Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended September 30, 2012

OR

For the transition period from             to             

Commission file number 333-89756

Alion Science and Technology Corporation

(Exact name of registrant as specified in its charter)

1750 Tysons Boulevard, Suite 1300, McLean, VA 22101

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (703) 918-4480

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

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

None

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

¨   Yes     x   No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

x   Yes     ¨   No

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x   Yes     ¨   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.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   ¨   Yes     x   No

The 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 was: None

The number of shares outstanding of Alion Science and Technology Corporation common stock as of December 17, 2012 was 6,731,404.

DOCUMENTS INCORPORATED BY REFERENCE:

None

Table of Contents

ALION SCIENCE AND TECHNOLOGY CORPORATION

FORM 10-K

TABLE OF CONTENTS

PART I

Table of Contents

PART I

Item 1. Business

Certain information included or incorporated by reference in this annual report on Form 10-K and in press releases, written statements or other documents filed with the United States (U.S.) Securities and Exchange Commission (SEC), and in our investor calls may not address historical fact and thus constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995 and other federal securities laws and involve certain known and unknown risks and uncertainties. All statements in this annual report on Form 10-K other than statements of historical fact are statements that could be deemed forward-looking statements, including projections of financial performance, assertions of strategies and objectives, comments on future development, statements concerning future economic performance and projections of our future performance under existing contracts as well as any assumptions underlying any of the foregoing. These forward-looking 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,” “forecast,” “projections,” “could,” “estimate,” “may,” “potential,” “should,” “would” and similar expressions.

Factors that could cause actual results to differ materially from anticipated results include, but are not limited to:

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s view only as of the date of filing of this annual report on Form 10-K. Any such forward-looking statements are not guarantees of future performance, and actual results, developments and business decisions may differ materially from those envisaged by such forward-looking statements. We undertake no obligation to update any of these factors or to publicly announce any change to our forward-looking statements in this annual report on Form 10-K, whether as a result of new information, future events, changes in expectations or otherwise.

Overview

Alion Science and Technology Corporation (Alion, the Company, we, our) is an employee-owned company. We provide scientific, engineering, program management and information technology solutions for problems relating to national defense, homeland security, and energy and the environment. We serve the U.S. Department of Defense, federal civilian agencies, commercial customers, and state and foreign governments.

1

Table of Contents

Our fiscal year 2012 revenue was $817 million, a 3.8% increase over our fiscal year 2011 revenue of $787 million. For the past three fiscal years, prime contracts accounted for more than 80% of our revenue. Both this year and last year, over 97% of our revenue came from federal government prime contracts and subcontracts; with 92% from Department of Defense contracts.

We provide professional engineering and program management services, and scientific expertise, in a range of specialized core business areas described below. Annual revenue by core business area for the past three fiscal years was:

Naval Architecture and Marine Engineering. We provide cradle-to-grave technical expertise for total ship and systems design. We are involved from the initial phase of mission analysis and feasibility trade-off studies through contract and detailed design. We offer production supervision, testing, delivery and life-cycle engineering support to commercial and naval markets both domestically and internationally.

Technology Design, Engineering, Integration and Assessment. We provide services and technologies to government and commercial customers to reduce cost, enhance performance and safety of complex systems and improve information flow across networks and organizations.

2

Table of Contents

Defense Operations. We perform military and policy analyses, assess logistics management readiness and operational support training, and analyze critical infrastructure risks for the Department of Defense.

Modeling and Simulation. We use our modeling and simulation expertise to examine event outcomes and identify technical failures and operational risks. We recommend solutions to mitigate risk and improve performance.

3

Table of Contents

4

Table of Contents

Corporate History

Alion was organized in October 2001 as a for-profit Delaware corporation to acquire substantially all the assets and liabilities of IITRI, a not-for-profit Illinois corporation. Alion was an S-corporation from its formation until March 2010 when the Company issued common stock warrants constituting a second class of stock and became a C-corporation. Alion is entirely owned by an employee stock ownership plan (ESOP). The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Trust (the ESOP Trust) owns all of Alion’s issued and outstanding common stock. In December 2002, some eligible IITRI employees directed funds from qualifying retirement account balances into Alion’s ESOP. State Street Bank and Trust Company, the ESOP Trustee, used those proceeds to purchase Alion common stock. The Company used the ESOP proceeds, together with funds from bank loans and other debt to complete the IITRI purchase.

The Alion ESOP

The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan, is a KSOP — a qualified retirement plan that includes an ESOP invested in Alion common stock and a non-ESOP component invested in mutual funds. The ESOP Trust owns all outstanding shares of our common stock. Eligible employees can purchase beneficial interests in our common stock by:

The ESOP Trust uses the money employees invest in the ESOP to purchase Alion common stock and allocates ESOP interests to employee accounts according to the Plan’s terms. We make retirement plan contributions to the ESOP component for all eligible employee participants. We also make matching contributions to the ESOP for eligible employees based on their pre-tax salary deferrals.

The ESOP Trust holds record title to all shares of Alion common stock allocated to ESOP accounts. Except in certain limited circumstances, the ESOP Trustee must vote those shares as directed by the ESOP committee. The ESOP committee consists of four members of Alion’s management team and three other Alion employees; it is responsible for financial management and administration of the ESOP.

By law, Alion is required to value the common stock held in the ESOP component at least once a year. Alion currently has the ESOP Trustee value the common stock in the ESOP twice a year — as of March 31 and September 30. The terms of the KSOP permit the ESOP Trust to use employee-directed funds to purchase shares of Alion common stock at the lesser of the then-current or the immediate prior fair market value of a share of Alion common stock. All other ESOP transactions occur at the current fair market value of a share of Alion common stock. Semi-annual valuations permit employees to invest in Alion common stock twice a year and permit former employees and beneficiaries to request ESOP distributions at mid-year and year end.

Business Strategy

This year we were able to deliver on our plan to grow organically. We plan to grow further by retaining our existing customers, increasing our work for them and seeking out new customers to use our services. We expect to do this through targeted business development efforts and by capitalizing on our skilled work force and our solutions competencies. We have several key strategies.

Broaden existing core competencies. We plan to expand our expertise to keep pace with technological developments. We hire skilled employees, engage in business development initiatives and invest in projects to expand our employees’ skill sets. We work to extend our core capabilities to new markets and new customers and focus on enhancing our ability to serve existing customers. We increase our employees’ technological and program management skills through training, internally funded projects and mentoring. Our Alion University offers programs in engineering, program management, and finance and administration to maintain and enhance our employees’ skills and advance Alion’s reputation in the commercial technology solutions markets.

5

Table of Contents

Expand market share by leveraging experience and reputation. We perform a variety of services for a broad base of more than 300 customers, including Cabinet-level government departments and agencies, and state and foreign governments. We plan to use our advanced technological capabilities and our customer relationships to expand our market presence by offering a broader range of services to our existing customers and by delivering our solutions to new customers. We intend to use our customer relationships and our technology expertise to strategically expand our Department of Homeland Security (DHS) customer base. For over five years, Washington Technology, Defense News and Military Training Technology have continued to rank us among the top professional services government contractors. And for the past two years, Military Times EDGE has voted us a “Best for Vets Employer.” Washington Business Journal continues to rank Alion in its top twenty technology employers and government contractors.

Improve financial performance and increase revenue. Despite federal budget uncertainties and expected lower Department of Defense spending levels, we remain focused on growing our business and striving to achieve operating efficiencies. We increased topline revenue 3.8% this year and reduced operating expenses (including general and administrative expense) by 3.0% compared to last year. Over the past five years our revenues grew organically at a 2% compound annual rate from $737.6 million in 2007 to $817.2 million in 2012. We intend to strengthen our financial performance by continuing to grow organically and controlling operating costs. We believe we can achieve an even more competitive cost structure than we currently have which will enhance our ability to win business and improve our operating results. We believe Alion’s size and expertise position us to continue to bid on larger government programs and broaden our customer base.

Market and Industry Background

In January 2012, President Obama and Secretary of Defense Panetta jointly outlined a new national defense strategy driven by three realities: the winding down of a decade of war in Iraq and Afghanistan, a fiscal crisis demanding hundreds of billions of dollars in Pentagon budget cuts, and a rising threat from China and Iran. This new strategy establishes cyberspace defense and offense; Special Operations forces; and intelligence, surveillance and reconnaissance (ISR) as priorities. Cyberwarfare and unmanned drones will continue to grow in priority, as will countering rogue nations’ efforts to interfere with the United States’ ability to project military force into an operational area and sustain power in the face of armed opposition in areas like the South China Sea and the Straits of Hormuz. This new federal strategy focuses on addressing the need to retain and sustain military superiority over an adversary in cyberspace as well as on land and sea and in the air and space.

Alion’s market development strategy is focused upon the Department of Defense’s (DoD) highest priorities that seek to make RDT&E investments to sustain and in some limited areas to expand national security capability by 2020 and beyond. A cornerstone of this market strategy is mindful of pending Defense Budget reductions to include sequestration that are most likely to impact major end-item equipment and platform programs and operation and maintenance (O&M) costs – minor Alion market areas. Accordingly, Alion’s marketing strategy is formulated in recognition of DoD’s increasing dependence upon information technology for business applications, wireless command and control, ISR platforms and remote autonomous sensors. Lastly, Alion’s market strategy seeks to expand the current Alion chemical, biological, nuclear and radiation market service offerings.

In the Defense Budget Priorities and Choices, Jan 2012, Defense Secretary Panetta offered a first glimpse into coming cuts coming and said that he would be requesting $525 billion for fiscal year 2013 base budget—the first budget to be implemented since last year’s Budget Control Act mandated nearly $500 billion to be cut from the defense spending over the coming 10 years. It’s $6 billion less than 2012’s requested base budget and part of the $259 billion in cuts to take place in the next five years.” Secretary Panetta acknowledged the U.S. is facing technological as well as conventional threats. He said, “We have to be prepared to be able to leap ahead technologically in order to be able to confront those kinds of adversaries. We have to retain a decisive technological edge. . . [T]o protect vital investments in the future, we’ve protected science and technology programs.”

Alion’s marketing development strategy further recognizes the opportunity associated with DoD’s expanding presence of more-highly capable smart phones, tablets, wireless networks and other sophisticated communication technologies as a means to rapidly enhance the way warfighters access, use and exchange information. This is challenging the DOD to place greater emphasis on situational awareness and enterprise IT initiatives to develop and improve command and control technologies to make warfighters more effective. The Defense Information Systems Agency (DISA) is leading the effort to optimize DOD’s fragmented IT structure and services into a single joint platform that can be leveraged for all DOD missions. The goal is to reduce total cost of ownership, reduce network vulnerability and enable more efficient information access “from any authorized IT device from anywhere in the world.”

In DISA’s 2012-3 Strategic Plan, Director LTG Ronnie Hawkins stated that DISA seeks “to provide modern armed forces with reliable information and communications networks and assured access to the cyber domain.” However, as communication options multiply, so do the problems of getting disparate technologies to work together efficiently and securely. “Communication integration is now one of the top challenges facing military technology leaders,” said Chris Herndon, chief technologist at MorganFranklin and former director of the tactical technologies development lab at the Naval Research Laboratory.

6

Table of Contents

It is becoming increasingly important and much more difficult for the DOD to address and balance the dilemma of limited investment resources, demands from increasing threats, and the need for expanded capabilities while ensuring the DOD sustains a decisive advantage. Alion’s long-standing core business competencies are well aligned with the DOD’s current and future needs. Our expertise in Naval Architecture and Marine Engineering; System Analysis, Design and Engineering; and Modeling, Simulation and Training continues to be in high-demand, sought after by DOD customers at all levels.

The Budget Control Act established a joint bipartisan committee of Congress responsible to recommend various significant cuts in federal government spending. The joint committee did not meet the November 23, 2011 deadline for proposing recommended legislation. Due to that failure, unless Congress passes and the President signs during its current lame-duck session legislation amending the Budget Control Act, additional automatic spending cuts (referred to as sequestration) totaling $1.2 trillion in DOD and discretionary spending over a 10 year period will be triggered. Alion is evaluating the potential effect sequestration could have on our business and our industry, which is now unclear. However, if sequestration were to occur, federal spending cuts on the magnitude contemplated by the Budget Control Act would materially and adversely affect our future revenue.

We are primarily a government contractor.

For the past three years, over 97% of our sales were from federal government contracts; more than 83% of our revenue comes from our prime contracts. The Department of Defense is our largest customer. We expect most of our revenue will continue to come from federal government contracts on which we work as a prime contractor or subcontractor. As a prime contractor, we have direct contact with our government customer. As a subcontractor, we work for a prime contractor, which serves as the point of contact with the government agency customer.

Our federal government contracts are normally multi-year contracts funded on an annual basis based on congressional budget authorizations and appropriations. Each year Congress appropriates funds for authorized programs for the coming government fiscal year. Budget delays and uncertainties have continued to push the approval process later into the fiscal year. The annual congressional appropriations process means a contract is usually only partially funded at the outset of a major program. Normally a procuring agency commits additional money to a contract only as Congress makes appropriations in future fiscal years. The government can modify or discontinue any contract at its discretion or due to contractor default. The government can terminate or modify a contract for any of a variety of reasons, including funding constraints, changing government priorities or changes in program requirements. If the government terminates one of our contracts at its discretion, it typically pays us for all the services we performed and costs we incurred prior to termination, our termination-related costs, and a negotiated contract fee.

Contract Types. We have a diverse contract base including many task order and multiple-award contract vehicles (ID/IQ—indefinite delivery/indefinite quantity type contracts). Many customers utilize our ID/IQ contracts to hire us. Four of our six largest contracts are ID/IQ delivery order contracts; they accounted for 47% of this year’s revenues. Our largest individual contract accounted for 10% of our revenues. We had a portfolio of over 400 individual active contracts and task orders as of September 2012.

We have three contract pricing structure types: cost-reimbursement, fixed-price and time-and-material. Cost-reimbursement contracts allow us to recover expenses for direct labor and materials, a share of indirect expenses, and a fixed or variable fee depending on contract terms. Government contract rules permit us to recover certain, though not all, of our operating expenses (indirect costs). Fixed-price contract customers pay a stated amount intended to cover all direct and indirect costs, and profit. We assume the risk of any cost overruns and receive the benefit of any cost savings on fixed price contracts. Time-and-material contracts have fixed hourly billing rates designed to cover our labor costs, indirect expenses and profit, with cost reimbursable provisions for materials and other direct costs. We have traditional closed-end contracts and multiple award contracts which require sustained post-award effort to realize revenue. The following table summarizes our revenue by contract type for the years ended September 30, 2012, 2011, and 2010.

7

Table of Contents

We try to reduce our financial and performance risks at each stage in the contracting process. However, sometimes we begin providing services before a U.S. government agency has actually signed or funded a contract or task order. We are at risk for costs we incur before a new contract is executed or an existing contract is modified. The practice is customary in our industry, particularly where a company has oral notification of a contract award, but has not received required contract documents. We designed our internal procedures to provide services “at risk” only when we believe funding is highly probable and delays are administrative or technical in nature. In most cases, we get paid for all our costs when a contract is ultimately executed or modified. However, we cannot be certain, when we work at risk, that we will receive an executed contract or that we will be paid for all our costs. As of September 30, 2012, we had $19 million in contract costs at risk; nearly 40% of that amount represents award fees we believe we have earned where we had yet to receive permission to bill our customers.

We compete for key contracts from various U.S. government agencies. Our business development and technical personnel target contract opportunities and analyze each customer’s priorities and overall market dynamics. Depending upon whether a targeted contract is a renewal or a new opportunity, it can take as little as three months and up to three years to develop and execute our strategy before a customer ultimately issues a contract. When we decide to pursue a potential contract, we mobilize a core group of employees with the requisite expertise to lead our bidding and proposal preparation efforts. We supplement our internal capabilities with a network of consultants and other industry experts as necessary. To enhance our prospects of winning a contract, we team with other contractors, frequently our competitors, who have complementary technical strengths.

When we win a contract or task order, we assign a project manager and a task leader to ensure we timely deliver high-quality services. Program managers regularly interface with customers to evaluate Alion’s performance and customer satisfaction levels. Managers use our financial management and information systems to compare costs to funding ceilings and measure performance and profitability.

Government Oversight. Federal government auditors and technical specialists regularly review our administrative procedures and our cost accounting policies and practices. Costs on flexibly-priced federal government contracts are subject to Defense Contract Audit Agency (DCAA) and other audits and negotiated adjustments. An audit may reveal that some costs charged to a government contract are not allowable, either in whole or in part. In these circumstances, we must repay the federal government any money it paid us for unallowable costs, plus interest and possible penalties. The government considers Alion a major contractor and maintains an onsite audit office. DCAA is currently auditing our 2006 and 2007 claimed indirect costs. We are negotiating our 2005 indirect rates and have settled our rates through 2004. We timely submitted our indirect cost proposals for all open fiscal years and expect to submit this year’s incurred cost proposal next March as required. We have recorded revenue on federal government contracts in amounts we expect to realize.

Backlog. Contract backlog represents our estimate, as of a given date, of the remaining future revenue we expect from existing contracts. Funded backlog is the value of executed contract funding less previously recognized revenue. Unfunded backlog is the estimated value of additional funding not yet authorized by customers on our existing contracts. On September 30, 2012, we had $2.4 billion in backlog on existing contracts and executed delivery orders of which $480 million was funded.

The U.S. government operates under annual appropriations; departments and agencies typically fund contracts on an incremental basis. Thus, only a portion of total contract backlog is “funded.” Funded backlog varies based on procurement and funding cycles and other factors beyond our control. Future funding from executing new contracts and extending or renewing existing contracts increases our backlog; completed contracts, early terminations, and reductions in estimated future revenue on existing contracts reduce backlog. Estimates of future revenue from contract backlog are by their nature inexact. Timing and receipt of future revenue are subject to various contingencies, many of which are outside our control. Accordingly, year over year comparisons are not necessarily indicative of future revenue trends. The table below shows the value of our contract backlog as of September 30, 2012, 2011 and 2010.

8

Table of Contents

Corporate Culture, Employees and Recruiting

We strive to create a culture that promotes performance excellence; respects colleagues’ ideas and judgments; and recognizes the value of our professional staff’s unique skills and capabilities. We seek to attract highly qualified and ambitious employees. We strive to establish an environment in which all employees can make their best personal contribution and have the satisfaction of being part of a unique team. We believe we have a track record of successfully attracting and retaining highly skilled employees because of the quality of our work environment, the professional challenges of our assignments, and the financial and career advancement opportunities we offer.

At September 30, 2012, we had approximately 2,882 employees, and approximately 2,684 full-time employees. Approximately 28% of our employees have Ph.D.s or masters degrees, and approximately 80% of our employees have college degrees. More than 32% of our employees have Top Secret or higher level security clearances. We believe we have a good relationship with our employees. None of our employees is covered by a collective bargaining agreement.

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

Our Customers

We provide scientific, research and development, technical expertise, and operational support to a diverse group of U.S. government customers. We also serve commercial, state, local and international government customers. As of September 30, 2012, we had 327 distinct customers, including U.S. government departments and agencies, state, and foreign governments. We have almost 400 Department of Defense contracts and delivery orders with the U.S. Navy, Army and Air Force; the Defense Information Systems Agency (DISA); the Defense Advanced Research Projects Agency (DARPA) and others representing approximately 91.6% of our 2012 revenue. Other federal civilian agencies and departments accounted for 5.7% of our revenue, including the National Institute of Environmental Health Sciences, the U.S. Department of Energy and the EPA. Commercial, state and local governments and international customers accounted for the remaining 2.7% of this year’s revenue. The table below shows revenue by customer category for our past three fiscal years.

Competition

The U.S. government engineering and technology services industries consist of a large number of enterprises ranging from small, niche-oriented companies to multi-billion dollar corporations that serve many U.S. government customers. Corporations frequently form teams to pursue contract opportunities because large contracting initiatives are highly competitive and government customers have diverse requirements. Prime contractors leading large proposal efforts typically select team members based on particular capabilities and experience relevant to each opportunity. Companies that compete on one opportunity may be team members on another opportunity.

9

Table of Contents

We frequently compete against well-known firms in the industry as a prime contractor. Our competitors include Booz Allen Hamilton, BAE, CACI International Inc., Science Applications International Corporation, Engility, Computer Sciences Corporation, ITT, TASC, QinetiQ, ManTech International, URS, CGI-Stanley and the services divisions of Lockheed Martin, General Dynamics and Northrop Grumman.

We also compete at the task order level, where knowledge of the customer, its procurement requirements and its environment is often the key to winning business. We have been successful in ensuring our presence on numerous contracts and GSA Schedules, and in competing for tasks under those contracts. The variety of contract vehicles at our disposal, as a prime contractor or subcontractor, allows us to market our services to any U.S. government agency. We have experience providing services to a diverse array of U.S. government departments and agencies. We have first-hand knowledge of our customers and their goals, problems and challenges. Most government contracts we seek are competitive awards. We believe our customers typically consider the following key factors in awarding contracts: technical capabilities and approach; personnel quality and management capabilities; previous successful contract performance; and price.

In our experience, price and technical capabilities are a customer’s two most important considerations in contracts for complex technological programs. We believe our customer knowledge, our government contracting and technical capabilities, and our pricing policies enable us to compete effectively.

Change in Tax Status

From inception until March 22, 2010, Alion was an S-corporation and was not subject to federal or most state income taxes. All our subsidiaries were qualified S-corporation subsidiaries or disregarded entities. An S-corporation is a pass-through entity that can only have a single class of stock; no more than 100 shareholders; and only certain kinds of shareholders, such as individuals, trusts and certain tax-exempt organizations like ESOPs. Alion’s income and losses were allocated to the ESOP Trust, its tax-exempt shareholder.

On March 22, 2010, we issued deep-in-the-money warrants deemed to constitute a second class of stock. Once we had two classes of stock, we no longer qualified as an S-corporation and automatically became a C-corporation. Some of our subsidiaries are also subject to separate state income tax and reporting requirements. We are also subject to franchise and other business taxes unaffected by our change in federal tax status.

The Internal Revenue Code permits the IRS to impose significant penalties on a subchapter S employer that maintains an ESOP if the ESOP allocates stock to certain “disqualified persons” above statutory limits or if disqualified persons as a group own 50% or more of a company’s stock. For this purpose, a “disqualified person” is typically someone who owns 10% or more of the subchapter S employer’s stock (including deemed ownership through warrants, stock appreciation rights, phantom stock, and similar rights). The KSOP and our stock appreciation rights plan have provisions designed to prohibit allocations that violate these limits. Apart from the warrants related to the IIT subordinated note that formerly represented approximately 24% of our common stock, no one person ever held an ownership interest representing more than 5% of Alion while we were an S corporation. See Note 13 – Redeemable Common Stock Warrants in our audited financial statements elsewhere in this report.

Business Development and Promotional Activities

We promote our contract research services by meeting face-to-face with current and potential customers, obtaining new work from satisfied customers, and responding to requests for proposals (RFPs) and international tenders. We use our knowledge of and experience with U.S. government procurement procedures, and our relationships with government personnel, to try to maximize our ability to respond timely to RFPs and customer requests. We bid on contracts in our core business areas and related areas where we believe we have a good chance of winning. When we bid on a potential contract, we draw on our core business area expertise to display the technical skills we can bring to a particular contract.

Our business developers work face-to-face with customers, are experienced in marketing to government customers, know the services and products they represent, and understand each particular customer’s organization, mission and culture. These professionals possess a working knowledge of rules governing the marketing limitations that are unique to the government arena. They understand government funding systems, conflict of interest restrictions, procurement integrity directives, and the procedural requirements designed to establish a level competitive playing field to ensure appropriate use of public funds.

Our technical staff is an integral part of our promotional efforts. The customer relationships they develop through their work often lead to additional business and new research opportunities. We hold weekly company-wide business development meetings to review proposal opportunities and determine strategy in pursuing these opportunities. We also use independent consultants for promoting business, developing proposal strategies and preparing proposals as necessary.

10

Table of Contents

We focus most of our substantial research and development activities on customer-funded projects and internally-developed capital assets. We believe actively fostering an environment of innovation is critical to our ability to grow our business, allowing us to proactively address issues of national concern in public health, safety and national defense.

Resources

Most of our work relies on computer and laboratory equipment and other supplies readily available from multiple vendors. Disruption in availability from any particular vendor is not likely to materially affect our ability to perform our contracts. Some of our specialized laboratory work depends on special materials and equipment whose unavailability could adversely affect experimental laboratory tasks. However, we believe these kinds of delays or disruptions are not likely to materially affect our overall operations or financial condition.

Patents and Proprietary Information

As a normal course of business, Alion performs research and development, and engineering activities in support of our customers. Typically these services do not depend on patent protection. In accordance with applicable law, our U.S. government contracts often provide government agencies certain license rights to our inventions and copyright works. Government agencies, and other contractors including our competitors, can obtain the right to utilize our inventions. Similarly, our U.S. government contracts often license to us patents and copyright works owned by third parties. We maintain an active program to track and protect our intellectual property. We routinely enter into intellectual property assignment agreements with our employees to protect our rights to any patents or technologies they develop while employed by Alion. Costs for internal research and development, patents and intellectual property activities are not material to the Company’s financial statements.

Seasonality

Although our business is not seasonal, it does fluctuate with the number of working days in each quarter. The first and fourth quarters each year generally have fewer working days for our employees to generate revenue. In the weeks before the federal government’s September fiscal year end, it is not uncommon for government agencies to award additional tasks or complete contract actions to avoid losing unexpended fiscal year funds.

Foreign Operations

In each of the past three fiscal years, nearly all our revenue came from contracts with U.S.-based customers. We treat revenue from U.S. government customers as United States revenue regardless of where we perform our services.

Company Information Available on the Internet

Our internet address is www.alionscience.com. Information on the Company’s website is not incorporated by reference into this report.

Environmental Matters

We are subject to federal, state, local and foreign laws and regulations relating to, among other things, emissions and discharges into the environment, handling and disposal of regulated substances, and contamination by regulated substances and wastes. Some of our operations may require environmental permits and/or controls to prevent or reduce air and water pollution. Issuing authorities can renew, modify, or revoke these permits.

Operating and maintenance costs associated with environmental compliance and preventing contamination at our facilities are a normal, recurring part of our operations. These costs have not been material in the past and are not material to our total operating costs or cash flows. Such costs are usually allowable under government contracts. Based on information presently available to us and on current U.S. government environmental policies relating to allowable costs, all of which are subject to change, we do not expect environmental compliance to materially affect us. We also believe our facilities’ environmental compliance costs will continue to be allowable.

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

11

Table of Contents

Item 1A. Risk Factors

Risks Related to Our Debt Structure

We have incurred a significant amount of debt; our debt load may limit our financial and operational flexibility which could prevent us from fulfilling our obligations under our debt agreements.

We have managed significant amounts of debt since December 2002. However, we continue to face challenges in functioning as a highly leveraged company in volatile and unfavorable credit markets. We borrowed money to acquire the IITRI assets in 2002. We refinanced that debt in 2004. We incurred substantial additional debt partly to fund acquisitions in 2005 and 2006. In 2007, we refinanced and restructured some of our debt by issuing $250 million in senior unsecured notes (Unsecured Notes). In 2010, we re-financed outstanding senior bank debt and subordinated debt by issuing $310 million in senior secured notes (Secured Notes). Secured Note principal will continue to increase over time through November 2014 as we issue notes for paid-in-kind (PIK) interest. As of September 2012, we owe lenders almost $589 million: approximately $326 million in Secured Note principal and accrued PIK interest; $245 million in Unsecured Note principal; and almost $18 million in accrued interest.

Our substantial debt has and could continue to:

Despite our current debt levels, we and our subsidiaries may still be able to incur more debt. This could further aggravate risks associated with our substantial leverage.

We have the ability to incur additional debt, subject to limitations imposed by covenants in our revolving credit facility, the indenture governing the Unsecured Notes, (Unsecured Note Indenture) and the indenture governing the Secured Notes (Secured Note Indenture). Secured Note PIK interest will increase our debt by the amount of PIK notes we issue. The Unsecured Note Indenture, the current revolving credit facility and the Secured Note Indenture do not completely prohibit us from incurring additional debt. The more we borrow, the more we, and in turn our security holders, become exposed to the risks described under “We have incurred a significant amount of debt and our debt load may limit our financial and operational flexibility which could prevent us from fulfilling our obligations under our debt agreements.” See Note 11 – Long-Term Debt in the Notes to the Audited Financial Statements, and Management’s Discussion and Analysis of Financial Condition and Results of Operations – Discussion of Debt Structure for additional information.

Our Unsecured Note Indenture, revolving credit facility and the Secured Note Indenture restrict our operations.

Our Unsecured Note Indenture, revolving credit facility, and the Secured Note Indenture contain, and our future debt agreements may contain, covenants that may restrict our ability to engage in activities that may be in our long-term best interest, including financing future operations or capital needs or engaging in other business activities. Our Unsecured Note Indenture, revolving credit facility and the Secured Note Indenture restrict, among other things, our ability and the ability of our subsidiaries to:

12

Table of Contents

Our revolving credit facility requires us, and future debt agreements may require us, to maintain specified financial levels relating to, among other things, our minimum trailing twelve-month EBITDA. Future debt agreements may also impose other minimum financial performance requirements including, but not limited to, fixed charge coverage and net worth tests. Events beyond our control can affect our ability to meet these financial performance requirements; we cannot guarantee that we will meet these tests.

Default under the revolving credit facility, the Unsecured Note Indenture or the Secured Note Indenture could allow lenders to declare all amounts outstanding under the revolving credit facility, the Secured Notes and the Unsecured Notes to be immediately due and payable. We have pledged substantially all of our assets to secure our revolving credit facility and secured note debt. If credit facility lenders were to declare the revolving credit facility balance due, they could proceed against those assets. Any event of default could have a material adverse effect on our business, financial condition and operating results if creditors were to exercise their rights.

From time to time we may require consents or waivers from our lenders to permit actions prohibited by the revolving credit facility, the Unsecured Note Indenture or the Secured Note Indenture. If, in the future, lenders refuse to waive restrictive covenants and/or financial levels under the revolving credit facility, the Unsecured Note Indenture and/or the Secured Note Indenture, we could be in default on the revolving credit facility, the Unsecured Note Indenture and/or the Secured Note Indenture. We could be prohibited from undertaking actions necessary or desirable to maintain or expand our business. There is no guarantee we will be able to obtain additional consents or waivers from our lenders.

We may not be able to obtain financing in the future, and the terms of any future financings may limit our ability to manage our business. Difficulties in obtaining financing on favorable terms would have a negative effect on our ability to execute our business strategy.

We will need to seek additional capital in the future to refinance or replace existing long-term debt. We may also need to seek additional capital in the future to meet current or future business plans, meet working capital needs or for other reasons. Based on current market conditions, the availability of financing is, and may continue to be, limited. There can be no assurance that we will be able to obtain future financings on acceptable terms, if at all. The secured notes, the revolving credit facility and the unsecured notes mature between August 2014 and February 2015; this could further limit our ability to obtain additional financing on acceptable terms, if at all.

Moody’s lowered our corporate family credit rating from Caa1 to Caa2 in September 2012. This downgrade or further downgrades could increase our cost of capital, or limit any attempt to obtain additional financing in the future. An increase in our cost of capital would adversely affect our results of operations and our financial position.

If we are unable to obtain alternative or additional financing arrangements in the future, or if we cannot obtain financing on acceptable terms, we may not be able to execute our business strategies. Moreover, the terms of any such additional financing may restrict our financial flexibility, including the debt we may incur in the future, or may restrict our ability to manage our business as we had intended.

13

Table of Contents

If we breach our financial covenants, we could have to amend our revolving credit facility financial covenants which could materially affect our ability to finance our future operations, meet our capital needs or satisfy obligations to repurchase our common stock.

Our credit arrangements, including our unsecured and secured note indentures and our revolving credit facility include a number of covenants. We expect to be able to comply with our indenture covenants and our credit facility financial covenants for at least the next twenty-one months. If we were unable to meet financial covenants in our revolving credit facility in the future, we might need to amend the revolving credit facility on less favorable terms. If we were to default under any of the revolving credit facility covenants, we could pursue an amendment or waiver with our existing lenders, but there can be no assurance that lenders would grant an amendment or waiver. In light of current credit market conditions, any such amendment or waiver might be on terms, including additional fees, increased interest rates and other more stringent terms and conditions materially disadvantageous to us. If we were unable to meet these financial covenants in the future and unable to obtain future covenant relief or an appropriate waiver, we could be in default under the revolving credit facility. This could cause all amounts borrowed under it and all underlying letters of credit to become immediately due and payable, expose our assets to seizure, cause a potential cross-default under our indentures and possibly require us to invoke insolvency proceedings including, but not limited to, a voluntary case under the U.S. Bankruptcy Code. We may find it more difficult to obtain waivers or amendments to covenants in our indentures than our revolving credit facility because the process to obtain such a waiver or amendment is complicated and would in most cases involve the consent of the relevant portion of the affected class of our note holders.

Risks Related to Our Business and Operations

We expect to experience net losses in at least our next four years of operation.

We have had a net loss every year since our inception in late 2002. We expect to incur a net loss in at least our next four years of operation, fiscal years 2013 through 2016. Interest expense on existing debt, amortization of purchased contracts and future deferred income tax expense are among the most significant factors contributing to our estimated future net losses. The size of future losses and achieving profitability depend on achieving significant revenue growth and controlling expenses. We may not become profitable if revenue grows more slowly than we anticipate, or if operating expenses exceed our expectations. Even if we become profitable, we may not be able to sustain our profitability.

Our ability to meet our financial and other future obligations depends on our future operating results. We cannot be sure we will be able to meet these obligations as they come due.

Our ability to pay our debt, to comply with financial covenants, and to fund working capital and planned capital expenditures depends on our ability to generate cash flow in the future. We cannot be certain our business strategy will succeed or that we will achieve our anticipated financial results. Our financial and operational performance depends upon a number of factors, many of which are beyond our control. Risk factors include:

14

Table of Contents

These factors will also affect our ability to meet future ESOP re-purchase obligations. In August 2014, we must re-pay any outstanding revolving credit facility balance. We are required to pay all outstanding principal and accrued interest on our Secured Notes on November 1, 2014. Three months later on February 1, 2015, we are required to pay all outstanding principal and accrued interest on our Unsecured Notes.

During 2011, the federal government was unable to reach agreement on budget reduction measures required by the Budget Control Act of 2011 (Budget Act) passed by Congress. During the recent presidential election cycle, much was debated about sequestration, and unless Congress and the Administration take further action during the current lame-duck session of Congress, the Budget Act will trigger automatic reductions in both defense and discretionary spending in January 2013. If sequestration were to occur, automatic across-the-board cuts in the federal budget due to sequestration could have material consequences to our business and our industry.

We may not generate sufficient cash flow to comply with our financial covenants and meet our payment obligations when they become due. If we are unable to comply with our financial covenants, or if we are unable to generate sufficient cash flow or otherwise obtain the funds we need for required debt payments, we may have to refinance our debt. We cannot be certain we could refinance our obligations on favorable terms, or at all. Absent refinancing, our lenders would be able to accelerate our debt’s maturity. As a result, we could default under our other senior debt, expose our assets to seizure, or declare bankruptcy.

We face intense competition from many companies that have greater resources than we do. This could cause price reductions, reduced contract profitability, and loss of market share.

We operate in highly competitive markets and often encounter intense competition to win contracts. If we are unable to successfully compete for new business, our revenue may not grow and operating margins may decline. Many of our competitors are larger; have greater financial, technical, marketing, and public relations resources; have larger client bases; and have greater brand or name recognition than we do. Larger competitors include U.S. federal systems integrators such as Booz Allen Hamilton, Computer Sciences Corporation, CACI International Inc., Science Applications International Corporation, Engility Corporation, TASC, URS Corporation, CGI Group Inc., ManTech International, and the services divisions of large defense contractors such as Lockheed Martin Corporation, General Dynamics Corporation and Northrop Grumman Corporation.

Our larger competitors may be able to vie more effectively for very large-scale government contracts. Our larger competitors also may be able to provide clients with different or greater capabilities or benefits than we can provide in areas such as technical qualifications, past performance on large-scale contracts, geographic presence, price, and availability of key professional personnel. Our competitors have established relationships among themselves or with third parties, including through mergers and acquisitions, to increase their ability to address client needs. They may establish new relationships; new competitors or competitive alliances may emerge.

Our ability to compete for desirable contracts will depend on: the effectiveness of our internal and customer-funded research and development programs; our ability to offer better performance than our competitors at lower or comparable cost; the readiness of our facilities, equipment and personnel to perform the programs for which we compete; and our ability to attract and retain key personnel. If we do not continue to compete effectively and win contracts, our future business, financial condition, results of operations and our ability to meet our financial obligations may be materially compromised.

Historically, a few contracts have provided most of our revenue. If we do not retain or replace these contracts our operations will suffer.

The following six federal government contracts accounted for half of our revenue both this year and last year.

15

Table of Contents

Termination of these contracts or our inability to renew or replace them when they expire could cause our revenue to decrease and could have a material adverse effect on our business, financial condition, operating results or ability to meet our financial obligations.

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

Attempting to achieve long-term growth has placed significant demands on our management, and on our administrative, operational and financial resources. To achieve and manage growth, we must improve operational, financial and management information systems, and expand, motivate and manage our workforce. If we are unable to achieve and manage growth without compromising our quality of service and our profit margins, or if systems we implement to aid in managing our growth do not produce expected benefits, our business, prospects, financial condition, operating results or ability to meet our financial obligations could be materially adversely affected.

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

We believe that our future success will be due, in part, to the continued services of our senior management team. The loss of any one of these individuals could cause our operations to suffer. We do not maintain key man life insurance policies on any members of management.

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

Availability of highly trained and skilled professional, administrative and technical personnel is critical to our future growth and profitability. Even in the current economic climate, competition in our industry for scientists, engineers, technicians, management and professional personnel is intense and competitors aggressively recruit key employees. Competition for experienced personnel, particularly in highly specialized areas, has made it more difficult for us to timely meet all our staffing needs. We cannot be certain we will be able to attract and retain required staff on acceptable terms. Any failure to do so could have a material adverse effect on our business, financial condition, operating results and our ability to meet our financial obligations. Failure to recruit and retain a sufficient number of these employees could adversely affect our ability to maintain or grow our business. Some of our contracts require us to staff a program with personnel the customer considers key to successful performance. If we cannot provide these key personnel or acceptable substitutes, the customer may terminate the contract, and we may not be able to recover our costs.

In order to succeed, we will have to keep up with a variety of rapidly changing technologies. Various factors could affect our ability to keep pace with these changes.

Our success will depend on our ability to keep pace with changing technologies in our core business areas. These technologies can change rapidly. Even if we keep up with the latest developments and available technology, newer services or technologies could negatively affect our business. Integrating our research services’ diverse technologies is complex and often has not been previously attempted. Our success will depend significantly on our ability to develop, integrate and deliver technologically advanced services and solutions at the same or faster pace as our competitors, many of which have greater resources than we do. We are limited by our revolving credit facility in the amount of money we may spend annually on capital expenditures, and those limitations could restrict our ability to invest in new and developing technologies in one or more of our core business areas. Failure to make the appropriate investment could materially affect our business, financial condition and operating results.

A continued economic downturn could harm our business.

Our business, financial condition, operating results and ability to meet our financial obligations may be affected by various economic factors. Continued unfavorable economic conditions may make it more difficult for us to achieve or maintain revenue growth. In an economic recession, or under other adverse economic conditions which may arise from natural or man-made events, customers and vendors may be less likely to meet contractual terms and payment or delivery obligations. Continued weakness or further deterioration of economic conditions may have a material adverse effect on our business, financial condition, operating results and ability to meet our financial obligations. We believe that it is possible that an economic downturn could result in 2013 and beyond from the combination of a significant reduction in governmental spending due to sequestration and the potential for federal income tax rates to increase in 2013 as a result of current federal tax law.

16

Table of Contents

Further adverse changes in market conditions, the stock market, the merger and acquisition environment in our industry or federal government budget constraints could adversely affect the value of our reporting units which could cause us to recognize a goodwill impairment charge in the future.

If market conditions were to become more unfavorable, if merger and acquisition activity in our industry were to occur at significantly lower prices, or we are unable to increase revenue and operating profit, we might have to recognize an impairment charge to the significant goodwill we have from acquisitions. An impairment charge could have a material adverse effect on our operating results and financial position.

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

We are exposed to the risk of employee fraud or other misconduct. Employee misconduct could include intentional failures to comply with U.S. government procurement regulations, unauthorized activities, attempts to obtain reimbursement for improper expenses, or submission of falsified time records. Employee misconduct could also involve improper use of our customers’ sensitive or classified information, which could result in regulatory sanctions against us and serious harm to our reputation. It is not always possible to deter employee misconduct, and the precautions we take to prevent and detect this activity may not be effective in controlling unknown or unmanaged risks or losses, which could harm our business, financial condition, operating results and our ability to meet our financial obligations.

The interests of the ESOP Trust and the ESOP Committee may not be aligned with the interests of participants in the ESOP component of the KSOP.

The ESOP Trust owns 100% of our outstanding shares of common stock. It can control the election of a majority of our directors, the outcome of most matters submitted to a vote of stockholders, and can change our management. The ESOP Committee, which consists of four members of Alion management and three employees, can direct the ESOP Trustee how to vote on most, but not all, matters. The interests of the ESOP Trust and the ESOP Committee may not be fully aligned with the interests of ESOP participants and this could lead to a strategy that are not in the best interests of those participants.

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

Our operations are subject to U.S. federal, state and local environmental laws and regulations, as well as environmental laws and regulations in the various countries in which we operate. We are also subject to environmental laws and regulations relating to the discharge, storage, treatment, handling, disposal and remediation of regulated substances and waste products, such as radioactive, biochemical or other hazardous materials and explosives. We may incur substantial costs in the future because of: modifications to current laws and regulations; new laws and regulations; new guidance or new interpretation of existing laws or regulations; violations of environmental laws or required operating permits; or discovery of previously unknown contamination.

Our operations involve several risks and hazards, including potential dangers to our employees and to third parties that are inherent in aspects of our business. If we do not adequately insure against these risks, unanticipated losses could materially and adversely affect our financial condition and operating results.

We maintain insurance against risk and potential liabilities related to our operations. We believe we maintain reasonable levels of insurance that limit our likely exposure to unanticipated losses. Our insurance coverage may not be adequate to cover claims or liabilities, and we could be forced to bear significant costs from an accident or incident. Substantial claims in excess of our related insurance coverage could cause our actual results to differ materially and adversely from those anticipated.

Internal system or service failures could disrupt our business and impair our ability to effectively provide our services and products to our customers, which could damage our reputation and adversely affect our revenue, profitability and operating results.

Our information technology systems are subject to systems failures, including network, software or hardware failures, whether caused by us, third-party service providers, intruders or hackers, computer viruses, natural disasters, power shortages or terrorist attacks. Any such failures could cause loss of data and interruptions or delays in our business, cause us to incur remediation costs, subject us to claims and damage our reputation. Failure or disruption of our communications or utilities could cause us to interrupt or suspend our operations or otherwise adversely affect our business. Any system or service disruptions if not anticipated and appropriately mitigated, could have a material adverse effect on our business including, among other things, an adverse effect on our ability to bill our customers for work performed on our contracts, collect the amounts that have been billed and produce accurate financial statements in a timely manner. Our property and business interruption insurance may be inadequate to compensate us for all losses that may occur as a result of any system or operational failure or disruption and, as a result, our results of operations could be materially and adversely affected.

17

Table of Contents

Security breaches in sensitive U.S. Government systems could result in the loss of clients and negative publicity.

Many of the systems we develop, install and maintain involve managing and protecting information involved in intelligence, national security and other sensitive or classified U.S. Government functions. A security breach in one of these systems could cause serious harm to our business, damage our reputation and prevent us from being eligible for further work on sensitive or classified systems for U.S. Government clients. We could incur losses from such a security breach that could exceed the policy limits under our errors and omissions and product liability insurance. Damage to our reputation or limitations on our eligibility for additional work resulting from a security breach in one of the systems we develop, install and maintain could materially reduce our revenue.

Our business could be negatively impacted by security threats, including cybersecurity threats, and other disruptions.

As a defense contractor, we face various security threats, including cybersecurity threats to gain unauthorized access to sensitive information; threats to the safety of our employees; threats to the security of our facilities and infrastructure; and threats from terrorist acts. Cybersecurity attacks in particular are evolving and include, but are not limited to, malicious software; attempts to gain unauthorized access to data; and other electronic security breaches that could lead to disruptions in mission critical systems, unauthorized release of confidential or otherwise protected information and corruption of data.

We utilize various procedures and controls to monitor these threats and mitigate our exposure to such threats. We are subject to frequent and increasingly sophisticated attempts by unauthorized individuals and/or entities to obtain access to sensitive, protected, and even classified data. We regularly review our systems and cybersecurity protocols. We do not outsource our cybersecurity functions.

An unauthorized party was able to gain access to our computer network. Management retained an independent third-party expert data security firm to assess the nature and extent of unauthorized access, and to recommend remedial actions. We also asked the outside data security expert to recommend additional steps we could take to further enhance our ability to detect, monitor and defend against cybersecurity incidents.

We undertook remedial actions based on the data security expert’s recommendations. We are considering additional enhancements to our network security. We notified certain government authorities and outside parties based on information obtained from the data security expert’s investigation. Our insurance carrier has agreed, subject to the limits of our coverage and a full reservation of its rights, to cover the costs of our investigation The Company recognized $250 thousand in operating expense for our insurance policy deductible related to this cybersecurity incident.

Risks Related to Our Industry

We depend on U.S. government contracts for substantially all of our revenue. Changes in the contracting or fiscal policies of the U.S. government could adversely affect our business, financial condition or results of operations.

In each of the past three years, over 80% of our revenue came from U.S. government agency prime contracts. Over the same period, Department of Defense prime contracts and subcontracts accounted for more than 90% of our revenue. Contracts with other government agencies accounted for approximately 5% to 6% of our sales each year. We expect U.S. government contracts will to continue to account for most of our revenue in the future. Changes in U.S. government contracting policies could directly affect our financial performance. Factors that could materially adversely affect our U.S. government contracting business include:

18

Table of Contents

These or other factors could cause U.S. government departments or agencies to reduce their purchases under contracts, to exercise their right to terminate contracts or fail to exercise options to renew contracts, any of which could have a material adverse effect on our business, financial condition, operating results and ability to meet our financial obligations.

Many of our U.S. government customers are subject to increasing constraints. We have substantial contracts in place with many U.S. government departments and agencies. Our continuing performance under these contracts, or the possibility of new contracts from these agencies, could be materially adversely affected by agency spending reductions or budget cutbacks. Such reductions or cutbacks could materially adversely affect our business, financial condition, operating results and ability to meet our financial obligations.

The Budget Control Act of 2011 could cause significant delays or reductions in federal government appropriations for our current and future programs and may negatively affect our revenue and materially adversely affect our financial position, operating results and cash flows.

In August 2011, Congress enacted the Budget Control Act intended to significantly reduce the federal deficit over ten years. The Budget Control Act established discretionary spending caps through 2021 and a Joint Committee of Congress to identify additional deficit reductions. The law’s passage also signaled the end of a decade of defense spending growth. The Joint Committee failed to agree on deficit reductions which triggered the sequestration provision of the Budget Control Act. Sequestration mandates substantial automatic spending cuts to defense and non-defense programs. By law, sequestration is scheduled to start in 2013 and continue over a nine-year period.

While the Administration has indicated that it intends to work with Congress during its lame-duck session to mitigate or eliminate the effects of sequestration, the outcome of these efforts remains uncertain. At this time, we cannot predict the effect that either identified or automatic cuts would have on funding for our individual programs. Long-term funding for certain programs in which we participate is likely to be reduced, delayed or cancelled. These cuts could materially and adversely affect the viability of our prime contractors and our subcontractors, and lead to further revenue reductions.

Although we believe that Alion may be well-positioned in areas the Department of Defense has indicated are the focus for future defense spending, the impact of the Budget Control Act remains uncertain and our business and industry could be materially adversely affected. Sequestration could also materially and adversely affect the business of our prime contractors and those with whom we team. Because we derive a material portion of our total revenue from the performance of subcontracts and teaming agreements, sequestration could have not only a direct effect, but also an indirect effect, on our business, financial condition and results of operation were the contracts we perform with prime contractors and teammates reduced.

Alion depends heavily on federal government contracts. Delays in the federal budget process, including actions related to the debt ceiling, sequestration, or a federal government shutdown, could delay procurement of the products, services and solutions we provide and adversely affect our sales, gross margin, operating results and cash flows.

Alion derives a significant portion of its revenue from the federal government and from prime contractors to the federal government. The Company expects to continue to derive significant sales from federal government contracts and prime contractors. Funding under those contracts is conditioned upon the continuing availability of Congressional appropriations and agency budgets. Congress usually appropriates funds on a fiscal year basis even though contract performance may extend over many years. The programs in which Alion participates must compete with other federal government programs and policies for funding during the budget and appropriation process. Concerns about increased deficit spending, along with continued economic challenges, continue to place pressure on federal customer budgets. While the Company believes that its programs are well aligned with national defense and other priorities, shifts in domestic spending and tax policy, changes in security, defense, and intelligence priorities, the affordability of the Company’s products and services, general economic conditions and developments, and other factors may affect a decision to fund or the level of funding for existing programs under which we perform contracts or proposed programs under which we might bid for future work.

19

Table of Contents

When the federal government does not complete its budget process before its September 30 fiscal year end, it typically funds operations through a continuing resolution that authorizes federal government agencies to continue operating, but does not authorize new spending initiatives. When the federal government operates under a continuing resolution, product and service procurement delays can occur, which in turn could cause delays in payments to Alion, which could negatively and materially affect our operating results, cash flow and liquidity.

Congress’s failure to agree on deficit reduction goals contemplated in the August 2011 agreement to increase the debt ceiling creates constraints on and uncertainties about the level of future federal spending. While specific budgetary decisions are not yet known, such constraints could delay or cancel key programs in which Alion is involved and could materially and adversely affect our cash flows, liquidity and operating results. If the federal budget process were to result in a prolonged federal government shutdown, we could incur substantial unreimbursed labor or other costs, or it could delay or cancel key programs, which could materially adversely affect our cash flows and operating results.

In addition, when the U.S. Government requires supplemental appropriations to operate or fund specific programs, and legislation to approve any supplemental appropriation bill is delayed, credit markets can react adversely to the uncertainty. Recently, Standard & Poor’s downgraded Alion’s corporate family credit rating from Caa1 to Caa2. Budgetary uncertainties and Alion’s lower credit rating could materially and adversely affect Alion’s access to credit and our overall liquidity. If we were to use our revolving credit facility to a greater extent and for greater amounts than we have in the recent past, this could also increase the cost of credit to Alion if our floating interest rates were to rise.

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

Each year, Congress must approve budgets for each of the U.S. government departments and agencies we support. When Congress is unable to agree on budget priorities, and is unable to pass the annual budget on a timely basis, it typically enacts a continuing resolution. A continuing resolution allows U.S. government agencies to operate at spending levels equal to or less than levels approved in the prior budget cycle. This can delay funding we expect to receive from clients for work we are already performing. A continuing resolution can delay or even cancel new initiatives which could adversely affect our business, financial condition, operating results, cash flows and our ability to meet our financial obligations.

We may not realize the full amount of our backlog, which could lower future revenue.

The maximum contract value identified in a U.S. government contract does not necessarily determine the revenue we will realize from that contract. Congress normally appropriates funds for a given program each fiscal year, even when actual contract performance may take many years. As a result, U.S. government contracts ordinarily are only partially funded at the time of award. Normally a procuring agency commits additional money to a contract only as Congress makes subsequent fiscal year appropriations. Estimates of future revenue attributed to backlog are not necessarily precise. Receipt and timing of any of this revenue is subject to various contingencies such as changed U.S. government spending priorities and government decisions not to exercise existing contract options. Many contingencies are beyond our control. The backlog on a given contract may not ultimately be funded or may only be partially funded, which may cause our revenue to be lower than anticipated, and adversely affect our business, financial condition, operating results, cash flows and our ability to meet our financial obligations.

Many of our U.S. government customers procure goods and services through multiple delivery order type contracts under which we must compete for post-award orders.

Budgetary pressures and reforms in the procurement process have caused many U.S. government customers to purchase goods and services through ID/IQ, GSA Schedule contracts and other multiple award and/or GWAC contract vehicles. These contract vehicles increase competition and pricing pressure requiring us to make sustained post-award efforts to obtain awards and realize revenue. There can be no assurance that we will increase revenue or otherwise sell successfully under these contract vehicles. Our failure to compete effectively in this procurement environment could harm our business, financial condition, operating results, cash flows and our ability to meet our financial obligations.

U.S. government contracts contain termination provisions that are unfavorable to us.

U.S. government agencies can terminate contracts with suppliers at any time without cause. If a government agency terminates one of our contracts without cause, we are likely to be compensated for services we have provided and costs we have incurred through the termination date, and receive payment for termination-related costs and a negotiated contract fee. However, if the U.S. government terminates a contract because we defaulted under the terms of the contract, we may be liable for any extra costs the U.S. government incurs to procure undelivered services from another company. Termination of any of our large U.S. government contracts could negatively impact our revenue and adversely affect our business, financial condition, operating results, cash flows and our ability to meet our financial obligations.

20

Table of Contents

The U.S. government can suspend or debar a company from doing business with the government if a company violates certain laws or government procurement regulations.

Alion is subject to numerous federal government procurement procedures and regulations including cost accounting standards, conflict of interest rules, whistleblower protection rules, the False Claims Act, the Truth in Negotiations Act and the Foreign Corrupt Practices Act. If the government were to determine that we had failed to comply with our obligations, it could suspend or debar Alion from doing business with the federal government which could materially adversely affect our operating results, cash flows and financial position.

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

The total price on a cost-reimbursement contract is primarily based on allowable costs incurred subject to a contract funding limit. U.S. government regulations require us to notify our customers of any cost overruns or underruns on a cost-reimbursement contract. We may not be able to recover cost overruns in excess of a contract’s funding limit and may not earn the profit we anticipated from the contract.

In a fixed-price contract, we estimate project costs and agree to perform services for a predetermined price regardless of our actual costs. We pay for any cost overruns. If we fail to anticipate technical problems, or accurately estimate or control costs, we may face a lower fixed-price contract profit margin or even a loss. Provisions in our financial statements for estimated contract losses may not be adequate to cover all our actual losses.

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

Based on profit as a percentage of estimated standard costs, cost-reimbursement contracts are our least profitable type of contract because government regulations limit cost-reimbursement contract fee levels. Our U.S. government customers typically choose the type of contract they issue. To the extent that in the future cost-reimbursement contracts continue to increase as a percentage of our contract mix, operating margins and results may suffer.

If our fixed-price contract revenue continues to decline in total or as a proportion of our total business, or if profit rates on these contracts deteriorate, our operating margins and operating results may suffer.

We have historically earned higher profit margins on fixed-price contracts. If fixed-price contract revenue continues to decrease, or customers shift to other types of contracts, our operating margins and operating results may suffer. We cannot ensure we will be able to maintain our historic profitability levels on fixed-price contracts overall nor can we ensure that our percentage of total revenue generated from fixed-price contracts will remain the same or improve.

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

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

Because U.S. government contracts are subject to government audits, contract payments are subject to adjustment and repayment which may result in lower than expected contract revenue.

Any U.S. government contract payments we receive that exceed allowable costs are subject to adjustment and repayment after the government audits our contract costs. DCAA has finished auditing 2005 and is currently auditing our 2006 and 2007 claimed indirect costs. We have settled indirect rates through 2004. We timely submitted our indirect cost proposals for all open fiscal years and expect to submit this year’s incurred cost proposal next March as required. We have recorded revenue on federal government contracts in amounts we expect to realize. If the estimated reserves in our financial statements are not adequate, future government contract revenue may be lower than expected.

21

Table of Contents

If we fail to recover at- risk contract costs, we may have reduced fees or losses.

We are at risk for any costs we incur before a contract is executed, modified or renewed. A customer may choose not to pay us for these costs. At September 30, 2012 we had $19 million in at-risk costs. While such costs were associated with specific anticipated contracts and funding modifications, we cannot be certain that our customers will execute these contracts or contract renewals or that they we pay us for all our related at-risk costs.

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

U.S. government agencies have conflict of interest policies that may prevent us from bidding on or performing certain contracts. When dealing with U.S. government agencies that have conflict of interest policies, we must decide, at times with insufficient information, whether to participate in the design process and lose the chance of performing the contract or to turn down the design opportunity for the chance of performing the future contract. We have, on occasion, declined to bid on particular projects because of actual or perceived conflicts of interest. We are likely to continue encountering such conflicts of interest in the future. Future conflicts of interest could cause us to be unable to secure key contracts with U.S. government customers.

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

We must comply with and are affected by laws and regulations relating to the formation, administration and performance of U.S. government contracts, which may impose added costs on our business. If a government review or investigation uncovers improper or illegal activities, we may be subject to civil and/or criminal penalties and administrative sanctions, including contract termination, fines, forfeiture of fees, suspension of payment and suspension or debarment from doing business with U.S. government agencies, which could impair our ability to conduct our business.

We derive significant revenue from U.S. government contracts awarded through competitive bidding which is an inherently unpredictable process.

We obtain most of our U.S. government contracts through competitive bidding. We face risks associated with:

Upon expiration, U.S. government contracts may be subject to a competitive re-bidding process. We may not succeed in winning new contract awards or renewals in the future. Our failure to renew or replace existing contracts when they expire or win new contracts, would negatively impact our business, financial condition, operating results, cash flows and our ability to meet our financial obligations.

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

As of September 30, 2012, we had approximately 370 Department of Defense contracts that required us to maintain facility security clearances at our 29 sites. Approximately 2,414 of our employees held security clearances needed to perform these contracts. Each cleared facility has a Facility Security Officer and Key Management Personnel whom the U.S. Department of Defense – Defense Security Service requires to be cleared to the level of the facility security clearance. Individual employees are selected to be cleared, based on specific classified contract task requirements and each employee’s technical, administrative or management expertise. Once an employee is cleared, he or she may access classified contract information, based on clearance level and a “need-to-know.”

22

Table of Contents

Protecting classified information is paramount. Loss of a facility clearance, or an employee’s failure to obtain or maintain a security clearance, could result in a U.S. government customer terminating an existing contract or choosing not to renew a contract. If we cannot maintain or obtain the required security clearances for our facilities and our employees, or obtain these clearances in a timely manner, we may be unable to perform certain U.S. government contracts. Lack of required clearances could also impede our ability to bid on or win new government contracts, which might result in terminating current research activities. This could damage our reputation and our revenue would likely decline, which would adversely affect our business, financial condition, operating results and ability to meet our financial obligations.

If we fail to establish and maintain important relationships with government entities and agencies, our ability to successfully bid for new business and retain existing business may be adversely affected.

To bid on new business, we rely in part on establishing and maintaining relationships with various government officials. These relationships enable us to provide informal input and advice to government agencies before we develop a formal proposal. We may be unable to maintain our relationships with government entities and agencies; any failure to do so could adversely affect our ability to bid successfully for new business or to retain existing business. This could adversely affect our operating results, cash flows and financial position and our ability to meet our obligations.

Failure to maintain strong relationships with other contractors could result in a decline in our revenue.

Approximately 14% of our revenue comes from our work as a subcontractor and from teaming arrangements with other contractors. As a subcontractor or teammate, we cannot control performance by our prime contractor or other teammates. Poor performance on a given contract could impact our customer relationship, even when we perform as required. We expect to continue to depend on relationships with other contractors for a portion of our revenue for the foreseeable future. Our revenue, operating results, financial position and cash flows could differ materially and adversely from what we anticipate if one or more of our prime contractors or teammates were to rely on one of our competitors or were to directly provide our customers the kind of services we provide.

The federal government’s appropriation process and other factors may delay the collection of our receivables, and our business may be adversely affected if we cannot collect our receivables in a timely manner.

We must collect our receivables to generate cash flow, provide working capital, pay debt and continue our business operations. If the federal government, or any of our prime contractors fails to pay or delays paying our invoices for any reason, our business and financial condition may be materially and adversely affected. The government may fail to pay outstanding invoices and DCAA could revoke our direct billing privileges, which would adversely affect our ability to timely collect our receivables. Contracting officers can also withhold payment of some portion or all of an outstanding invoice which could also adversely affect our ability to collect our receivables timely.

New government rules could limit our ability to get paid for the work we perform.

A new Defense Federal Acquisition Regulation interim rule became effective May 18, 2011, applying to solicitations issued on or after that date. The new rule requires Department of Defense contracting officers to impose contractual withholdings at no less than certain minimum levels if a contracting officer determines that one or more of a contractor’s business systems have one or more significant deficiencies. If a contracting officer were to impose such a withholding on Alion or even one of our prime contractors, it would increase the risk we would not be paid in full or paid timely. If we experience difficulties collecting receivables, it could adversely affect our operating results, cash flows and financial position and our ability to meet our obligations.

The U.S. Government may adopt new contract rules and regulations or revise its procurement practices in a manner adverse to us at any time.

The U.S. Government may face restrictions or pressure regarding the type and amount of services it may obtain from private contractors. Legislation, regulations and initiatives dealing with procurement reform, environmental responsibility or sustainability, and mitigation of potential conflicts of interest, as well as any resulting shifts in the buying practices of U.S. Government agencies could adversely affect us. Such changes could impair our ability to obtain new contracts or win a recompete of an existing contract. Any new contracting requirements or procurement methods could be costly or administratively difficult for us to implement and could materially and adversely affect our financial position, operating results or cash flows.

Item 1B. Unresolved Staff Comments

None.

23

Table of Contents

Item 2. Properties

Our headquarters in McLean, Virginia consists of 23,823 square feet of leased office space. We also lease approximately 69 additional office facilities totaling 962,533 square feet. Of these, our largest offices are located in Washington, DC; Fairfax, Alexandria, Vienna, Arlington, Norfolk, Portsmouth, and Newport News, Virginia; Pittsburgh and West Conshohocken, Pennsylvania; Huntsville and Mobile, Alabama; New London, Connecticut; Annapolis, Annapolis Junction and Lanham, Maryland; Orlando, Florida; Rome, New York; Pascagoula, Mississippi; Fairborn, Ohio; Mt. Clements, Michigan; Boulder, Colorado; Durham, North Carolina; Bath, Maine; San Diego, California; Albuquerque, New Mexico; and Burr Ridge, Illinois. We lease 22 facilities that contain laboratory space totaling approximately 114,202 square feet, for contract-related research. Our largest laboratories are located in Durham, North Carolina; Warrenville, Chicago and Geneva, Illinois; Annapolis Junction and Lanham, Maryland; West Conshohocken, Pennsylvania; Mount Clemens, Michigan and Louisville, Colorado. Lease terms vary in length from one to twelve years, and are generally at market rates.

Aggregate average monthly base rental expense for fiscal year 2012 was approximately $2.3 million for 2012 and 2011. We periodically enter into other lease agreements that are, in most cases, directly chargeable to current contracts. These obligations are usually either covered by currently available contract funds or cancelable upon termination of the related contracts. We consider our leased space to be adequate for our current and our reasonable anticipated future operations. If sequestration takes effect, we may find we have excess leased space. We cannot ensure that if we have excess capacity we will be able to sublease a portion of or assign our leases on terms and conditions favorable to us or at all.

Item 3. Legal Proceedings

We are involved in routine legal proceedings occurring in the ordinary course of business. We believe these routine legal proceedings are not material to our financial condition, operating results, or cash flows.

As a government contractor, from time to time we may be subject to DCAA audits and federal government inquiries. The federal government may suspend or debar for a period of time any federal contractor it finds has violated the False Claims Act, or any contractor indicted for or convicted of violating other federal laws. This could also result in fines or penalties. Given Alion’s dependence on federal government contracts, suspension or debarment could have a material effect on our business, financial condition, operating results, cash flows and our ability to meet our financial obligations. We are not aware of any such pending federal government claims or investigations.

Item 4. Mine Safety Disclosures

Not applicable.

24

Table of Contents

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

There is no established public trading market for Alion’s common stock.

Holders

As of September 30, 2012, the ESOP Trust was the only holder of our common stock. The ESOP Trustee is independent of Alion and its management. Consistent with its fiduciary responsibilities, the ESOP Trustee retains an independent third party valuation firm to assist it in determining the fair market value (share price) at which the Trustee may acquire or dispose of investments in Alion common stock. Alion’s transactions with the ESOP Trust during the past two years were based on the fair market value share prices and dates set out below.

Dividends

Alion has never declared any cash dividends. We are required to make “distributions” to purchase common stock from the ESOP to meet our repurchase obligations. We do not expect to pay any dividends in the future, and the terms of our credit agreements limit our ability to do so. We currently intend to retain future earnings, if any, to use in operating our business. Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will depend on our operating results, our financial condition, contractual restrictions, applicable law and other factors our Board of Directors determines to be relevant. The Secured Notes, the Unsecured Notes and our revolving credit facility prohibit us in many instances from paying dividends without consent from the respective creditors.

Performance Graph

Not applicable.

Recent Sales of Unregistered Securities

In fiscal year 2012, Alion employees directed more than $2.4 million in pre-tax salary deferrals and rollovers to the ESOP Trust to purchase beneficial interests in Alion common stock. On March 31, 2012, the Company sold approximately $1.3 million of common stock to the ESOP Trust at $18.00 per share and on September 30, 2012 the Company sold approximately $1.1 million of common stock to the ESOP Trust at $16.45 per share. The Company did not use an underwriter and did not pay underwriter discounts or commissions. The shares of common stock were sold pursuant to an exemption under Section 4(2) of the Securities Act of 1933, as amended.

Item 6. Selected Financial Data

The following table presents selected historical consolidated financial data for Alion for each of the last five fiscal years through September 30, 2012. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes in this annual report. We derived our consolidated operating data for the years ended September 30, 2012, 2011 and 2010 and our September 2012 and 2011 consolidated balance sheet data from our audited consolidated financial statements included in this annual report. We derived our consolidated operating data for the years ended September 30, 2009 and 2008 and our September 2010, 2009 and 2008 consolidated balance sheet data from our consolidated financial statements not included in this annual report. Our historical consolidated financial information may not be indicative of our future performance.

25

Table of Contents

We divested our HFA subsidiary in September 2010. In July 2010 and September 2011, we sold some contracts with the Office of Naval Research. Operating results include divestitures through their sale date.

26

Table of Contents

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

The following discussion and analysis is intended to assist the reader understand Alion’s business, financial condition, results of operations and liquidity and capital resources. You should read the following discussion in conjunction with the consolidated financial statements and related notes included in this annual report. This discussion contains forward-looking statements about our business and operations that involve risks and uncertainties. Future results may differ materially from those we currently anticipate because of the “Risk Factors” described beginning on page 11 and elsewhere in this annual report.

About This Management’s Discussion and Analysis

Our discussion provides an overview of our business and critical accounting policies, explains year-over-year changes in operating results, describes our liquidity, capital resources and certain other obligations, and discloses certain market and other risks that could affect us.

Overview

We are a leading provider of scientific, engineering, and information technology expertise. Alion employees apply this expertise to research and develop technological solutions for complex problems relating to national defense, homeland security, and energy and the environment. We principally serve U.S. government departments and agencies and, to a much lesser extent, commercial and international customers. Alion has a 75 year history of providing our customers a talented employee base of more than 2,800 industry thought leaders, blending together industry expertise, domain experience and functional knowledge to solve critical client needs.

Despite a very challenging defense market environment the Company performed very well in 2012. Our fiscal 2012 revenues increased 3.8% over fiscal 2011 and operating income growth exceeded revenue growth by increasing 13.9%. Revenue increases were attributed expanding our existing base of customers such as the U.S. Navy and U.S. Air Force and expanding into to new, growing markets including Special Operations Command. Our profitability gains were a result of Company initiatives to drive efficiencies throughout the business, which resulted in reduced operating expenses as well as general and administrative costs. Risks related to the Budget Control Act of 2011, sequestration, the “fiscal cliff” and other market factors, which were described earlier in this report, could impact the favorable revenue and operating income results Alion has enjoyed in fiscal 2012. The table below presents summary operating results for the past three fiscal years.

Alion contracts primarily with the U.S. federal government. We expect that we will continue to derive most of our revenue from contracts with the U.S. Department of Defense and other federal agencies. We believe we will continue to have some level of commercial, state, local and international revenues. The table below shows the percentage of revenue we derived from each major customer category for each of the past three fiscal years.

27

Table of Contents

We intend to broaden our existing base of U.S. federal government business and further expand our scientific, engineering and information technology expertise offerings in the commercial and international markets. However, any expansion in the commercial and international markets will be relatively modest. In fiscal 2012, our international revenue was generated primarily from naval architecture and marine engineering services and engineering and technical analysis.

We earn our revenue by providing highly skilled employee and subcontractor services to our customers. The key to generating revenue is hiring new employees to meet customer requirements; retaining existing employees; and deploying our staff on revenue-generating contracts. We closely monitor hiring success, attrition trends, and direct labor utilization. Hiring enough technically skilled employees with appropriate security clearances is a key challenge in maintaining and growing our business. We strive to optimize Alion employee labor content on our contracts as we can earn higher profits from our employee services than from subcontractor services or from other goods or materials we purchase for re-sale, or on behalf of our customers. We plan to grow revenue organically by capitalizing on our skilled work force and our solutions competencies.

Our mix of contract types (i.e., cost-reimbursement, fixed-price, and time-and-material) affects our revenue and operating margins. A significant portion of our revenue is generated from services performed on cost-reimbursement contracts under which customers pay us for approved costs, plus a fee (profit) on the work we perform. We recognize revenue on cost-reimbursement contracts based on our actual costs plus a pro-rata share of fees earned. We also have a number of fixed-price government and commercial contracts for which we use the percentage-of-completion method to recognize revenue. Fixed price contracts involve higher financial risks, and in some cases higher margins, because we must deliver specified services at a predetermined price regardless of our actual costs. Failure to anticipate technical problems, estimate costs accurately or control performance costs on a fixed-price contract may reduce the contract’s overall profit or cause a loss. On time-and-material contracts, customers pay us for labor at negotiated, fixed hourly rates and related material costs on a pre-determined mark-up. We recognize time-and-material contract revenue at contractually billable rates as we deliver labor hours and incur direct expenses.

Despite the President’s stated goal of reducing government’s use of cost-reimbursable contracts, Alion’s cost-reimbursable revenue increased this year as it has for the past several years. Because the scientific and engineering services we deliver are not by nature inherently governmental functions, management believes any federal government policies and changes aimed solely at reducing overall reliance on government contractors will not materially or adversely affect operations. However, Alion faces the same risks our competitors face that overall government spending will decline because of budgetary constraints or possible sequestration. Notwithstanding this overarching business risk, if the government were to ultimately shift contracting activity away from the cost-reimbursement arena to fixed-price contracting, we believe we would likely benefit. All other factors being equal, our fixed price type contracts traditionally generate higher profit margins than our cost-reimbursable contracts do.

The table below summarizes revenue by contract type for each of the past three fiscal years.

Annual revenue for the contract types described above may differ slightly for fiscal years 2011 and 2010 from amounts previously reported as individual contracts, task orders and programs are further defined by our customers and management team.

Results of Operations

There were no acquisitions affecting reported results in any of the past three fiscal years. In 2010, we divested Human Factors Applications Inc. (HFA) and several Office of Naval Research (ONR) contracts. We sold several ONR contracts on July 9, 2010 and our HFA subsidiary on September 30, 2010. Consolidated results include HFA and ONR contract results through their respective sale dates.

28

Table of Contents

Year ended September 30, 2012 Compared to Year ended September 30, 2011

The table below presents selected comparative financial information for fiscal years ended September 30, 2012 and 2011. Our discussion and analysis refers to financial information in this table and to Alion’s consolidated financial statements in this annual report on Form 10-K.

Contract Revenue. Alion’s revenues from federal government customers and work as a prime contractor increased year over year and represented 97% of overall revenue. Prime contracts with federal customers now account for 85.6% of our revenue. Revenue in 2012 was $29.9 million (3.8%) greater than 2011 revenue. Growth came from both government and commercial and international customers with commercial and international revenues up by $7.1 million (47%) over last year.

Cost-reimbursable contract revenue continued a trend of increasing as an overall percentage of our revenues. Almost 83% of our revenue is derived from cost-reimbursable contracts. Fiscal 2012 realized a $27 million increase in cost-reimbursable contract revenues as revenues on our Weapons Systems Information Analysis Center and Seaport-E Multiple Award contracts increased. Fixed price contract revenue reversed its trend and increased as a percentage of Alion revenue. Fixed price revenues increased more than $13 million, up 26% from last year. Fixed price contracts now represent more than 7.0% of Alion’s revenue. However, time-and-material contracts were down this year, in both absolute dollars ($10.1 million) and as a percentage of Alion revenue (9.5% in 2012 compared to 11.1% in 2011).

Two of our core business areas saw significant growth this year. Naval Architecture and Marine Engineering recovered from 2011 program delays and was further buoyed by new contract awards, including the Amphibious Warfare Program Office Support Services (PMS 377) and the Integrated Warfare Systems Surface Ship Weapons (IWS 3.0) contracts. This led 2012 Naval Architecture and Marine Engineering revenue to exceed $361 million and increase more than $29 million over 2011. On a combined basis, our three other core business revenues totaled approximately $456 million in fiscal 2012, which accounted for a modest increase of approximately $800 thousand. Our Technology Design and Other Services revenue grew this year, up by more than $77 million as Alion provided rapid weapon systems prototyping analysis, weapon systems integration as well as logistical analysis support functions. Defense Operations revenue declined by almost $27.5 million and Modeling and Simulation revenue was down almost $49.1 million as some work migrated to our Technology Design and Other Services and Defense Operation offerings. In addition, we faced significant procurement and award delays hampered our growth expectations. ID/IQ contracts continued prior year trends of representing more than 60% of our total revenue. This year, our ID/IQ contracts generated more than $499 million revenue, an $8.5 million increase (1.7%) over last year.

Direct Contract Expenses and Gross Profit. Direct contract costs increased by $29.4 million (4.9%) in 2012 compared to 2011. This was in line with our higher fiscal 2012 revenues. Direct labor costs were stable year over year while third-party costs for materials and subcontracts climbed 9.4% an increase of $31 million compared to last year. The increase in material and subcontractor costs are the result of Alion winning larger, more complex contracts as a prime contractor, which requires us to manage the work of other contractors. Other direct costs decreased by $1.1 million. Gross profit was up by $540 thousand this year, but declined as a percentage of overall revenue. Our contract fee rates averaged 6.3 % of costs compared to 6.7% of costs last year. This reflects, in part, our increasing level of lower margin cost-reimbursable work with the attendant limitations on contractor profit as well as the increase in materials and subcontractor costs.

29

Table of Contents

Operating Expenses. Operating expenses declined by $4.2 million in 2012 (down 2.9%) to 17.6% of revenue. The decrease in operating expenses were driven by a $12.9M (19.7%) reduction in general and administrative costs, which were due, in part, to previously announced headcount reductions and cost containment efforts. Specifically, executive compensation expense (stock-based compensation, bonuses, severance and incentive compensation) was reduced by $900 thousand, costs for administration and accounting and finance decreased approximately $1.2 million, and the cost for legal and compliance costs we lower by $1.4 million. Rent and related facilities costs also decreased by $225 thousand in fiscal 2012. Depreciation and amortization expense increased modestly ($360 thousand) as amortization of recently deployed intangibles offset declines in amortization charges for prior years’ acquired contracts. In addition, we also saw an increase in our spending on information technology and software support (approximately $800 thousand) and our costs for our expanded proposal and marketing efforts.

Operating Income. Although 2012 gross margin was only up modestly, lower operating expenses helped generate $40.3 million in operating income. This was a $4.8 million (13.5%) improvement over last year’s $35.5 million in operating income. In 2011, operating income as a percentage of revenue was 4.5% of revenue. This year operating income rose to 4.9% of revenue due to the cost reductions noted in the Operating Expenses.

Other Expense. Interest income, interest expense and other aggregate non-operating expenses for 2012 increased $2.0 million compared to 2011; interest accounted for half the increase and the absence of a debt extinguishment gain accounted for the other half. Secured Note interest was higher in 2012 because more interest-bearing PIK notes were outstanding. Unsecured Note interest was slightly lower because our outstanding principal was lower. Our revolver interest costs were a little higher as we used the revolver slightly more frequently in 2012 and we had a higher balance of outstanding letters of credit. PIK interest and debt issue cost amortization was also higher in 2012 than it was last year.

Debt Extinguishment. In 2012, we did not repurchase any outstanding debt. In 2011 we retired $5 million in Unsecured Note principal and recognized an aggregate debt extinguishment gain of $939 thousand.

Income Tax Expense. We recognized $7.0 million in income tax expense both this year and last year. In 2012, our deferred tax assets increased by $20.7 million and in 2011 they increased by $21.1 million. Changes in deferred tax assets which reduce income tax expense were entirely offset by corresponding increases in valuation allowances. Our 2012 and 2011 income tax expense came solely from recognizing changes in our deferred tax liability arising from amortizing tax-deductible goodwill.

Net Loss. Although our net loss in 2012 was smaller than 2011, we still incurred a net loss of $41.4 million this year. Revenue, gross margin and operating income were all higher this year and operating expenses were lower. However, higher interest expense and the absence of a debt extinguishment gain partially offset these improvements and adversely affected this year’s bottom line.

30

Table of Contents

Year ended September 30, 2011 Compared to Year ended September 30, 2010

The table below presents selected comparative financial information for fiscal years ended September 30, 2011 and 2010. Our discussion and analysis refers to financial information in this table and to Alion’s consolidated financial statements in this annual report on Form 10-K.

Contract Revenue. Alion’s revenues from our U.S. federal government customers, including work as a prime contractor and as a subcontractor, continued to increase as a percentage of overall revenue. U.S. federal government customers accounted for over 98% of our revenue with 83.5% of revenue from government prime contracts. However, 2011 revenue was $46.7 million (5.6%) less than 2010. The residual impact of the Congressional continuing resolutions, fear of a government shutdown and the debt ceiling crisis of 2011 caused our customers to reduce or delay funding of critical contracts and programs. These award delays as well as a number of contract protests accounted for $33.1 million (4.0%) of 2011’s decline. Revenues were also down by an additional $12.4 million in 2011 because of prior year divestitures. In 2010, we sold several contracts we had with the Office of Naval Research and divested our HFA subsidiary due to organizational conflicts of interests, or shedding of non-core business activities.

Cost-reimbursable contract revenue continued a trend of increasing as an overall percentage of our revenues. More than 82% of our 2011 revenues were attributed to cost-reimbursable contracts. This occurred even though 2011 cost-reimbursable contract revenue increased by less than $5.0 million. Fixed price contract revenue also continued its trend as a declining percentage of Alion revenue. Fixed price revenues were down $30.6 million, off almost 38% from 2010 and represented 6.4% of Alion’s revenue. Time-and-material contracts were down in 2011 as well, in both absolute dollars ($21.1 million) and as a percentage of Alion revenue (11.1% in 2011 compared to 13.0% in 2010).

The residual impact of the Congressional continuing resolutions, fear of a government shutdown and the debt ceiling crisis of 2011 affected our core business areas. In 2011, Defense Operations revenues were $203.1 million, down $13.1 million from $216.2 million in 2010. Defense Operations revenue as a percentage of revenue in 2011 was stable compared to 2010. Although Naval Architecture and Marine Engineering revenues suffered from program delays and contract protests, 2011 revenue came in at $332 million. This was down $6.6 million from 2010 revenue of $338.6 million. Naval Architecture and Marine Engineering revenues increased to 42.2% of revenue from 40.6% in 2010. Modeling and Simulation revenue for 2011 were down $24.8 million (15.1%) to $139.3 million compared to 2010 revenue of $164.1 million, declining to less than 18% of total revenue. Revenue from Technology Design and Other Services were down 1.9% to $112.8 million in 2011 compared to $115.0 million in 2010.

Consistent with 2011’s year over year revenue decline, federal government contract revenues were off $42.9 million (5.3%) compared to 2010. Department of Defense contract revenues were down $49 million compared to 2010. This was partly mitigated by a modest $6.1 million increase in 2011 revenues from federal civilian agencies and departments (up 15% over 2010). Revenues from commercial and international customers were also down $3.8 million (19.9%) in 2011.

31