FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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)

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

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

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

Common Stock      3,224,027

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

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

See accompanying notes to consolidated financial statements.

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

See accompanying notes to consolidated financial statements.

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

See accompanying notes to consolidated financial statements.

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

See accompanying notes to consolidated financial statements.

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ALION SCIENCE AND TECHNOLOGY CORPORATION

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

1. Description and Formation of the Business

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

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

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

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

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

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

2. Basis of Presentation

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

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

3. Summary of Significant Accounting Policies

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

Fiscal, Quarter and Interim Periods

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

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

Reclassifications

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

Recently Issued Accounting Pronouncements

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

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

4. Earnings (Loss) Per Share

     Basic and diluted loss per share is computed by dividing net loss by the weighted average number of common shares outstanding. For the pro forma forty-week period ended July 4, 2003, pro forma loss per share has been computed as though the 2,575,408 shares of common stock sold by the Company to the employee stock ownership plan (ESOP) component of the Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan (KSOP) on December 20, 2002 to fund the Transaction described in Note 1, were outstanding for the entire period presented. Prior to the sale of shares of common stock to the ESOP, the Company’s capital structure consisted of 100 shares of common stock issued and outstanding. Accordingly, historical earnings per share information for periods prior to the Transaction has not been presented as it is not indicative of the Company’s ongoing capital structure.

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

5. Goodwill and Intangible Assets

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

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

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

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

6. Redeemable Common Stock Warrants

     In connection with the issuance of the Mezzanine Note, Subordinated Note, and the Deferred Compensation Agreement described in Note 8, the Company issued 524,229, 1,080,437, and 22,062, respectively, detachable redeemable common stock warrants (the Warrants) to the holders of those instruments. The Warrants have an exercise price of $10 per share and are exercisable until December 20, 2008 for the warrants associated with the Mezzanine Note and the Deferred Compensation Agreement and until December 20, 2010 for the warrants associated with the Subordinated Note. In addition, the Warrants enable the holders to sell the warrants back to the Company, at predetermined times, at the then current fair value of the common stock less the exercise price. Accordingly, the warrants are classified as debt instruments in accordance with Emerging Issues Task Force Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. The estimated fair value of the Warrants of approximately $10.3 million on the date of issuance was recorded as a discount to the face value of the notes issued and as a liability in the accompanying consolidated balance sheet. The estimated fair value of the Warrants was approximately $16.8 million as of June 30, 2004. Changes in the estimated fair value of the Warrants are recorded as interest expense in the accompanying consolidated statements of operations.

7. Shareholder’s Equity, Subject to Redemption

     The Company’s outstanding common stock is owned by the Alion Science and Technology Corporation Employee Ownership, Savings and Investment Trust (the Trust). The Company provides a put option to any participant or beneficiary which permits the participant or beneficiary to sell such common stock to the Company during certain periods, at the then current market value per share, which was $16.56 per share as of June 30, 2004. Accordingly, all of the Company’s equity is classified as subject to redemption in the accompanying consolidated balance sheets. The per share market value is determined based upon a valuation performed by an independent, third-party firm. The Company may allow the Trust to purchase shares of common stock tendered to the Company under the put option.

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

8. Long-term Debt

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

Senior Credit Agreement

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

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

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

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

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

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

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

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Mezzanine Note

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

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

Subordinated Note

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

Other Notes and Agreements

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

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

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

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

9. Segment Information and Customer Concentration

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

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

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

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

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

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

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

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

11. Commitments and Contingencies

     On September 16, 2002, IITRI filed a lawsuit against Clyde Andrews and William Bewley, former shareholders of AB Technologies, Inc., in the U.S. District Court for the Eastern District of Virginia. IITRI acquired substantially all of the assets of AB Technologies in February 2000. Messrs. Andrews and Bewley filed a lawsuit against IITRI for breach of the AB Technologies asset purchase agreement claiming at least $8.2 million in damages. The Andrews-Bewley lawsuit was removed to federal court and consolidated into IITRI’s lawsuit. The federal court stayed the litigation and ordered both parties to submit the dispute to the independent accounting firm of Grant Thornton for arbitration.

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

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

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

12. IITRI Acquisition and Pro Forma Information

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

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

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

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

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

13. Related Party Transaction

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

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14. Subsequent Event

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

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

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

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

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

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

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

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Critical Accounting Estimates and Policies

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

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

     Our critical accounting policies are set forth below:

Revenue Recognition, Cost Estimation and Payment

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

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

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

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

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

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

17

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

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

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

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

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

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

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

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

Goodwill and Identifiable Intangible Assets

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

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

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

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

Comparisons of Results of Operations

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

19

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

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

Results of Operations

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

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

•		For the three months ended June 30, 2004 there were 64 available workdays (based on a standard five-day work week of Monday through Friday and excluding designated holidays recognized by Alion) as compared to 78 for the sixteen-week period ended July 4, 2003.
•		Alion completed the acquisition of Integrated Technology Solutions Corporation (ITSC) on October 31, 2003. ITSC is a New Mexico corporation that had approximately 53 employees, the majority of whom were located in New Mexico. ITSC provided nuclear safety and analysis services to the U.S. Department of Energy (DOE) as well as to the commercial nuclear power industry.
•		Alion completed the acquisition of Identix Public Sector, Inc. (IPS) on February 13, 2004. IPS is based in Fairfax, Virginia and provides program and acquisition management, integrated logistics support, and foreign military support primarily to U.S. Navy customers. IPS was a wholly-owned subsidiary of Identix Incorporated.

20

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

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

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

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

21

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

     The net loss was due to the factors discussed above.

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

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

26

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

•		For the nine months ended June 30, 2004 there were 192 available workdays (based on a standard five-day work week of Monday through Friday and excluding designated holidays recognized by Alion) as compared to 194 for the forty-week period ended July 4, 2003.
•		Alion completed the acquisition of Integrated Technology Solutions Corporation (ITSC) on October 31, 2003. ITSC is a New Mexico corporation with approximately 53 employees, the majority of whom are located in New Mexico. ITSC provides nuclear safety and analysis services to the U.S. Department of Energy (DOE) as well as to the commercial nuclear power industry.
•		Alion completed the acquisition of Identix Public Sector, Inc. (IPS) on February 13, 2004. IPS is based in Fairfax, Virginia and provides program and acquisition management, integrated logistics support, and foreign military support primarily to U.S. Navy customers. IPS was a wholly-owned subsidiary of Identix Incorporated.

*

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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