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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Alion Science and Technology Corporation

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

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

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

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

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

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

Documents Incorporated by Reference:

ALION SCIENCE AND TECHNOLOGY CORPORATION

FORM 10-K

TABLE OF CONTENTS

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PART I

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

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

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

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

Overview

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

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

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

Estimated Revenue by Fiscal Year*

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

*	Revenues and percentages based on management estimates.

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

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

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

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

	•	Homeland security: we provide integrated solutions and vulnerability analysis for protecting people and systems, and we provide critical infrastructure tools for decision support, risk assessment, information assurance, and physical security.
	•	Strategic planning and operational analysis: we assist the U.S. Army in its objective to become a more technologically sophisticated and versatile combat force by providing readiness studies that employ decision support tools to improve strategic planning and decision making.
	•	Military transformation: we identify and analyze issues and programs of major importance for the Office of the Secretary of Defense (OSD) and related U.S. military services transformation initiatives such as joint warfare experimentation and integrate command, control, communication and computer intelligence (C4I) initiatives.
	•	Logistics management: we provide support to the U.S. Army on a broad range of requirements including infrastructure assessment, reserve force mobilization, defense industrial base assessment, financial management, cost analysis, and base realignment.
	•	Readiness assessments and operational support: we deliver strategic planning and decision-making process improvements by providing technical assistance and decision support tools, such as Full Spectrum Analysis and Distributed Information System Collaboration Architecture (DISCATM).
	•	Distance learning services: we develop policy and technology solutions to permit training and education from remote locations. We develop the necessary technology, compile the information to be used in the courseware, and then translate this into an electronic or web-based advanced distant learning medium so that the student can interact with the courseware from a remote location.

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

	•	Wargaming, experimentation, scenario design and execution: we design and conduct strategic and operations analytic wargames to evaluate future operational concepts and force transformation initiatives, create and implement training scenarios for 2 dimensional and 3 dimensional simulation systems, support Joint Forces Command’s (JFCOM) Millennium Challenge, and we support Joint Conflict and Tactical Simulation (JCATS) scenarios.
	•	C4I integration: for the U.S. Department of Defense, we design and develop policies to enable standard automated interfaces between simulation and Command, Control, Communication and Computer Intelligence systems which support improved planning, training and military operations.
	•	Analysis and visualization: we develop terrain modeling and manage the Modeling and Simulation Information Analysis Center (MSIAC) for the U.S. Department of Defense (DoD).
	•	Phenomenological modeling: we develop phenomenological models for nuclear, chemical, biological and electromagnetic environments.
	•	Transport systems: we design and build railroad car simulators and complementary training programs for railway carriers to train their employees. Participation in our simulation training is designed to improve safety and to minimize fuel consumption for carriers. Our training tools range from training simulators based on desktop computers to full motion simulators for both electric and diesel-electric locomotives. We have delivered our training tools and services to domestic government and commercial customers and to customers in the U.K., Brazil, Turkey, India, Australia and South Africa.

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

	•	Enterprise architecture development and integration: we design, develop and implement enterprise information systems.
	•	Applications development: we develop web-based and stand-alone solutions, as well as decision support tools.
	•	Knowledge management: we deliver solutions for data warehousing/mining, decision support, and information analysis.
	•	Network design and secure network operations: we provide information assurance, business continuity and disaster planning, network planning, and call center modeling.
	•	Independent verification and validation: we implement modeling and simulation, test and evaluation, and database monitoring.

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

	•	Reliability, material and manufacturing engineering: we apply technology to enhance production, improve performance, reduce cost and extend life of complex engineered products.
	•	Sensor technology development: we develop, evaluate, adapt and integrate sensor technologies.
	•	Facilities engineering: we provide expertise in engineering, architecture and related disciplines (e.g., construction management, logistics, design oversight and inspection).
	•	Research and analysis center management: we manage numerous U.S. Department of Defense information and analysis centers such as the: Reliability Analysis Center (RAC), Advanced Materials and Processes Technology Information Analysis Center (AMPTIAC), Manufacturing Technology Information Analysis Center (MTIAC), Electronic Packaging and Interconnection Technology Center and DuPage Manufacturing Research Center.

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	•	Acoustic engineering: we test and evaluate various components for sound transmission, absorption and intensity.
	•	Aerospace coating production and application: we develop and apply coatings to protect government and commercial satellites.
	•	Innovative manufacturing technologies: we develop and integrate systems for low-volume productivity (e.g., laser cladding of parts), micro-machines and rapid manufacturing systems.

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

	•	Chemical and biological research: we provide research that examines the fundamentals necessary to improve defense strategy against chemical and biological weapons.
	•	Analytical and design methods: we provide analytical methods to enhance safe handling of chemical substances and design methods to convert harmful chemical and biological materials into harmless materials.
	•	Threat reduction: we provide technical expertise to branches of the U.S. military, the FBI, police departments, hospitals, fire departments, and other federal government and commercial customers, to reduce the threat of chemical-biological terrorism.
	•	Laboratory support: we provide support to U.S. Environmental Protection Agency laboratories in their pursuit of identifying and monitoring chemical contaminants in soil, air and water at specified Superfund sites.
	•	Explosive sciences: we provide unexploded ordnance services to the U.S. Army Corps of Engineers and to other departments of the U.S. military. Through our wholly-owned subsidiary, Human Factors Applications, Inc. (HFA), we develop and use technologies for detection, recovery and disposal of unexploded ordnance in the U.S. and abroad. We also perform decontamination and demolition of buildings and equipment contaminated with explosive materials.
	•	Ordnance management: we provide ordnance management services to the U.S. Navy, which includes the maintenance of, and accounting for, weapons inventories.

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

	•	Modeling and simulation: we provide services in the areas of computational fluid dynamics, structural response, materials behavior, and neutronics.
	•	Safety and risk performance analysis: we provide services in the areas of probabilistic safety assessments, accident consequence analysis, and source term dose assessment.
	•	Design and performance assessments: we provide services related to nuclear power facilities in the areas of control room habitability, power rate analysis, and license extension.
	•	Management systems and program services: we provide technical expertise in the areas of compliance (e.g., regulatory analysis, policy development, and audits), project management, and training.
	•	Regulatory compliance support services: we provide technical support in the areas of nuclear plant operational readiness reviews and conduct of operations.

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

	•	Frequency Assignment & Certification Engineering Tool (FACETTM). This software tool automates the assignment of radio frequencies, which we refer to as spectrum management, in a way that is designed to minimize interference between multiple users of the radio frequency spectrum.
	•	Advanced Cosite Analysis Tool (ACATTM). This software tool is designed to permit co-location of numerous antennas on towers, rooftops and other platforms by predicting interference between the various systems and informing the user how to minimize interference.
	•	Individual Isolation Pod (IIPTM). This transport pod is designed to isolate and transport individuals contaminated with biological or chemical agents. The transport pod is designed to enable first responders to administer emergency medical treatment.
	•	Spectrum Monitoring Automatic Reporting and Tracking System (SMARTTM). This system characterizes the frequency usage in a given geographic area, allowing the customer to remotely monitor the spectrum to identify unauthorized users and to look for gaps in the spectrum usage.
	•	Cave Dog: This product is a small, remote-controlled hemispherical, multi-spectral vision robot vehicle used for surveillance and reconnaissance.
	•	Real Time Location System (RTLS). This product is designed to enable customers to track thousands of users in a defined area, such as a seaport, a football stadium or an office building, using low cost antennas and badges.

Corporate History

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

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

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

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

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

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

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

	•	Alion’s and HFA’s organization and corporate standing, their authority to enter into the stock purchase agreement and the binding effect of the agreement on us;
	•	the accuracy, compliance with U.S. generally accepted accounting principles and consistency with past practice of the financial statements with respect to the portion of IITRI’s business transferred to Alion; and
	•	our obligation to repurchase any shares of our common stock distributed to ESOP participants.

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

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

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

	•	we will not take any steps without the ESOP trust’s consent to change our status as an S corporation;
	•	we will not enter into any transactions with any of our officers or directors without approval from our board of directors or compensation committee;
	•	we will enforce our obligations under the asset purchase agreement with IITRI and other related agreements;
	•	we will obtain the ESOP trust’s consent before effecting our first public offering of stock to be listed on any securities exchange;
	•	we will not take actions that would prevent the ESOP trust from acquiring any additional shares of our stock under the control share acquisition provisions of the Delaware General Corporation Law;
	•	we will repurchase any shares of common stock distributed to participants in the ESOP component of the KSOP, to the extent required by the ESOP, any ESOP related documents and applicable laws;
	•	we will maintain the KSOP and the ESOP trust so that they will remain in compliance with the qualification and tax exemption requirements under the Internal Revenue Code; and
	•	we will use our best efforts to ensure that the ESOP trust fully enjoys its right to elect a majority of our board of directors and to otherwise control Alion.

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

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

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

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

	•	rolling over their eligible retirement account balances into the ESOP component of the KSOP by making an individual one-time ESOP investment election available to new hires; and/or
	•	directing a portion of their pre-tax payroll income to be invested in the ESOP component of the KSOP.

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

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

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

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

Growth Strategy

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

	To build on our experience in wireless communications. We anticipate that U.S. Department of Defense budgets for the next few years will reflect an increased emphasis on communications and spectrum issues in which we have established expertise. For example, we expect to play a significant role for the U.S. Department of Defense in the development of Global Electromagnetic Spectrum Information (GEMSIS) as part of the Department of Defense’s move toward net-centric warfare. In addition, civilian agencies of the federal government are interested in the communications solutions we have developed for the U.S. Department of Defense. We also intend to try to expand our communications research base to include more foreign and commercial customers.
	To support the nation in homeland security. Alion has a long history of research and development in defense and destruction of chemical and biological agents. We have also developed a suite of software tools to support first responders in training to deal with potential release of chemical, biological, or nuclear material. We plan to expand our support to the Department of Homeland Security (DHS) and state and local governments in these areas.
	To expand our defense operations research. We will seek to provide new services to the U.S. Department of Defense. We intend to expand our military planning, operations, readiness assessment, and distance learning services to the Navy; historically, more of our services in the defense arena have been provided to the Army and Air Force. We also intend to use our technical capabilities to develop modeling and simulation systems for all branches of the U.S. armed forces.

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	To expand our information technology research. We intend to promote our specialized information technology expertise to a broader range of customers, including the civilian agencies of the federal government, primarily by applying technology research and solutions originally developed for military use.
	To develop new software tool and technical products. We will seek to capture some of our intellectual property in the form of stand-alone tools and products to increase revenue. We intend to develop these tools and products to better serve existing customers, and to offer them separately as stand-alone tools and products for new customers.
	To recruit and retain highly skilled employees. We will seek to recruit and retain engineers, scientists, and technical experts with the experience, skills and innovation necessary to design and implement solutions to the complex problems our customers face. We will also seek to attract and retain other motivated professionals who have the qualities necessary to assist us in implementing our future business strategy and meeting our future business goals. As an employee owned company, we believe we will be able to provide enhanced financial incentives to our employees, and that those incentives will be important recruitment and retention tools.
	To pursue strategic acquisitions. We intend to broaden our customer base and our capabilities in our core research fields by pursuing strategic acquisitions from companies with talent and technologies complementary to our current fields and to our future business goals in order to add new clients and expand our core competencies. During fiscal year 2004, Alion completed the following acquisitions:

	•	Integrated Technology Solutions Corporation (ITSC) — On October 31, 2003, Alion completed the acquisition of ITSC, a New Mexico corporation that had approximately 53 employees, the majority of whom were located in New Mexico. ITSC provides nuclear safety and analysis services to the U.S. Department of Energy (DOE) as well as to the commercial nuclear power industry.
	•	Identix Public Sector, Inc. (IPS) — On February 13, 2004, Alion completed the acquisition of IPS, a Virginia-based company that provides program and acquisition management support, integrated logistics support, and foreign military support primarily to U.S. Navy customers. IPS was a wholly-owned subsidiary of Identix Incorporated.

Market and Industry Background

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

	•	Increased Spending on National Defense. The terrorist attacks of September 11, 2001 and subsequent events have intensified the federal government’s commitment to strengthen our country’s military, intelligence, and homeland security capabilities. Department of Defense appropriations, excluding military construction and supplemental appropriations to pay for the ongoing efforts in Iraq and Afghanistan, were increased from $366 billion in federal fiscal year 2004 to $391 billion for federal fiscal year 2005 and grew at an average annual growth rate over the past five years of 5.9%. In addition, the federal fiscal year 2005 Homeland Security budget proposal totaled $47 billion, with $27 billion allocated to initiatives in the Department of Homeland Security, $8 billion allocated to the Department of Defense, and $12 billion allocated to other federal agencies.
	•	Increased interest in procurement and development. We expect that the U.S. Department of Defense budget for research and development, testing and evaluation (R,D,T&E), all of which fund our programs, will grow proportionately with overall defense spending.

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

	•	training and training transformation;
	•	modeling and simulation as basis for mission planning and preparation;
	•	the enhancement of defenses against biological, chemical and nuclear attacks;
	•	the use of information technology for national security; and
	•	an overall increase in spending for homeland defense.

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

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

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

	•	Cost-reimbursement contracts allow us to recover our direct labor and allocable indirect costs, plus a fee which may be fixed or variable depending on the contract arrangement. Allocable indirect costs refer to those costs related to operating our business that can be recovered under a contract.
	•	Time-and-material contracts allow us to recover our labor costs, based on negotiated, fixed hourly rates, as well as certain other costs.
	•	Under fixed-price contracts, customers pay us a fixed dollar amount to cover all direct and indirect costs, plus a fee. Under fixed-price contracts, we assume the risk of any cost overruns and receive the benefit of any cost savings.

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

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

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

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

	•	funded backlog, which refers to contracts that have been awarded to us and whose funding has been authorized by the customer, less revenue previously recognized under the same contracts, and
	•	unfunded backlog, which refers to the total estimated value of contracts awarded to us, but whose funding has not yet been authorized by the customer.

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