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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

________________________

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED DECEMBER 20, 2002.

OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT 1934

FROM THE TRANSITION PERIOD FROM ______TO ______

COMMISSION FILE NUMBER 333–89756

________________________

ALION SCIENCE AND TECHNOLOGY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

(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 December 20, 2002, was:
Common Stock     2,575,508.127

ALION SCIENCE AND TECHNOLOGY CORPORATION
FORM 10-Q INDEX
FOR INTERIM PERIOD ENDED DECEMBER 20, 2002

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALION SCIENCE AND TECHNOLOGY CORPORATION
Consolidated Balance Sheets
As of September 30, 2002 and December 20, 2002
(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
Interim Period Ended December 21, 2001
and December 20, 2002
(In thousands)
(Unaudited)

See accompanying notes to consolidated financial statements.

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ALION SCIENCE AND TECHNOLOGY CORPORATION
Pro Forma Consolidated Statements of Operations
Interim Period Ended December 21, 2001
and December 20, 2002
(In thousands except share data)
(Unaudited)

See accompanying notes to consolidated financial statements.

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ALION SCIENCE AND TECHNOLOGY CORPORATION
Consolidated Statement of Shareholder’s Equity (Deficit)
Interim Period ended December 20, 2002
(In thousands, except share data)
(Unaudited)

See accompanying notes to consolidated financial statements.

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ALION SCIENCE AND TECHNOLOGY CORPORATION
Consolidated Statements of Cash Flows
For the Interim Periods Ended December 21, 2001 and December 20, 2002
(In thousands, except share information)

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ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS

Interim period ended December 20, 2002 and December 21, 2001 (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. 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 working for the advancement and knowledge and the beneficial application of science and engineering to meet the needs of society.

On December 20, 2002, Alion completed the acquisition of substantially all of the assets and certain of the liabilities of IITRI for aggregate proceeds of approximately $130 million (the Transaction). See Note 9.

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. 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 interim period ended December 20, 2002 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2003. For further information, refer to the consolidated financial statements and notes thereto included in the registration statement on Form S-1 (No. 333-89756) filed by the Company on December 9, 2002.

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

     Fiscal and Interim Periods

The Company’s fiscal year ends on September 30. The Company operates on a 13-period fiscal year consisting of three, four-week periods in its first interim period; three, four-week periods in its second interim period; four, four-week periods in its third interim period; and the balance of the fiscal year of approximately three, four-week periods in its fourth interim period. Accordingly, comparisons between interim periods will need to consider the differing length of the third interim period.

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     New Accounting Policies

As a result of the Transaction described in Note 1, the Company adopted the following accounting policies that were not applicable to IITRI due to its not-for-profit status:

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141 requires the purchase method of accounting to be used for all business combinations initiated after June 30, 2001 and specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. SFAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Goodwill and other intangible assets with an indefinite life will not be amortized, but rather tested for impairment annually or whenever an event occurs indicating that the asset may be impaired.

     Recently Issued Accounting Pronouncements

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs of Exit or Disposal Activities. SFAS No. 146 nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). This statement requires that an exit or disposal activity related cost be recognized when the liability is incurred instead of when an entity commits to an exit plan. The provisions of SFAS No. 146 are effective for financial transactions initiated after December 31, 2002. The Company does not believe SFAS 146 will have a material impact on its future earnings or financial position.

     Reclassifications

Certain reclassifications have been made to previously reported balances to conform with the current-period presentation.

4.     Earnings Per Share

Pro forma earnings per share have been computed as though the 2,575,408 shares sold by the Company to the employee stock ownership plan (ESOP) component of its Employee Ownership Savings and Investment Plan (KSOP) to fund the Transaction described in Note 1 were outstanding for the entire pro forma periods 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 has not been presented as it is not indicative of the Company’s prospective capital structure.

5.     Goodwill and Intangible Assets

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

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As a result of the Transaction described in Note 1, the Company recorded goodwill of approximately $58.7 million, which will be subject to the aforementioned annual impairment review. In addition, the Company recorded intangible assets of approximately $30.6 million, comprised primarily of purchased contracts. The intangible assets have an estimated useful life of three years and will be amortized using the straight-line method.

6.     Redeemable Common Stock Warrants

In connection with the issuance of the Mezzanine Note, Subordinated Note, and the Officer Agreement described in Note 7, the Company issued 524,229, 1,080,437, and 22,062, respectively, detachable redeemable common stock warrants (the Warrants) to the holders of the notes. The Warrants have an exercise price of $10 per share and are exercisable until the sixth anniversary of the issue date for the warrants associated with the Mezzanine Note and the Officer Note and until the eighth anniversary of the issuance date 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 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.

7.     Long-term Debt

On December 18, 2002, the Company entered into a Business Loan and Security Agreement with LaSalle Bank National Association, US Bank, National Cooperative Bank, Orix and BB&T Bank to refinance and replace debt previously held by IITRI (Senior Credit Facility). The Senior Credit Facility provides for a $25.0 million revolving credit facility and a $35.0 million term loan (Senior Term Note) which terminates on December 6, 2007. Borrowings under the Senior Credit Facility are collateralized by our eligible contract receivables, inventory, all of our stock in our subsidiaries and our property and equipment and bear interest at the London Interbank Offering Rate (LIBOR), or the lender’s prime rate, plus market-rate spreads that are determined based on a Company leverage ratio calculation. The LIBOR spreads may range from 2.75% to 3.50% and the prime rate spreads may range from 1.25% to 2.00%. At December 20, 2002, the Company had approximately $42.0 million in borrowings outstanding under the Senior Credit Facility, comprised of approximately $7.0 million drawn under the $25 million revolving credit facility and $35.0 million under the Senior Term Note.

The Senior Term Note has scheduled principal payments, payable in quarterly installments, in the following annual amounts:

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On December 20, 2002, the Company executed a six-year Mezzanine Note Securities Purchase Agreement with IITRI for approximately $20.3 million (Mezzanine Note) to be used as part of the consideration for the Transaction. The Mezzanine Note bears interest at a rate of 12 percent per year, payable quarterly in cash with the principal amount due in a single sum on the sixth anniversary of issuance. The Mezzanine Note is subordinate to the Senior Credit Facility.

On December 20, 2002, the Company executed an eight-year Seller Note Securities Purchase Agreement (Subordinated Note), with a face value of $39.9 million, to IITRI. The Subordinated Note served as part of the purchase price paid for the Transaction. The Subordinated Note bears simple interest at a rate of six percent per year in years one through six, payable quarterly by the issuance of non-interest-bearing notes maturing at the same time as the Subordinated Note and 16 percent per year payable quarterly in cash during the seventh and eighth years following closing of the Transaction. One-half of the principal amount outstanding under the Subordinated Note becomes due in 2009, while the other half becomes due in 2010. The Subordinated Note is subordinate to both the Senior Credit Facility and the Mezzanine Note.

On December 20, 2002, the Company entered into a Mezzanine Deferred Compensation Agreement with an officer for approximately $0.86 million (Deferred Compensation Agreement). The Deferred Compensation Agreement bears interest at a rate of 12 percent per year. In most circumstances, at the officer's election, interest is payable quarterly in cash or credited to the officer's account. The principal amount of deferred compensation plus accrued but unpaid interest on his account is payable in full thirty days after the sixth anniversary of the agreement or the date the holders of the Mezzanine Note have been paid in full. The Officer Agreement is subordinate to the Senior Credit Facility and ranks pari passu with the Mezzanine Note.

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.

8.     Segment Information and Customer Concentration

The Company operates as one segment, delivering a broad array of scientific and engineering expertise to research and develop technological solutions for problems relating to national defense, public health and safety under contracts with the 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.

Revenues from services provided to various agencies of the U.S. Government by the business acquired from IITRI represented $46.7 million or approximately 99%, and $42.9 million or approximately 98%, of revenues for the interim period ended December 20, 2002 and December 21, 2001, respectively. Contract receivables from agencies of the U.S. Government represented approximately $43.9 million, or 91%, of accounts receivable at December 20, 2002 and 96% at December 21, 2001.

In addition, during the interim period ended December 20, 2002, there were no sales by the business acquired from IITRI 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

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performed. Substantially all of the Company's assets were located within the United States for the interim period ended December 20, 2002.

9.     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 (the Transaction) for approximately $130 million. 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 7, to fund the Transaction. The acquisition was accounted for using the purchase method. The acquisition occurred on the last day of the Company’s interim period and accordingly, the accompanying consolidated income statements exclude the results of operations of the acquired company. The purchase price has been allocated to the acquired assets and assumed liabilities based on their estimated fair values at the date of acquisition. The purchase price allocation is preliminary and subject to change. The Company is currently completing its analysis of intangible assets acquired and estimated fair values of certain fixed assets acquired.

Prior to the Transaction, the Company’s activities had been organizational in nature. The consolidated balance sheet as of December 20, 2002 reflects the estimated fair values of the acquired assets and assumed liabilities, the sale of common stock to the ESOP, and the debt and warrants issued as described in Note 7.

The pro forma consolidated statements of operations for the interim period ended December 20, 2002 and December 21, 2001 have been prepared by giving effect to the following transactions as if those transactions had been consummated on October 1, 2002 and 2001, respectively:

	•		The incurrence of debt with detachable warrants to purchase common stock as described in Notes 6 and 7;
	•		The consummation of the Transaction, accounted for using the purchase method; and
	•		The purchase of common stock by the ESOP.

The pro forma consolidated statements of operations include 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.

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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 proceedings which may arise out of our operations (including our contracts with government agencies) and the attendant risks of fines, liabilities, penalties, suspension and/or debarment; material changes in laws or regulations applicable to the Company’s businesses; and other risk factors discussed in the Company’s registration statement on Form S-1 filed with the SEC on December 9, 2002.

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s view only as of February 3, 2003. 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 for the interim period ended December 20, 2002, included herein and in the Notes to the Consolidated Financial Statement of Selected Operations of IIT Research Institute, the business we acquired, included in the Company’s registration statement on Form S-1 (No. 333-89756).

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 interim 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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