal year ends on September 30. Beginning with the fiscal year ending September 30, 2004, the Company has been operating based on a three-month quarter, four-quarter fiscal year whereas for the fiscal year ended September 30, 2003 the Company operated on a thirteen-period fiscal year that consisted of three, four-week periods in its first interim period; three, four-week periods in its second interim period; four, four-week periods in its third interim period; and the balance of the fiscal year of approximately three, four-week periods in its fourth interim period. For the three months ended March 31, 2004, there were 63 available work days (based on a standard work week of Monday through Friday and excluding designated holidays recognized by Alion) as compared to 57 available workdays for the twelve-week period ended March 14, 2003. On a fiscal year-to-date basis, through the six months ended March 31, 2004 there were 126 available workdays as compared to 114 available workdays for the twenty-four week period ended March 14, 2003. Accordingly, comparisons between the six-months and quarter ended March 31, 2004 and the twenty-four and twelve week periods ended March 14, 2003 will need to take into account the differing lengths of time.

          As described in the notes to the accompanying consolidated financial statements, Alion completed the acquisition of substantially all of the assets and certain of the liabilities of IIT Research Institute on December 20, 2002, the last day of the Company’s first interim period for the fiscal year ended September 30, 2003. The following discussion and analysis of results of operations relates to the results of operations for the three and six months ended March 31, 2004 and for the results of operations for the twelve-week and pro forma twenty-four week periods ended March 14, 2003, assuming that the IITRI acquisition had been consummated on the first day of the interim period, October 1, 2002.

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

Results of Operations

Three Months Ended March 31, 2004 Compared to Twelve-Week Period Ended March 14, 2003

          Revenues. Revenues increased $15.7 million, or 32.0%, to $64.7 million for the three months ended March 31, 2004, from $49.0 million for the twelve-week period ended March 14, 2003. This $15.7 million increase is attributable to the following:

	•		For the three months ended March 31, 2004 there were 63 available workdays (based on a standard five-day work week of Monday through Friday and excluding designated holidays recognized by Alion) as compared to 57 for the twelve-week period ended March 14, 2003. The six day increase in the number of available work days for the three months ended March 31, 2004 resulted in additional revenue of approximately $5.7 million of the $15.7 million increase.
	•		Alion completed the acquisition of Integrated Technology Solutions Corporation (ITSC) on October 31, 2003. ITSC is a New Mexico corporation with approximately 53 employees, the majority of whom are

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			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. During the three months ended March 31, 2004, the revenue generated by the activities of ITSC was approximately $2.8 million.
	•		Alion completed the acquisition and purchase of Identix Public Sector, Inc. (IPS) on February 13, 2004. IPS is based in Fairfax, Virginia and provides program and acquisition management, integrated logistics support, and foreign military support primarily to U.S. Navy customers. IPS was a wholly-owned subsidiary of Identix Incorporated. For the approximately seven weeks from February 14, 2004 to March 31, 2004, the revenue generated by the activities of IPS was approximately $3.0 million.
	•		Our performance of additional work under contracts that were in existence during the prior year. 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., accounted for approximately $1.6 million of increased revenue, while our support to the Department of Defense Joint Spectrum Center (JSC) accounted for approximately $1.3 million of increased revenue. Additional work in ordinance management services for the U.S. Navy through a subcontract to Raytheon Technical Services Corporation contributed approximately $0.6 million of the revenue increase.

          On the balance of our contracts, revenue increased approximately $0.7 million for the three months ended March 31, 2004 as compared to the twelve-week period ended March 14, 2003.

          Excluding the $5.7 million and $5.8 million increases in revenue associated with the impact of the additional six working days during the three months ended March 31, 2004 and the acquisition of ITSC and IPS operations, respectively, revenue increased approximately $4.2 million, or 8.6%, to $53.2 million (as adjusted) for the three-month period ended March 31, 2004 from $49.0 million for the twelve-week period ended March 14, 2003.

          As a component of revenue, material and subcontract (M&S) revenue increased approximately $3.7 million, or 30.0%, to $16.0 million for the three months ended March 31, 2004 from $12.3 million for the twelve-week period ended March 14, 2003. Approximately $1.3 million of the $3.7 million increase is due to the six-day increase in available workdays for the three-month period ended March 31, 2004 as compared to the twelve-week period ended March 14, 2003 while approximately $2.3 million of the $3.7 million increase is related to activities performed by ITSC and IPS operations. Also, approximately $0.1 million of the $3.7 million increase is associated with M&S activity on the balance of our contracts. M&S revenues vary in both dollar amount and schedule which are dependent on the requirements of the contracts.

          Direct Contract Expenses. Direct contract expenses increased $10.4 million, or 28.9%, to $46.4 million for the three months ended March 31, 2004, from $36.0 million for the twelve-week period ended March 14, 2003. Approximately $4.0 million of the $10.4 million increase in direct contract expenses is due to the impact of the additional six working days in the three months ended March 31, 2004 while approximately $4.5 million of the $10.4 million increase is attributable to the activities of the ITSC and IPS operations and approximately $1.9 million of the $10.4 million increase is attributable to additional work on the contracts referenced above (see “Revenues”). As a component of direct contract expenses, direct labor costs for the three months ended March 31, 2004 increased by $6.5 million or 26.9% to approximately $30.3 million for the three months ended March 31, 2004 from $23.8 million for the twelve-week period ended March 14, 2003. Approximately $2.7 million of the $6.5 million increase in direct labor cost is due to the impact of the additional six working days in the three months ended March 31, 2004 while approximately $2.1 million of the increase in direct labor cost is attributable to the direct labor performed in connection with the activities of ITSC and IPS. The remaining $1.7 million increase is attributable to increased direct labor cost incurred on existing contracts.

          As a component of direct contract expense, other direct costs (ODC’s) increased by $0.6 million or 35.3% to approximately $2.3 million for the quarter ended March 31, 2004 from approximately $1.7 million for the twelve-week period ended March 14, 2003. Approximately $0.1 million of the $0.6 million increase is due to the additional six working days in the three months ended March 31, 2004 while approximately $0.1 million of the increase to ODC’s is attributable to the activities of the ITSC and IPS operations. The remaining $0.4 million increase is attributable to ODC’s incurred on existing contracts.

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          As a component of direct contract expense, material and subcontract cost increased approximately $3.4 million, or 32.3%, to $13.9 million for the three months ended March 31, 2004, compared to $10.5 million for the twelve-week period ended March 14, 2003. Approximately $1.1 million of the $3.4 million increase in M&S costs is due to the impact of the additional six working days that occurred for the three months ended March 31, 2004 while approximately $2.2 million of the increase in M&S is related to the M&S activities performed by the ITSC and IPS operations. The remaining increase of approximately $0.1 million is attributable to increased M&S costs incurred on existing contracts for the twelve-week period ended March 14, 2003.

          As a percentage of revenue, direct contract expenses decreased to 71.7% for the three months ended March 31, 2004 from 73.5% for the twelve-week period ended March 14, 2003. For the twelve-week period ended March 14, 2003, revenue was reduced by approximately $0.6 million related to certain additional non-reimbursable contract costs. Absent this revenue reduction, direct contract expenses, as a percentage of revenue would have been approximately 72.6% for the twelve-week period ended March 14, 2003.

          Gross Profit. Gross profit increased $5.3 million, or 40.8%, to $18.3 million for the three months ended March 31, 2004, from $13.0 million for the twelve-week period ended March 14, 2003. Approximately $1.7 million of the $5.3 million increase is due to the additional gross profit recognized on the revenue generated during the six additional working days during the three months ended March 31, 2004 while approximately $1.2 million of the $5.3 million increase is attributable to the gross profit generated by the contracts performed by the ITSC and IPS operations. The remaining increase comes from additional profits on existing contracts.

          Gross profit as a percentage of revenue increased to 28.3% for the three months ended March 31, 2004, from 26.5% for the twelve-week period ended March 14, 2003. For the twelve-week period ended March 14, 2003, revenue was reduced by approximately $0.6 million related to certain additional costs on a fixed-price contract and a non-reimbursement contract. This revenue adjustment resulted in a corresponding reduction in gross profit. Excluding this revenue reduction, gross profit, as a percentage of revenue, would have been approximately 27.4% for the twelve-week period ended March 14, 2003.

          Operating Expenses. Operating expenses increased $3.7 million, or 26.8% to $17.5 million for the three months ended March 31, 2004, from $13.8 million for the twelve-week period ended March 14, 2003. Approximately $1.6 million of the $3.7 million increase is due to the additional six working days in the three months ended March 31, 2004 while approximately $0.6 million is attributable to the activities of the ITSC and IPS operations. Approximately $1.5 million of the $3.7 million increase is attributable to the increase in infrastructure to support the revenue growth.

          Operating expenses, net of depreciation and amortization and non-recurring transaction-related expenses (e.g., third-party legal, accounting, finance, etc., incurred in connection with the purchase of assets from IITRI) increased approximately $3.7 million, or 35.2%, to $14.2 million for the three months ended March 31, 2004, from $10.5 million for the twelve-week period ended March 14, 2003. Approximately $1.3 million of the increase in net operating expenses is due to the impact of the six additional working days during the three months ended March 31, 2004 as compared to the twelve-week period ended March 14, 2003 while approximately $0.6 million of the $3.7 million increase is attributable to the operating expenses incurred by the ITSC and IPS operations. Approximately $1.8 million of the $3.7 million increase is associated with the additional infrastructure required to support the revenue growth.

          As a component of operating expenses, overhead expenses for indirect personnel and facilities costs related to rental and occupancy expenses increased approximately $2.3 million, or 46.7%, to $7.2 million for the three months ended March 31, 2004, from $4.9 million for the twelve-week period ended March 14, 2003. Approximately $0.6 million of the $2.3 million increase is due to the additional six working days during the three months ended March 31, 2004, and approximately $0.6 million is attributable to indirect personnel and occupancy costs incurred by the ITSC and IPS operations. The remaining $1.1 million increase is due to infrastructure needs in support of the revenue growth.

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          As a second component of our operating expenses, general and administrative expense increased approximately $1.5 million, or 27.8%, to $6.9 million for the three months ended March 31, 2004, compared to $5.4 million for the twelve-week period ended March 14, 2003. Approximately $0.7 million of the $1.5 million increase is due to the impact of the additional six working days. The remaining $0.8 million increase is due to additional costs to support the infrastructure. As a percentage of revenue, general and administrative expenses decreased to 10.6% for the three months ended March 31, 2004, compared to 11.1% for the twelve-week period ended March 14, 2003.

          Depreciation and Amortization. Depreciation and amortization expense increased approximately $0.5 million, or 17.9%, to $3.3 million for the three months ended March 31, 2004, as compared to $2.8 million for the twelve-week period ended March 14, 2003. Approximately $0.4 million of the increase is for additional depreciation on approximately $1.3 million of capital expenditures incurred during the year ended September 30, 2003. Additionally, amortization expense associated with the value assigned to the purchased contracts of ITSC was approximately $0.1 million for the three-month period ended March 31, 2004. The value to be assigned to the purchased contracts of IPS will be estimated in the third quarter. For each respective three-month or twelve-week period, approximately $2.4 million of total amortization expense was incurred associated with the intangible asset value assigned to purchased customer contracts of IITRI. Also, for each respective three-month or twelve-week period, approximately $0.1 million of depreciation expense was incurred associated with the fair market value assigned to the purchased assets of IITRI.

          Income (Loss) from Operations. For the three months ended March 31, 2004, income from operations was $0.8 million compared to a $0.8 million operating loss for the twelve-week period ended March 14, 2003. The changes in results from operations were due to the factors discussed above.

          Other Income and Expense. Other expenses increased approximately $1.9 million, or 82.6%, to $4.2 million for the three months ended March 31, 2004 as compared to $2.3 million for the twelve-week period ended March 14, 2003. Approximately $0.3 million of the $1.9 million increase is due to the amount of interest expense recognized resulting from the conversion to a three-month quarter from a twelve-week interim period. The number of interest-bearing days increased to 92 for the three-month quarter ended March 31, 2004 from 84 days for the twelve-week period ended March 14, 2003. However, absent the impact of the eight additional days, approximately $1.4 million of the $1.9 million increase is associated with the interest expense incurred related to the debt financing associated with the purchase of the assets from IITRI. Warrant repurchase liabilities increased as a result of an increase in the share price of Alion’s common stock which resulted in additional interest expense. Approximately $0.4 million of the $1.9 million increase is associated with an increase in the deferred compensation expense related to Alion’s stock appreciation rights and phantom stock plans. For the three months ended March 31, 2004, the deferred compensation expense was approximately $0.5 million while for the twelve-week period ended March 14, 2003, the deferred compensation expense was approximately $0.1 million. The remaining $0.1 million of the $1.9 million increase is associated with interest expense on the revolving credit facility which included borrowings to fund the February 13, 2004 acquisition of IPS.

          Income Tax (Expense) Benefit. Alion is a S-corporation and is not subject to federal and most state income taxes. As of December 20, 2002, our wholly-owned subsidiary, HFA elected to be a qualified subchapter S subsidiary and is no longer treated as a taxable corporation for federal income tax purposes. As a result, HFA recorded no income tax provision for the three months ended March 31, 2004 or for the twelve-week period ended March 14, 2003.

          Net Loss. The net loss of $3.4 million for the three months ended March 31, 2004, as compared to net the loss of $3.1 million for the twelve-week period ended March 14, 2003, was due to the factors discussed above.

          Six Months Ended March 31, 2004 Compared to the Pro Forma Twenty-Four Week Period Ended March 14, 2003

          Revenues. Revenues increased $27.0 million, or 28.0%, to $123.3 million for the six months ended March 31, 2004, from $96.3 million for the twenty-four weeks ended March 14, 2003. This $27.0 million increase is attributable to the following:

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	•		For the six months ended March 31, 2004 there were 126 available workdays (based on a standard five-day work week of Monday through Friday and excluding designated holidays recognized by Alion) as compared to 114 for the twenty-four week period ended March 14, 2003. The twelve day increase in the number of available work days for the six months ended March 31, 2004 resulted in additional revenue of approximately $11.1 million.
	•		Alion completed the acquisition and purchase of ITSC on October 31, 2003. For the six months ended March 31, 2004, the revenue generated by the activities of ITSC was approximately $4.2 million.
	•		Alion completed the acquisition and purchase of IPS on February 13, 2004. For the approximately seven weeks from February 14, 2004 to March 31, 2004, the revenue generated by the activities of IPS was approximately $3.0 million.
	•		Our performance of additional work under contracts that were in existence during the prior year. 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., accounted for approximately $2.7 million of increased revenue, while our support to the Department of Defense Joint Spectrum Center (JSC) accounted for approximately $1.7 million of increased revenue. Additional work in ordnance management services for the U.S. Navy through a subcontract to Raytheon Technical Services contributed approximately $1.7 million of the revenue increase.

      On the balance of our contracts, revenue increased approximately $2.6 million for the six-month period ended March 31, 2004 as compared to the twenty-four week period ended March 14, 2003.

     Excluding the $11.1 million and $7.2 million increases in revenue associated with the impact of the additional twelve working days during the six months ended March 31, 2004 and the acquisition of ITSC and IPS operations, respectively, revenue (as adjusted) increased approximately $8.7 million, or 9.0%, to $105.0 million for the six-month period ended March 31, 2004 from $96.3 million for the twenty-four week period ended March 14, 2003.

     As a component of revenue, M&S revenue increased approximately $8.0 million, or 35.2%, to $30.7 million for the six months ended March 31, 2004 from $22.7 million for the twenty-four week period ended March 14, 2003. Approximately $2.7 million of the $8.0 million increase is due to the twelve-day increase in available workdays for the six-month period ended March 31, 2004 as compared to the twenty-four week period ended March 14, 2003. Also, approximately $3.4 million of the $8.0 million increase in M&S revenue is related to activities performed by ITSC and IPS operations. Approximately $1.9 million of the $8.0 million increase is associated with M&S activity on the balance of our contracts. M&S revenues vary in both dollar amount and schedule which are dependent on the requirements of the contracts.

     Direct Contract Expenses. Direct contract expenses increased $17.8 million, or 25.2%, to $88.5 million for the six months ended March 31, 2004, from $70.7 million for the twenty-four week period ended March 14, 2003. Approximately $7.9 million of the $17.8 million increase in direct contract expense is due to the impact of the additional twelve working days in the six months ended March 31, 2004 while approximately $5.5 million of $17.8 million increase is attributable to the activities of the ITSC and IPS operations and approximately $4.4 million of the $17.8 million increase is attributable to the additional contract performance referenced above (see “Revenues”).

     As a component of direct contract expenses, direct labor costs for the six months ended March 31, 2004 increased by $10.0 million or 21.2% to $57.2 million for the six months ended March 31, 2004 from $47.2 million for the twenty-four week period ended March 14, 2003. Approximately $5.2 million of the $10.0 million increase in direct labor cost is due to the impact of the additional twelve working days in the six months ended March 31, 2004 while approximately $2.7 million of the increase in direct labor cost is attributable to the direct labor related to the activities of the ITSC and IPS operations. The remaining $2.1 million increase is attributable to increased direct labor cost incurred on existing contracts. As a component of direct contract expense, ODC’s increased by $1.0 million or 29.4% when compared to the twenty-four week period ended March 14, 2003. Approximately $0.4 million of the $1.0 million increase in ODC’s is due to the impact of the twelve additional working days in the six months ended March 31, 2004 while approximately $0.1 of the $1.0 million increase is attributable to the activities

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of the ITSC and IPS operations. The remaining $0.5 million increase is associated with ODC’s incurred on the balance of our contracts.

      As a component of direct contract expense, material and subcontract cost increased approximately $6.5 million, or 31.9%, to $26.9 million for the six months ended March 31, 2004, compared to $20.4 million for the twenty-four week period ended March 14, 2003. Approximately $2.3 million of the $6.5 million increase in M&S costs is due to the impact of the additional twelve working days that occurred for the six months ended March 31, 2004 while approximately $2.6 million of the increase in M&S is related to the M&S activities performed by the ITSC and IPS operations. The remaining increase of $1.6 million is attributable to increased M&S cost incurred on existing contracts.

     As a percentage of revenue, direct contract expenses decreased to 71.8% for the six months ended March 31, 2004 from 73.4% for the twenty-four week period ended March 14, 2003. For the twenty-four week period ended March 14, 2003, revenue was reduced by approximately $0.6 million related to certain additional non-reimbursable contract costs. Absent this revenue reduction, direct contract expenses as a percentage of revenue, would have been approximately 73.0% for the twenty-four week period ended March 14, 2003.

     Gross Profit. Gross profit increased $9.2 million, or 35.9%, to $34.8 million for the six months ended March 31, 2004, from $25.6 million for the twenty-four week period ended March 14, 2003. Approximately $3.2 million of the $9.2 million increase is due to the additional gross profit generated during the twelve additional working days in the six months ended March 31, 2004 while approximately $1.5 million of the $9.2 million increase is attributable to the gross profit generated by the contracts performed by the ITSC and IPS operations. The remaining $4.5 million increase is associated with gross profit generated on the balance of our contracts.

     Gross profit as a percentage of revenue increased to 28.2% for the six months ended March 31, 2004, from 26.5% for the twenty-four week period ended March 14, 2003. For the twenty-four week period ended March 14, 2003, revenue was reduced by approximately $0.6 million related to certain additional costs on a fixed-price contract and a non-reimbursement contract. Absent this revenue reduction, gross profit as a percentage of revenue would have been approximately 27.0% for the twenty-four week period ended March 14, 2003.

     Operating Expenses. Operating expenses increased $2.3 million, or 7.1% to $34.6 million for the six months ended March 31, 2004, from $32.3 million for the twenty-four week period ended March 14, 2003. However, for the twenty-four week period ended March 14, 2003, there was approximately $5.8 million in non-recurring, transaction-related expense. There were no such costs incurred for the six months ended March 31, 2004. As such, the adjusted increase in operating expense was approximately $8.1 million ($2.3 million plus $5.8 million). On an adjusted basis, approximately $3.2 million of the $8.1 million increase is due to the additional twelve working days in the six months ended March 31, 2004. Approximately $0.9 million of the $8.1 million adjusted increase is attributable to the activities of the ITSC and IPS operations while approximately $4.0 million of the adjusted increase is attributable to the infrastructure costs in support of the revenue growth. Operating expenses, net of depreciation, amortization, and non-recurring transaction-related expense increased approximately $7.4 million, or 35.6%, to $28.2 million for the six months ended March 31, 2004, from $20.8 million for the twenty-four week period ended March 14, 2003. Approximately $2.7 million of the increase in total operating expenses is due to the impact of the twelve additional working days during the six months ended March 31, 2004 as compared to the twenty-four week period ended March 14, 2003, while approximately $0.9 million of the $7.4 million increase is attributable to the operating expenses incurred by the ITSC and IPS operations. Approximately $3.8 million of the increase is attributable to the additional infrastructure required to support the revenue growth.

     As a component of our operating expenses, overhead expenses for indirect personnel and facilities costs related to rental and occupancy expenses increased approximately $4.0 million, or 41.2%, to $13.7 million for the six months ended March 31, 2004, from $9.7 million for the twenty-four week period ended March 14, 2003. Approximately $1.3 million of the $4.0 million increase is due to the additional twelve working days during the six months ended March 31, 2004, and approximately $0.9 million is attributable to facility and occupancy costs

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incurred by ITSC and IPS operations. The remaining $1.8 million increase was driven by infrastructure needs in support of the revenue growth.

          As a second component of our operating expenses, general and administrative expense increased approximately $3.6 million, or 33.6%, to $14.3 million for the six months ended March 31, 2004, compared to $10.7 million for the twenty-four week period ended March 14, 2003. Approximately $1.4 million of the $3.6 million increase is due to the impact of the additional twelve working days. Approximately $0.7 million of the $3.6 million increase was due to outside legal fees of $0.5 million associated with the AB Technologies arbitration proceedings and year-end audit fees of approximately $0.2 million. The remaining $1.5 million increase is due to additional costs to support the infrastructure. As a percentage of revenues, general and administrative expenses increased to 11.6% for the six months ended March 31, 2004, compared to 11.2% for the twenty-four week period ended March 14, 2003.

          Depreciation and Amortization. Depreciation and amortization expense increased approximately $0.7 million, or 12.3%, to $6.4 million for the six months ended March 31, 2004, as compared to $5.7 million for the twenty-four week period ended March 14, 2003. Approximately $0.6 million of the increase is due to additional depreciation expense associated with approximately $1.3 million of capital expenditures incurred during the year ended September 30, 2003. As part of the $0.7 million increase, amortization expense associated with the intangible asset value assigned to the purchased customer contracts of ITSC was $0.1 million for the six-month period ended March 31, 2004. For each respective six-month or twenty-four week period, approximately $4.9 million of total amortization expense was incurred associated with the intangible asset value assigned to purchased customer contracts of IITRI. Also, for each respective six-month or twenty-four week period, approximately $0.2 million of depreciation expense was incurred associated with the fair value assigned to the purchased fixed assets of IITRI.

          Income (Loss) from Operations. For the six months ended March 31, 2004, income from operations was $0.2 million compared with $6.7 million operating loss for the twenty-four-week period ended March 14, 2003. The results from operations were due to the factors discussed above.

          Other Income and Expense. Other expenses increased approximately $3.5 million, or 79.5%, to $7.9 million for the six months ended March 31, 2004 as compared to $4.4 million for the twenty-four week period ended March 14, 2003. Approximately $0.5 million of the $3.5 million increase is due to the interest expense recognized resulting from the conversion to a three-month quarter from a twelve week interim period. The number of days for the six months ended March 31, 2004 increased to 183 from 168 for the twenty-four week interim period ended March 14, 2003. However, absent the impact of the fifteen additional days, approximately $2.4 million of the $3.5 million increase is associated with the interest expense incurred related to the debt financing associated with the purchase of the assets from IITRI; specifically, the warrant repurchase liabilities increased as a result of an increase in the share price of Alion’s common stock which resulted in additional interest expense. Also, approximately $0.8 million of the $3.5 million increase is associated with an increase in the deferred compensation expense related to Alion’s stock appreciation rights and phantom stock plans. For the six months ended March 31, 2004, the deferred compensation expense was approximately $0.9 million while for the twenty-four-week period ended March 14, 2003, the deferred compensation expense was $0.1 million. Approximately $0.2 million of the $3.5 million increase is due to an increase in the interest expense on the mezzanine and subordinate note resulting from the increase in the number of days in which interest accrued to 183 days for the six months ended March 31, 2004 from 85 days commencing with the date of issuance (December 20, 2002) to March 14, 2003. For the six months ended March 31, 2004, interest expense on the mezzanine note and subordinate note was approximately $2.6 million and for the twenty-four week period ended March 14, 2003, interest expense on the mezzanine note and subordinate note was $2.4 million. The remaining $0.1 million of the $3.5 million increase is associated with interest expense on the revolving credit facility which was used to fund the acquisition of IPS.

          Income Tax (Expense) Benefit. Our wholly-owned subsidiary, HFA, had operating income of approximately $0.7 for the six months ended March 31, 2004, compared to $0.3 million for the twenty-four-week period ended March 14, 2003. As of December 20, 2002, HFA was elected to be a qualified subchapter S subsidiary and is no longer treated as a taxable corporation for federal income tax purposes. As a result, HFA recorded no

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income tax provision for the six months ended March 31, 2004 and approximately $0.03 million for the twenty-four-week period ended March 14, 2003.

          Net Loss. The net loss of $7.7 million for the six months ended March 31, 2004, as compared to net loss of $11.2 million for the twenty-four week period ended March 14, 2003, was due to the factors discussed above.

Recent Accounting Pronouncements.

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

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

Liquidity and Capital Resources.

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

          The following discussion relates to the cash flow of Alion for the six months ended March 31, 2004 as compared to the cash flow of Alion for the twelve-week period ended March 14, 2003 plus the cash flows of the operating activities of the business acquired on December 20, 2002 for the twelve-week period ended December 20, 2002.

          Net cash provided by operating activities was $3.6 million for the six months ended March 31, 2004, an increase of $1.9 million from the $1.7 million provided by operating activities for the twenty-four week period ended March 14, 2003. The primary reason for this $1.9 million increase in cash provided by operations results from the increase in the adjustment to the net loss from operating activities of approximately $2.6 million from non-cash interest expense (e.g. accretion of debt to face value, amortization of debt issuance costs, and the change in fair market value of the redeemable common stock warrants) associated with the debt structure which resulted from the Transaction compared to the twenty-four week period ended March 14, 2003. Net cash used in investing activities was $16.3 million for the six months ended March 31, 2004, and $59.3 million for the twenty-four week period ended March 14, 2003. Approximately $13.1 million of the $16.3 million of cash used during the six months ended March 31, 2004 was for the acquisition and purchase of ITSC and IPS. During the twenty-four week period ended March 14, 2003, the cash Alion paid for the selected operations of IITRI was $58.6 million. Cash of $25.8 million was generated from the sale of Alion common stock to the ESOP Trust, and $32.1 million resulted from net borrowings under the Senior Term Note.

          Net cash provided by financing activities was $12.4 million for the six months ended March 31, 2004, compared to cash provided by financing activities of $58.5 million for the twenty-four week period ended March 14, 2003. For the six months ended March 31, 2004, net cash provided by financing activities was primarily the result of increased borrowings under Alion’s working capital bank facility. For the six months ended March 31, 2004, the balance drawn under the working capital facility was approximately $14.6 million primarily to fund the acquisition of IPS. For the twenty-four week period ended March 14, 2003, the balance drawn was approximately $7.0 million. During the twenty-four week period ended March 14, 2003, the additional financing required to complete the purchase of the selected operations of IITRI included a $35.0 million Senior Term Note, a $20.3 million Mezzanine Note (with warrants), a $39.9 million Subordinated Note (with warrants), and the sale of $25.8 million of common stock to the ESOP Trust.

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Discussion of Debt Structure

          On December 20, 2002, the Company entered into a senior credit agreement among LaSalle Bank National Association, US Bank, National Cooperative Bank, Orix Financial Services, Inc. and BB&T Bank to refinance and replace IITRI’s prior credit arrangements. The new agreement consists of a $25.0 million revolving credit facility and a $35.0 million term loan to finance, in part, the IITRI acquisition. Principal repayments under the term loan are payable in quarterly installments. As of March 31, 2004, the approximate remaining fiscal year principal repayments (taking into account previous repayments) of $26.8 million under the term loan are as follows:

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

          From December 20, 2002 until January 31, 2004, the term note and the revolving line of credit under the senior credit facility bore interest at either of two floating rates at the Company’s choice: an annual rate equal to the Eurodollar rate plus 350 basis points, or the LaSalle Bank prime rate plus 200 basis points. After January 31, 2004, the interest rate equals the Eurodollar rate or the prime rate plus margins which will vary depending upon the Company’s leverage ratio. Leverage ratio is the ratio of total funded debt, excluding the Subordinated Note (described below), to earnings before interest, taxes, depreciation, amortization, ESOP repurchase obligations and non-cash compensation expenses.

          Interest on the term note was payable at the LaSalle Bank prime rate plus 200 basis points through February 14, 2003. Effective February 14, 2003, the Company exercised its right to have the term note bear interest at a Eurodollar rate plus 350 basis points. This did not affect the interest rate on the revolving line of credit. Thereafter the term note bore interest at the Eurodollar rate plus 350 basis points.

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

          On February 6, 2004, Amendment Number 1 to the Senior Credit Agreement was executed by and among the parties whereby the definition of “Borrowing Base (Senior Debt)” has been redefined for the fiscal period ending December 31, 2003. As such, the amended definition increased the Company’s borrowing capacity under the Senior Credit Agreement for the fiscal period ended December 31, 2003.

          On March 31, 2004, Amendment Number 2 to the Senior Credit Agreement was entered into, whereby 1) certain cash payments for earn out obligations under current arrangements are to be excluded in fiscal year 2004 for purposes of calculating the minimum Fixed Price Charge Coverage Ratio, 2) the effective period of Borrowing Base Formula for “Senior Debt (ii)” is to apply for the fiscal periods ending March 31, 2004, June 30, 2004, and September 30, 2004, 3) the Borrowing Base Formula “Senior Debt (ii)” is amended to include an advance for fifty percent (50%) of the total billed receivables outstanding one-hundred and twenty-one days (121) or more for the date of original invoice, plus fifty percent (50%) of the value of the net property, and equipment of the Borrower, and 4) the waiver of the requirement to have the mezzanine (and warrants) that were purchased from an officer of the Company be repurchased by a member of Alion’s senior management team. As such, the adoption of this amendment potentially increases the Company’s borrowing capacity under the Senior Credit Agreement.

          On March 31, 2004, the Company had approximately $26.8 million in borrowings outstanding under the senior term note with approximately $14.6 million outstanding under the revolving credit facility. The revolving credit facility bears interest at the LaSalle Bank prime rate plus 200 basis points, which was 6.0% as of March 31, 2004. The approximately $26.8 million balance remaining under the senior term note bears interest at the Eurodollar rate plus 350 basis points, which was 4.62% as of March 31, 2004.

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

          On December 20, 2002, the Company issued a Mezzanine Note to IITRI with a face value of approximately $20.3 million, as part of the consideration for the 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. 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.

          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. The Company will issue 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 for the same sum previously issued to another officer of the Company, the termination of whose employment relationship resulted in repurchase of the note. The agreement with the officer is subordinate to the senior credit agreement and the mezzanine note referenced above.

          Also on December 20, 2002, the Company issued the Subordinated Note to IITRI, with a face value of $39.9 million, as part of the consideration for the IITRI acquisition. The Subordinated Note bears interest at a rate of

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

          On December 20, 2002, the Company entered into a $0.9 million deferred compensation agreement with Dr. Atefi, with payment terms substantially equivalent to those of the Mezzanine Note previously described.

          The Company issued detachable warrants with the Mezzanine Note and the Subordinated Note. The outstanding warrants associated with the Mezzanine Note represent the right to buy approximately 12% of the Company’s shares of common stock on a fully diluted basis (assuming the exercise of all warrants outstanding on September 30, 2003), at an exercise price of $10.00 per share. These warrants are exercisable until December 20, 2008 and contain a put right giving the holder the right to require the Company to purchase the warrants back at the then-current fair value of the Company’s common stock, minus the warrants’ exercise price. The put right can be exercised within thirty days after a change in control, or within thirty days prior to December 20, 2008, or within thirty days after delivery to the current holders of an appraisal of the per share value of the Company’s common stock as of September 30, 2008, if the ESOP still exists and no public market price exists for the Company’s common stock. The warrants associated with the Subordinated Note represent the right to buy approximately 26% of the Company’s shares of common stock on a fully diluted basis (assuming the exercise of all warrants outstanding on September 30, 2003), at an exercise price of $10.00 per share. These warrants are exercisable until December 20, 2010 and also contain a put right giving the holder the right to require the Company to purchase the warrants back at the then-current fair value of the Company’s common stock, minus the warrants’ exercise price. This put right applies to up to 50% of these warrants within thirty days prior to December 20, 2009 (or within thirty days after delivery to the warrantholders of an appraisal of the per share value of the Company’s common stock as of September 30, 2009, if the ESOP still exists and no public market price exists for its common stock), and up to 100% of these warrants within thirty days prior to December 20, 2010 (or within thirty days after delivery to the warrant holders of an appraisal of the per share value of its common stock as of September 30, 2010, if the ESOP still exists and no public market value exists for its common stock). All put rights terminate upon one or more underwritten public offerings of Alion common stock resulting in aggregate gross proceeds of at least $30.0 million to the sellers (excluding proceeds received from certain affiliates of Alion).

          Under the terms of the senior credit facility, the Company is subject to covenants including financial covenants with respect to minimum fixed charge coverage, maximum total senior leverage, maximum total leverage, maximum capital expenditures and minimum EBITDAE. EBITDAE is defined in the senior credit facility as earnings before interest, taxes, depreciation, amortization, ESOP repurchase obligations and non-cash compensation expenses. The Mezzanine Note contains financial covenants similar to those contained in the senior credit facility, but on less onerous terms mutually agreed upon by the Company, IITRI and the senior lenders. The Subordinated Note includes covenants customary for deeply subordinated obligations, such as the timely payment of principal and interest.

          The Company has a maximum earnout payment obligation of $11.5 million to the former shareholders of AB Technologies arising from IITRI’s acquisition of their company. The earnout arrangement applies to results of certain operations for part of fiscal year 2000, all of fiscal years 2001 through 2004, and part of fiscal year 2005. Messrs. Andrews and Bewley filed a lawsuit against IITRI for breach of the AB Technologies asset purchase agreement claiming at least $8.2 million in damages. The Andrews-Bewley lawsuit was removed to federal court and consolidated into IITRI’s lawsuit. The federal court stayed the litigation and ordered both parties to submit the dispute to the independent accounting firm of Grant Thornton for arbitration.

          On January 20, 2004, the arbitrator issued a decision awarding Messrs. Andrews and Bewley a purchase price adjustment of approximately $0.7 million. The arbitrator’s decision reclassified certain overhead expenses as

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general and administrative expenses which were capped by the asset purchase agreement. That decision increased earn out payments due Messrs. Andrews and Bewley by approximately $3.5 million for the period from the acquisition date through September 30, 2002. The Company was also required to recognize a liability of approximately $0.3 million for potential payments to employees who worked in the business units subject to this earn out.

          Through March 31, 2004, the Company recognized approximately $4.5 million in additional earn out obligations due Messrs. Andrews and Bewley and approximately $0.3 million for potential payments to employees who worked in the business units subject to this earn out. As of March 31, 2004, the Company had paid approximately $0.7 million to Messrs. Andrews and Bewley for earn outs and purchase price adjustments. The Company expects to pay Messrs. Andrews and Bewley approximately $3.5 million in the quarter ending June 30, 2004 and approximately $3.3 million in the quarter ending September 30, 2004.

          The Company’s minimum lease payment obligations under non-cancelable operating leases for the full fiscal years ending 2004, 2005, 2006, 2007 and 2008 are $9.8 million, $10.8 million, $8.6 million, $8.7 million and $8.6 million, respectively. The remaining aggregate obligations on these leases thereafter are approximately $17.2 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 liabilities which will impact the Company’s cash flow relate to:

	•		Repurchase obligations under the KSOP which may be significant commencing in 2004;
	•		Obligations related to the holders’ put rights associated with the Mezzanine Note warrants;
	•		Obligations related to the holder’s put rights associated with the Subordinated Note warrants;
	•		Obligations relating to our stock appreciation rights and phantom stock programs; and
	•		Obligations relating to deferred compensation programs for senior managers.

          In December 2003, the Company spent $0.7 million to re-purchase 50,031 shares of its common stock from the ESOP Trust at $14.71 per share to satisfy obligations to terminated employees.

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

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

          Given the Company’s significant obligations that become due in years 2007 through 2010, it expects that it will need to refinance a portion of its indebtedness at least by fiscal year 2007. The Company’s cash from operations will be insufficient to satisfy all of its obligations and it cannot be certain that it will be able to refinance on terms that will be favorable to the Company, if at all. Moreover, if the Company’s plans or assumptions change, if its assumptions prove inaccurate, if it consummates investments in or acquisitions of other companies, if it experiences unexpected costs or competitive pressures, or if its existing cash and projected cash flow from operations prove insufficient, it may need to obtain greater amounts of additional financing and sooner than expected. While it is the Company’s intention only to enter into new financing or refinancing that it considers advantageous, it cannot be certain that such sources of financing will be available to the Company in the future, or, if available, that financing could be obtained on terms favorable to the Company.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

          The Company’s exposure to interest rate risk is primarily due to the additional debt it incurred to finance the IITRI and IPS acquisitions. The Mezzanine Note and Subordinated Note have fixed interest rates, and therefore present no risk of change to interest charges as a result of an increase in market interest rates. The balance drawn under the $25.0 million senior revolving credit facility and $1.8 million of the Company’s $26.8 million remaining balance on its senior term note, however, bear interest at variable rates tied to the Eurodollar rate. Such variable rates increase the risk that interest charges will increase materially if market interest rates increase. The Company has reduced, in part, the maximum total amount of variable interest rate risk by entering into an interest rate cap agreement which caps at 6% the first $25.0 million of principal borrowed under the term note effective until February 3, 2007. For a description of the arrangement, refer to “Discussion of Debt Structure” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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

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

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

	•		Repurchase obligations under the KSOP which may be significant commencing in 2004;
	•		Obligations related to the holders’ put rights associated with the Mezzanine Note warrants;
	•		Obligations related to the holder’s put rights associated with the Subordinated Note warrants;
	•		Obligations relating to its stock appreciation rights and phantom stock programs; and
	•		Obligations relating to deferred compensation programs for senior managers.

ITEM 4. CONTROLS AND PROCEDURES

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

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

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PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

          On September 16, 2002, IITRI, Alion’s predecessor entity, filed a lawsuit against Clyde Andrews and William Bewley in the U.S. District Court for the Eastern District of Virginia, which we refer to as the Court. Messrs. Andrews and Bewley were formerly the shareholders of AB Technologies, Inc. IITRI acquired substantially all of the assets of AB Technologies in February 2000.

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

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

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

          Through March 31, 2004, the Company recognized approximately $4.5 million in additional earn out obligations due Messrs. Andrews and Bewley for the fiscal year ended September 30, 2003 and for the six-month period ended March 31, 2004. Additionally, the Company recognized approximately $0.3 million for potential payments to employees who worked in the business units subject to this earn out. As of March 31, 2004, the Company had paid approximately $0.7 million to Messrs. Andrews and Bewley for earn outs and purchase price adjustments. The Company expects to pay Messrs. Andrews and Bewley approximately $3.5 million in the quarter ending June 30, 2004 and approximately $3.3 million in the quarter ending September 30, 2004.

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

          Alion’s complaint alleges that:

	•		Under contract to the U.S. Army, IITRI developed a mobile rescue device — an Emergency Personal Isolation and Containment (“EPIC®”) Pod — to enable rescuers to safely attend to and support victims of chemical or biological attacks;
	•		IITRI assembled a team of employees to conceive the device, including Messrs. Gauger, Stefanek and Petrovic, each of whom executed an agreement assigning to IITRI all intellectual property rights arising out of his employment. Messrs. Gauger, Stefanek and Petrovic also acknowledged receipt of the IITRI Code of Ethics prohibiting outside activities in conflict with IITRI’s interests;
	•		In December 1998, IITRI filed a provisional patent application for the device;

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	•		In August 1999, Messrs. Gauger, Stefanek and Petrovic and IITRI employee Robert Mullins jointly filed a patent application, which assigned the patent to IITRI and that related back to IITRI’s December 1998 provisional patent application. The patent was awarded to IITRI in November 2001;
	•		Messrs. Gauger, Stefanek and Petrovic began a process starting in March 1999, while they were still IITRI employees, to form companies that would compete with IITRI using IITRI’s trade secrets;
	•		Isovac Products, L.L.C., Inteledatics, Inc., James R. Gauger, George L. Stefanek and Joseph J. Petrovic, collectively the defendants, misappropriated IITRI’s trade secrets and filed a patent application on behalf of Isovac Products, L.L.C.;
	•		Mr. Petrovic defamed IITRI’s product in an interview with the New York Times for the defendants’ pecuniary gain and to cause harm to the reputation of IITRI’s products; and
	•		IITRI assigned to Alion its intellectual property rights in the EPIC Pod and its rights to claims against the defendants as part of Alion’s purchase of substantially all of IITRI’s assets.

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

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

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

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

          None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

          None.

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

          None.

ITEM 5. OTHER INFORMATION

          None.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)

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(b) Reports on Form 8-K:

          The Company filed a Report on Form 8-K on February 13, 2004 with respect to Item 5. Other Events and Required FD Disclosure and Item 7 Financial Statements, Pro Forma Financial Information and Exhibits announcing the acquisition of Identix Public Sector, Inc., dated February 13, 2004.

          The Company filed an amendment to its Report on Form 8-K on March 5, 2004 with respect to Item 2. Acquisition or Disposition of Assets, Item 5. Other Events and Required FD Disclosure and Item 7. Financial Statements, Pro Forma Financial Information and Exhibits announcing the acquisition of Identix Public Sector, Inc., dated February 13, 2004.

          The Company filed a Report on Form 8-K on March 8, 2004 with respect to Item 12. Results of Operations and Financial Condition, dated March 8, 2004.

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SIGNATURES

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

ALION SCIENCE AND TECHNOLOGY CORPORATION

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EXHIBIT INDEX

- 37 -

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