##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-Q


|  |  |                                                                                            
|- |  | -------------------------------------------------------------------------------------------
|þ |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
| 
|  |  | For the quarterly period ended December 31, 2005.                                          

Commission File Number 333-89756








Alion Science and Technology Corporation


(Exact Name of Registrant as Specified in Its Charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Delaware                                                           |  | 54-2061691                              
|(State or Other Jurisdiction of
    Incorporation of Organization) |  | (I.R.S. Employer
    Identification No.)

|                       |  |                                  
|---------------------- |  | ---------------------------------
|                      
|                      
|                      
|                      
|10 West
    35thStreet |  | 1750 Tysons Boulevard, Suite 1300
|                      
|                      
|                      
|                      
|Chicago, IL 60616      |  | McLean, VA 22102                 
|                      
|                      
|                      
|                      
|(312) 567-4000         |  | (703) 918-4480                   

(Address, including Zip Code and Telephone Number with


Area Code, of Principal Executive Offices)





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


þ o


12b-2 o þ


12b-2 o þ












---



##### 










ALION SCIENCE AND TECHNOLOGY CORPORATION


FORM 10-Q


FOR THE QUARTER ENDED DECEMBER 31, 2005


|                                                                                                       |  |  |    | 
|------------------------------------------------------------------------------------------------------ |  |  | -- | 
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|PART I  Financial
    Information                                                                     |  |  | 2  | 
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Item 1.  Financial
    Statements                                                                      |  |  | 2  | 
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Consolidated Balance Sheets                                                                            |  |  | 2  | 
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Consolidated Statements of Operations                                                                  |  |  | 3  | 
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Consolidated Statements of Cash Flows                                                                  |  |  | 4  | 
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Item 2.  Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations |  |  | 27 | 
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Item 3.  Quantitative and
    Qualitative Disclosures About Market Risk                                |  |  | 45 | 
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Item 4.  Controls and
    Procedures                                                                   |  |  | 46 | 
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|PART II  Other
    Information                                                                        |  |  | 47 | 
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Item 1.  Legal
    Proceedings                                                                         |  |  | 47 | 
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Item 2.  Unregistered Sales
    of Equity Securities and Use of Proceeds                               |  |  | 48 | 
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Item 3.  Defaults upon
    Senior Securities                                                           |  |  | 48 | 
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Item 4.  Submission of
    Matters to a Vote of Security Holders                                       |  |  | 48 | 
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Item 5.  Other
    Information                                                                         |  |  | 48 | 
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Item 6.  Exhibits                                                                                      |  |  | 48 | 
|EX-31.1                                                                                               
|EX-31.2                                                                                               
|EX-32.1                                                                                               
|EX-32.2                                                                                               



1



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##### Table of Contents






PART I  FINANCIAL INFORMATION







|        |                     
|------- | --------------------
|Item 1. | Financial Statements

ALION SCIENCE AND TECHNOLOGY CORPORATION





CONSOLIDATED BALANCE SHEETS


As of December 31, 2005 (Unaudited) and
September 30, 2005


|                                                                          |                                                                                                                                                                                                                                                                   |                                                                       |                                                   |         |               |         |         |         |         |         | 
|------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ------------------------------------------------- | ------- | ------------- | ------- | ------- | ------- | ------- | ------- | 
|                                                                          |                                                                                                                                                                                                                                                                   | December 31,                                                          |                                                   |         | September 30, |        
|                                                                          |                                                                                                                                                                                                                                                                   | 2005                                                                  |                                                   |         | 2005          |        
|                                                                          |                                                                                                                                                                                                                                                                   |                                                                       |                                                   |         |               |        
|                                                                          |                                                                                                                                                                                                                                                                   | (In thousands, except share                                           |                                                  
|                                                                          |                                                                                                                                                                                                                                                                   | and per share information)                                            |                                                  
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Current assets:                                                           |                                                                                                                                                                                                                                                                   |                                                                       |                                                   |         |               |         |         |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Cash and cash equivalents                                                                                                                                                                                                                                         |                                                                       | $                                                 | 15,259  |               |         | $       | 37,778  |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Accounts receivable, less allowance of $3,649 and $3,539 at
    December 31, 2005 and September 30, 2005, respectively                                                                                                                                            |                                                                       |                                                   | 92,736  |               |         |         | 80,898  |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Stock subscriptions receivable                                                                                                                                                                                                                                    |                                                                       |                                                   |        |               |         |         | 1,733   |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Prepaid expenses                                                                                                                                                                                                                                                  |                                                                       |                                                   | 2,389   |               |         |         | 1,944   |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Other current assets                                                                                                                                                                                                                                              |                                                                       |                                                   | 2,508   |               |         |         | 2,802   |        
|                                                                          |                                                                                                                                                                                                                                                                   |                                                                       |                                                   |         |               |        
|                                                                          |                                                                                                                                                                                                                                                                   |                                                                       | Total current assets                              |         |               | 112,892 |         |         |         | 125,155 | 
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Property, plant and equipment, net                                        |                                                                                                                                                                                                                                                                   |                                                                       | 11,620                                            |         |               |         | 11,174  |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Intangible assets, net                                                    |                                                                                                                                                                                                                                                                   |                                                                       | 26,667                                            |         |               |         | 30,198  |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Goodwill                                                                  |                                                                                                                                                                                                                                                                   |                                                                       | 163,428                                           |         |               |         | 163,419 |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Other assets                                                              |                                                                                                                                                                                                                                                                   |                                                                       | 1,780                                             |         |               |         | 1,860   |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Deferred compensation assets                                              |                                                                                                                                                                                                                                                                   |                                                                       | 2,536                                             |         |               |         | 2,443   |        
|                                                                          |                                                                                                                                                                                                                                                                   |                                                                       |                                                   |         |               |        
|                                                                          |                                                                                                                                                                                                                                                                   |                                                                       | Total assets                                      |         | $             | 318,923 |         |         | $       | 334,249 | 
|                                                                          |                                                                                                                                                                                                                                                                   |                                                                       |                                                   |         |               |        
|Current liabilities:                                                      |                                                                                                                                                                                                                                                                   |                                                                       |                                                   |         |               |         |         |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Current portion, Term B Senior Credit Facility note payable                                                                                                                                                                                                       |                                                                       | $                                                 | 1,406   |               |         | $       | 1,404   |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Current portion, acquisition obligations                                                                                                                                                                                                                          |                                                                       |                                                   | 8,540   |               |         |         | 3,616   |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Trade accounts payable and accrued liabilities                                                                                                                                                                                                                    |                                                                       |                                                   | 27,181  |               |         |         | 27,312  |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Accrued payroll and related liabilities                                                                                                                                                                                                                           |                                                                       |                                                   | 23,449  |               |         |         | 29,161  |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | ESOP liability                                                                                                                                                                                                                                                    |                                                                       |                                                   | 1,861   |               |         |         | 274     |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Current portion of accrued loss on operating leases                                                                                                                                                                                                               |                                                                       |                                                   | 1,037   |               |         |         | 1,054   |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Billings in excess of costs and estimated earnings on
    uncompleted contracts                                                                                                                                                                                   |                                                                       |                                                   | 1,822   |               |         |         | 2,559   |        
|                                                                          |                                                                                                                                                                                                                                                                   |                                                                       |                                                   |         |               |        
|                                                                          |                                                                                                                                                                                                                                                                   |                                                                       | Total current liabilities                         |         |               | 65,296  |         |         |         | 65,380  | 
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Acquisition obligations, excluding current portion                        |                                                                                                                                                                                                                                                                   |                                                                       | 2,000                                             |         |               |         | 7,100   |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Term B Senior Credit Facility note payable, excluding
    current portion |                                                                                                                                                                                                                                                                   |                                                                       | 137,832                                           |         |               |         | 137,945 |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Subordinated note payable                                                 |                                                                                                                                                                                                                                                                   |                                                                       | 43,859                                            |         |               |         | 42,888  |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Deferred compensation liability                                           |                                                                                                                                                                                                                                                                   |                                                                       | 2,943                                             |         |               |         | 2,465   |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Accrued compensation, excluding current portion                           |                                                                                                                                                                                                                                                                   |                                                                       | 7,825                                             |         |               |         | 6,356   |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Accrued postretirement benefit obligations                                |                                                                                                                                                                                                                                                                   |                                                                       | 3,402                                             |         |               |         | 3,357   |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Non-current portion of lease obligations                                  |                                                                                                                                                                                                                                                                   |                                                                       | 4,161                                             |         |               |         | 3,694   |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Redeemable common stock warrants                                          |                                                                                                                                                                                                                                                                   |                                                                       | 46,390                                            |         |               |         | 44,590  |        
|                                                                          |                                                                                                                                                                                                                                                                   |                                                                       |                                                   |         |               |        
|                                                                          |                                                                                                                                                                                                                                                                   |                                                                       | Total liabilities                                 |         |               | 313,708 |         |         |         | 313,775 | 
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Shareholders equity, subject to redemption:                              |                                                                                                                                                                                                                                                                   |                                                                       |                                                   |         |               |         |         |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Common stock (subject to redemption), $0.01 par value,
    8,000,000 shares authorized; 4,941,647 shares and
    5,149,840 shares issued, and 4,941,647 shares and
    5,149,840 shares outstanding at December 31, 2005 and
    September 30, 2005, respectively |                                                                       |                                                   | 49      |               |         |         | 51      |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Additional paid-in capital                                                                                                                                                                                                                                        |                                                                       |                                                   | 81,002  |               |         |         | 88,479  |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Accumulated deficit                                                                                                                                                                                                                                               |                                                                       |                                                   | (75,836 | )             |         |         | (68,056 | )      
|                                                                          |                                                                                                                                                                                                                                                                   |                                                                       |                                                   |         |               |        
|                                                                          |                                                                                                                                                                                                                                                                   |                                                                       | Total shareholders equity, subject to redemption |         |               | 5,215   |         |         |         | 20,474  | 
|                                                                          |                                                                                                                                                                                                                                                                   |                                                                       |                                                   |         |               |        
|                                                                          |                                                                                                                                                                                                                                                                   | Total liabilities and shareholders equity, subject to
    redemption |                                                   | $       | 318,923       |         |         | $       | 334,249 |        
|                                                                          |                                                                                                                                                                                                                                                                   |                                                                       |                                                   |         |               |        



2



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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION





CONSOLIDATED STATEMENTS OF OPERATIONS


Three Months Ended December 31, 2005 and 2004


|                                                             |                               |                             |           |        |        |   |           |        |        |  
|------------------------------------------------------------ | ----------------------------- | --------------------------- | --------- | ------ | ------ | - | --------- | ------ | ------ | -
|                                                             |                               | Three Months Ended          |          
|                                                             |                               | December 31,                |          
|                                                             |                               |                             |          
|                                                             |                               | 2005                        |           |        | 2004   |  
|                                                             |                               |                             |           |        |        |  
|                                                             |                               | (In thousands, except share |          
|                                                             |                               | and per share information)  |          
|                                                             |                               | (Unaudited)                 |          
|                                                            
|                                                            
|                                                            
|                                                            
|Contract revenue                                             |                               | $                           | 101,289   |        |        | $ | 69,221    |       
|                                                            
|                                                            
|                                                            
|                                                            
|Direct contract expense                                      |                               |                             | 76,305    |        |        |   | 50,192    |       
|                                                             |                               |                             |           |        |        |  
|                                                             | Gross profit                  |                             |           | 24,984 |        |   |           | 19,029 |       
|                                                             |                               |                             |           |        |        |  
|Operating expenses:                                          |                               |                             |           |        |        |   |           |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Indirect contract expense     |                             |           | 5,355  |        |   |           | 4,479  |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Research and development      |                             |           | 245    |        |   |           | 87     |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | General and administrative    |                             |           | 9,603  |        |   |           | 6,709  |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Rental and occupancy expense  |                             |           | 4,957  |        |   |           | 2,444  |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Depreciation and amortization |                             |           | 4,790  |        |   |           | 3,488  |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Stock-based compensation(1)   |                             |           | 2,756  |        |   |           | 457    |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Bad debt expense              |                             |           | 106    |        |   |           | 292    |       
|                                                             |                               |                             |           |        |        |  
|Total operating expenses                                     |                               |                             | 27,812    |        |        |   | 17,956    |       
|                                                             |                               |                             |           |        |        |  
|                                                             |                               | Operating income (loss)     |           |        | (2,828 | ) |           |        | 1,073  |  
|                                                            
|                                                            
|                                                            
|                                                            
|Other income (expense):                                      |                               |                             |           |        |        |   |           |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Interest income               |                             |           | 372    |        |   |           | 19     |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Interest expense              |                             |           | (5,445 | )      |   |           | (6,994 | )     
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Other                         |                             |           | 140    |        |   |           | (11    | )     
|                                                             |                               |                             |           |        |        |  
|                                                             |                               | Loss before income taxes    |           |        | (7,761 | ) |           |        | (5,913 | )
|                                                            
|                                                            
|                                                            
|                                                            
|Income tax expense                                           |                               |                             | (19       | )      |        |   | (51       | )     
|                                                             |                               |                             |           |        |        |  
|                                                             |                               | Net loss                    |           | $      | (7,780 | ) |           | $      | (5,964 | )
|                                                             |                               |                             |           |        |        |  
|Basic and diluted loss per share                             |                               | $                           | (1.52     | )      |        | $ | (1.77     | )     
|                                                             |                               |                             |           |        |        |  
|Basic and diluted weighted average common shares outstanding |                               |                             | 5,123,744 |        |        |   | 3,368,564 |       
|                                                             |                               |                             |           |        |        |  






|    |                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------
|(1) | Stock-based compensation is a separately reported component of
    general and administrative expense.



3



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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY CORPORATION





CONSOLIDATED STATEMENTS OF CASH FLOWS


Three Months Ended December 31, 2005 and 2004


|                                                                                    |                                                          |                             |         |         |      |   |        |         |  
|----------------------------------------------------------------------------------- | -------------------------------------------------------- | --------------------------- | ------- | ------- | ---- | - | ------ | ------- | -
|                                                                                    |                                                          | Three Months Ended          |        
|                                                                                    |                                                          | December 31,                |        
|                                                                                    |                                                          |                             |        
|                                                                                    |                                                          | 2005                        |         |         | 2004 |  
|                                                                                    |                                                          |                             |         |         |      |  
|                                                                                    |                                                          | (In thousands, except share |        
|                                                                                    |                                                          | and per share information)  |        
|                                                                                    |                                                          | (Unaudited)                 |        
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Cash flows from operating activities:                                               |                                                          |                             |         |         |      |   |        |        
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Net loss                                                 |                             | $       | (7,780  | )    |   | $      | (5,964  | )
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Adjustments to reconcile net loss to net cash provided by
    operating activities: |                                                          |                             |         |         |      |   |        |        
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Depreciation and amortization                            |                             |         | 4,790   |      |   |        | 3,488   |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Accretion of debt to face value                          |                             |         | 221     |      |   |        | 2,392   |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Amortization of debt issuance costs                      |                             |         | 249     |      |   |        | 170     |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Decrease in value of interest rate cap agreement         |                             |         | 50      |      |   |        | 53      |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Change in fair value of redeemable common stock warrants |                             |         | 1,800   |      |   |        | 889     |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Stock-based compensation                                 |                             |         | 2,756   |      |   |        | 457     |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Gain on investments, net                                 |                             |         | (25     | )    |   |        | (28     | )
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Changes in assets and liabilities, net of effect of acquisitions:                   |                                                          |                             |         |         |      |   |        |        
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Accounts receivable, net                                 |                             |         | (11,830 | )    |   |        | (2,103  | )
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Other assets                                             |                             |         | (149    | )    |   |        | 1,006   |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Trade accounts payable and accruals                      |                             |         | (3,950  | )    |   |        | (4,700  | )
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Other liabilities                                        |                             |         | (787    | )    |   |        | 91      |  
|                                                                                    |                                                          |                             |         |         |      |  
|Net cash used in operating activities                                               |                                                          |                             | (14,655 | )       |      |   | (4,249 | )      
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Cash flows from investing activities:                                               |                                                          |                             |         |         |      |   |        |        
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Cash paid for acquisitions, net of cash acquired         |                             |         |        |      |   |        | (1,650  | )
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Capital expenditures                                     |                             |         | (1,605  | )    |   |        | (600    | )
|                                                                                    |                                                          |                             |         |         |      |  
|Net cash used in investing activities                                               |                                                          |                             | (1,605  | )       |      |   | (2,250 | )      
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Cash flows from financing activities:                                               |                                                          |                             |         |         |      |   |        |        
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Proceeds from Term B Senior Credit Facility note payable |                             |         |        |      |   |        | 22,000  |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Payment of debt issuance costs                           |                             |         |        |      |   |        | (58     | )
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Repayment of Term B Credit Facility note payable         |                             |         | (360    | )    |   |        | (180    | )
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Repayment of mezzanine note payable                      |                             |         |        |      |   |        | (20,201 | )
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Repayment of agreements with officers                    |                             |         |        |      |   |        | (1,823  | )
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Borrowings under revolving credit facility               |                             |         |        |      |   |        | 3,000   |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Purchase of shares of common stock from ESOP Trust       |                             |         | (7,592  | )    |   |        | (933    | )
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Sale of common stock to Trust                            |                             |         | 1,693   |      |   |        |        |  
|                                                                                    |                                                          |                             |         |         |      |  
|Net cash provided by (used in) financing activities                                 |                                                          |                             | (6,259  | )       |      |   | 1,805  |        
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Net decrease in cash                                                                |                                                          |                             | (22,519 | )       |      |   | (4,694 | )      
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Cash and cash equivalents at beginning of period                                    |                                                          |                             | 37,778  |         |      |   | 4,717  |        
|                                                                                    |                                                          |                             |         |         |      |  
|Cash and cash equivalents at end of period                                          |                                                          | $                           | 15,259  |         |      | $ | 23     |        
|                                                                                    |                                                          |                             |         |         |      |  
|Supplemental disclosure of cash flow information:                                   |                                                          |                             |         |         |      |   |        |        
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Cash paid for interest                                   |                             |         | 2,375   |      |   |        | 3,023   |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Cash paid (received) for taxes                           |                             |         | 19      |      |   |        | 51      |  



4



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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|    |                                          
|--- | -----------------------------------------
|(1) | Description and Formation of the Business







|    |                                           
|--- | ------------------------------------------
|(2) | Summary of Significant Accounting Policies



| |                                                          
| | ---------------------------------------------------------
| | Basis of Presentation and Principles of
    Consolidation

10-K 333-89756)






| |                           
| | --------------------------
| | Fiscal and Quarter Periods





| |                 
| | ----------------
| | Use of Estimates





| |                          
| | -------------------------
| | Cash and Cash Equivalents



5



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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                    
| | -------------------
| | Revenue Recognition





percentage-of








Accounting for Performance on
Construction-Type and Certain Production-Type Contracts.




| |             
| | ------------
| | Income Taxes



6



---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | Accounts Receivable and Billings in Excess of Costs and
    Estimated Earnings on Uncompleted Contracts







| |                               
| | ------------------------------
| | Goodwill and Other Intangibles

Business Combinations




| |             
| | ------------
| | Fixed Assets





| |                                    
| | -----------------------------------
| | Fair Value of Financial Instruments



7



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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                                                                     
| | --------------------------------------------------------------------
| | Cash, cash equivalents, accounts payable and accounts
    receivable





| |                      
| | ---------------------
| | Marketable securities



Senior
long-term debt






| |                  
| | -----------------
| | Interest rate cap





| |                                 
| | --------------------------------
| | Redeemable common stock warrants





|    |                                                                   
|--- | ------------------------------------------------------------------
|(3) | Employee Stock Ownership Plan (ESOP) and Stock Ownership
    Trust





|    |                        
|--- | -----------------------
|(4) | Postretirement Benefits







8



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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|    |               
|--- | --------------
|(5) | Loss Per Share





|    |                                            
|--- | -------------------------------------------
|(6) | Shareholders Equity, Subject to Redemption







|    |                               
|--- | ------------------------------
|(7) | Goodwill and Intangible Assets







9



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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                  |  |                |      |                |     |   |     | 
|--------------------------------- |  | -------------- | ---- | -------------- | --- | - | --- | 
|                                  |  |                |      | (In Thousands) |    
|                                  |  |                |      |                |    
|For the remaining nine months:    |  |                | 2006 |                |     | $ | 3.8 | 
|                                 
|                                 
|                                 
|                                 
|For the year ending September 30: |  |                | 2007 |                |     |   | 5.0 | 
|                                 
|                                 
|                                 
|                                 
|                                  |  |                | 2008 |                |     |   | 4.7 | 
|                                 
|                                 
|                                 
|                                 
|                                  |  |                | 2009 |                |     |   | 4.4 | 
|                                 
|                                 
|                                 
|                                 
|                                  |  |                | 2010 |                |     |   | 4.3 | 
|                                 
|                                 
|                                 
|                                 
|                                  |  | and thereafter |      |                | 4.6 |  





|    |               
|--- | --------------
|(8) | Long-Term Debt







| |                              
| | -----------------------------
| | Term B Senior Credit Facility





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a senior term loan in the approximate amount of
    $142.6 million (which includes the incremental term loan),
    all of which was drawn down as of December 31, 2005;                                                                                                                                                                                                                                                                             
|
| |  | a senior revolving credit facility, in the amount of
    $30.0 million, of which approximately $2.6 million was
    deemed borrowed as of December 31, 2005, through the
    issuance of letters of credit issued under the Companys
    prior senior credit facility which remain outstanding under the
    Term B Senior Credit Facility and the issuance of one
    additional letter of credit under the Term B Senior Credit
    Facility; and
|
| |  | an uncommitted incremental term loan accordion
    facility in the amount of $150.0 million.                                                                                                                                                                                                                                                                                                                                                      





10



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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








Use of Proceeds.




11



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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Security.


Interest and Fees.


Eurodollar Prime Rate


|               |                                                                  |                   |     |  |                   |  |     |                   |  |  |     |  | 
|-------------- | ---------------------------------------------------------------- | ----------------- | --- |  | ----------------- |  | --- | ----------------- |  |  | --- |  | 
|               |                                                                  | Spread            |     |  | ABR Spread        |  |     | ABR Spread        | 
|Leverage Ratio |                                                                  | (in basis points) |     |  | (in basis points) |  |     | (in basis points) | 
|               |                                                                  |                   |     |  |                   |  |     |                   | 
|Category 1     |                                                                  |                   | 275 |  |                   |  | 225 |                   |  |  | 175 | 
|               | Greater than or equal to 3.00 to 1.00                            |                   |     |  |                   |  |     |                   |  |  |     |  | 
|              
|              
|              
|              
|Category 2     |                                                                  |                   | 250 |  |                   |  | 200 |                   |  |  | 150 | 
|               | Greater than or equal to 2.50 to 1.00 but less than 3.00 to 1.00 |                   |     |  |                   |  |     |                   |  |  |     |  | 
|              
|              
|              
|              
|Category 3     |                                                                  |                   | 225 |  |                   |  | 175 |                   |  |  | 125 | 
|               | Greater than or equal to 2.00 to 1.00 but less than 2.50 to 1.00 |                   |     |  |                   |  |     |                   |  |  |     |  | 
|              
|              
|              
|              
|Category 4     |                                                                  |                   | 200 |  |                   |  | 150 |                   |  |  | 100 | 
|               | Less than 2.00 to 1.00                                           |                   |     |  |                   |  |     |                   |  |  |     |  | 







12



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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)
















Covenants.


Leverage Ratio.


13



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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                        |  |       |              | 
|--------------------------------------- |  | ----- | ------------ | 
|Period                                  |  | Ratio |             
|                                        |  |       |             
|April 1, 2005 through December 31, 2005 |  |       | 3.75 to 1.00 | 
|                                       
|                                       
|                                       
|                                       
|January 1, 2006 through March 31, 2006  |  |       | 3.50 to 1.00 | 
|                                       
|                                       
|                                       
|                                       
|April 1, 2006 through March 31, 2007    |  |       | 3.25 to 1.00 | 
|                                       
|                                       
|                                       
|                                       
|April 1, 2007 through March 31, 2008    |  |       | 2.75 to 1.00 | 
|                                       
|                                       
|                                       
|                                       
|Thereafter                              |  |       | 2.25 to 1.00 | 

Interest Coverage Ratio.






| |   |                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | incur additional indebtedness other than permitted additional
    indebtedness;                                                                                                                                                                                                                          
|
| |  | consolidate, merge or sell all or substantially all of the
    Companys assets;                                                                                                                                                                                                                         
|
| |  | make certain loans and investments including acquisitions of
    businesses, other than permitted acquisitions;                                                                                                                                                                                          
|
| |  | pay dividends or distributions other than distributions needed
    for the ESOP to satisfy its repurchase obligations, for the
    Company to satisfy any put right if exercised by mezzanine
    warrant holders and for certain payments required under the
    Companys equity based incentive plans;
|
| |  | enter into transactions with the Companys shareholders and
    affiliates;                                                                                                                                                                                                                              
|
| |  | enter into certain transactions not permitted under ERISA;                                                                                                                                                                                                                                               
|
| |  | grant certain liens and security interests;                                                                                                                                                                                                                                                              
|
| |  | enter into sale and leaseback transactions;                                                                                                                                                                                                                                                              
|
| |  | change lines of business;                                                                                                                                                                                                                                                                                
|
| |  | repay subordinated indebtedness and redeem or repurchase certain
    equity; or                                                                                                                                                                                                                          
|
| |  | use the proceeds of the Companys borrowings other than as
    permitted by the Term B Senior Credit Facility.                                                                                                                                                                                           

Events of Default.




| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | payment default;                                                                        
|
| |  | breach of representations and warranties;                                               
|
| |  | uncured covenant breaches;                                                              
|
| |  | default under certain other debt exceeding an agreed amount;                            
|
| |  | bankruptcy and insolvency events;                                                       
|
| |  | notice of debarment, suspension or termination under a material
    government contract;

14



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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | certain ERISA violations;                                                                                        
|
| |  | unstayed judgments in excess of an agreed amount;                                                                
|
| |  | failure of the subordinated note to be subordinated to the Term
    B Senior Credit Facility;                    
|
| |  | failure of the guarantee of the Term B Senior Credit
    Facility to be in effect;                               
|
| |  | failure of the security interests to be valid, perfected first
    priority security interests in the collateral;
|
| |  | failure of the Company to remain an S-corporation;                                                               
|
| |  | the Trust is subject to certain taxes in excess of an agreed
    amount;                                         
|
| |  | final negative determination that the ESOP is not a qualified
    plan; or                                       
|
| |  | change of control (as defined below).                                                                            





| |               
| | --------------
| | Mezzanine Note







| |                  
| | -----------------
| | Subordinated Note

(paid-in


15



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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                           
| | --------------------------
| | Other Notes and Agreements







|                                  |  |                      |      |  |      |   |      |      |  |   |      |  |  |      |        |  |       |   |       |  |  |   |        | 
|--------------------------------- |  | -------------------- | ---- |  | ---- | - | ---- | ---- |  | - | ---- |  |  | ---- | ------ |  | ----- | - | ----- |  |  | - | ------ | 
|                                  |  | 5-Fiscal Year Period |     
|                                  |  |                      |     
|                                  |  | 2006                 |      |  | 2007 |   |      | 2008 |  |   | 2009 |  |  | 2010 |        |  | Total |  
|                                  |  |                      |      |  |      |   |      |      |  |   |      |  |  |      |        |  |       |  
|                                  |  | ($ in millions)      |     
|                                 
|                                 
|                                 
|                                 
|Senior Secured Term B Loan(1)     |  | $                    | 1.08 |  |      | $ | 1.44 |      |  | $ | 1.44 |  |  | $    | 138.60 |  |       | $ |      |  |  | $ | 142.56 | 
|                                 
|                                 
|                                 
|                                 
|Subordinated Seller Note(2)       |  |                      |     |  |      |   |     |      |  |   |     |  |  |      | 19.95  |  |       |   | 19.95 |  |  |   | 39.90  | 
|                                 
|                                 
|                                 
|                                 
|Subordinated Paid in Kind Note(3) |  |                      |     |  |      |   |     |      |  |   |     |  |  |      | 7.18   |  |       |   | 7.18  |  |  |   | 14.36  | 
|                                  |  |                      |      |  |      |   |      |      |  |   |      |  |  |      |        |  |       |  
|Total principal payments          |  | $                    | 1.08 |  |      | $ | 1.44 |      |  | $ | 1.44 |  |  | $    | 165.73 |  |       | $ | 27.13 |  |  | $ | 196.82 | 
|                                  |  |                      |      |  |      |   |      |      |  |   |      |  |  |      |        |  |       |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Term B Senior Credit Facility requires the Company to
    repay 1 percent of the principal balance outstanding under
    the senior term loan during the first four years
    (i.e., fiscal years 2005 through 2008) of the Term B
    Senior Credit Facilitys term and 96 percent of the
    principal balance outstanding during the fifth and final year of
    the term. The table reflects the balance drawn of $142.6 as of
    December 31, 2005, resulting in expected annual principal
    payments of approximately $1.1 million, $1.4 million
    and $1.4 million for the remainder of fiscal year 2006 and
    for fiscal years 2007 and 2008, respectively. During the fifth
    year, or 2009, we expect to pay principal in the amount of
    $138.6 million. The Term B Senior Credit Facility also
    requires the Company to make mandatory prepayments of principal
    depending upon whether the Company generates certain excess cash
    flow in a given fiscal year, issues certain equity, issues or
    incurs certain debt or sells certain assets. Due to the
    uncertainty of these payments, the table does not reflect any
    such payments. The approximate $142.6 million includes, as
    of December 31, 2005, approximately $3.3 million of
    the remaining unamortized debt discount. Approximately
    $4.6 million of debt issuance costs were recorded as debt
    discount.
|   
|(2) | Repayment of $39.9 million for the face value of the
    Subordinated Seller Note in two equal payments of
    $19.95 million in years 2009 and 2010. The
    $39.9 million includes, as of December 31, 2005,
    approximately $4.6 million of the remaining unamortized
    debt discount, assigned to fair value of the detachable
    warrants. At date of issuance, December 20, 2002,
    approximately $7.1 million was assigned as                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

16



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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | the fair value of the warrants in accordance with Emerging
    Issues Task Force Issue
    No. 00-19,
    Accounting for Derivative Financial Instruments Indexed
    to, and Potentially settled in, a Companys Own Stock.                                                                                                                                                                                                                           
|   
|(3) | During the eight-year term of the Subordinated Note,
    approximately $14.4 million of principal accretes to the
    note. These amounts are included in the principal payments in
    fiscal years 2009 and 2010. In fiscal years 2009 and 2010,
    interest will be 16% paid quarterly in cash. The principal,
    together with the outstanding balance of the PIK notes will be
    paid in equal amounts at the end of fiscal years 2009 and 2010.



|    |                                 
|--- | --------------------------------
|(9) | Redeemable Common Stock Warrants

00-19,




|     |       
|---- | ------
|(10) | Leases





17



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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                        |  |                |        | 
|--------------------------------------- |  | -------------- | ------ | 
|Fiscal Years Ending                     |  | (In Thousands) |       
|                                        |  |                |       
|2006 (for the remainder of fiscal year) |  | $              | 13,651 | 
|                                       
|                                       
|                                       
|                                       
|2007                                    |  |                | 15,316 | 
|                                       
|                                       
|                                       
|                                       
|2008                                    |  |                | 14,000 | 
|                                       
|                                       
|                                       
|                                       
|2009                                    |  |                | 10,865 | 
|                                       
|                                       
|                                       
|                                       
|2010                                    |  |                | 6,700  | 
|                                       
|                                       
|                                       
|                                       
|and thereafter                          |  |                | 4,057  | 
|                                        |  |                |       
|Gross lease payments                    |  | $              | 64,589 | 
|                                       
|                                       
|                                       
|                                       
|Less: non-cancelable subtenant receipts |  |                | 7,727  | 
|                                        |  |                |       
|Net lease payments                      |  | $              | 56,862 | 
|                                        |  |                |       





|     |             
|---- | ------------
|(11) | Fixed Assets



|                                               |                  |                |        |        |               |   |        |        | 
|---------------------------------------------- | ---------------- | -------------- | ------ | ------ | ------------- | - | ------ | ------ | 
|                                               |                  | December 31,   |        |        | September 30, |  
|                                               |                  | 2005           |        |        | 2005          |  
|                                               |                  |                |        |        |               |  
|                                               |                  | (In thousands) |       
|                                              
|                                              
|                                              
|                                              
|Leasehold improvements                         |                  | $              | 2,403  |        |               | $ | 2,302  |       
|                                              
|                                              
|                                              
|                                              
|Equipment and software                         |                  |                | 18,899 |        |               |   | 17,395 |       
|                                               |                  |                |        |        |               |  
|                                               | Total cost       |                |        | 21,302 |               |   |        | 19,697 | 
|                                               |                  |                |        |        |               |  
|Less accumulated depreciation and amortization |                  |                | 9,682  |        |               |   | 8,523  |       
|                                               |                  |                |        |        |               |  
|                                               | Net fixed assets |                | $      | 11,620 |               |   | $      | 11,174 | 
|                                               |                  |                |        |        |               |  





|     |                          
|---- | -------------------------
|(12) | Stock Appreciation Rights



18



---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                        |  |                |         |  |                    |  |        |                |  |  |             |  |            |                |             |  |  |  |         | 
|----------------------- |  | -------------- | ------- |  | ------------------ |  | ------ | -------------- |  |  | ----------- |  | ---------- | -------------- | ----------- |  |  |  | ------- | 
|                        |  | Number of SARs |         |  | Number of SARs     |  |        | Total          |  |  |             |  | Cumulative |               
|                        |  | Granted to     |         |  | Granted to         |  |        | Number of SARs |  |  | Exercise    |  |            | Number of SARs |            
|Effective Date of Grant |  | Employees      |         |  | Board of Directors |  |        | Granted        |  |  | Price/Share |  |            | Granted        |            
|                        |  |                |         |  |                    |  |        |                |  |  |             |  |            |                |            
|December 23, 2002       |  |                | 64,250  |  |                    |  | 29,400 |                |  |  | 93,650      |  |            | $              | 10.00/share |  |  |  | 93,650  | 
|                       
|                       
|                       
|                       
|May 15, 2003            |  |                | 300     |  |                    |  |       |                |  |  | 300         |  |            | $              | 11.13/share |  |  |  | 93,950  | 
|                       
|                       
|                       
|                       
|June 5, 2003            |  |                | 300     |  |                    |  |       |                |  |  | 300         |  |            | $              | 11.13/share |  |  |  | 94,250  | 
|                       
|                       
|                       
|                       
|December 21, 2003       |  |                | 129,550 |  |                    |  | 12,600 |                |  |  | 142,150     |  |            | $              | 14.71/share |  |  |  | 236,400 | 





10-year




|                        |  |                |         |  |                    |  |        |                |  |  |             |  |            |                |             |  |  |  |         | 
|----------------------- |  | -------------- | ------- |  | ------------------ |  | ------ | -------------- |  |  | ----------- |  | ---------- | -------------- | ----------- |  |  |  | ------- | 
|                        |  | Number of SARs |         |  | Number of SARs     |  |        | Total          |  |  |             |  | Cumulative |               
|                        |  | Granted to     |         |  | Granted to         |  |        | Number of SARs |  |  | Exercise    |  |            | Number of SARs |            
|Effective Date of Grant |  | Employees      |         |  | Board of Directors |  |        | Granted        |  |  | Price/Share |  |            | Granted        |            
|                        |  |                |         |  |                    |  |        |                |  |  |             |  |            |                |            
|November 2004           |  |                |        |  |                    |  | 12,600 |                |  |  | 12,600      |  |            | $              | 19.94/share |  |  |  | 12,600  | 
|                       
|                       
|                       
|                       
|February 2005           |  |                | 164,750 |  |                    |  |       |                |  |  | 164,750     |  |            | $              | 19.94/share |  |  |  | 177,350 | 
|                       
|                       
|                       
|                       
|March 2005              |  |                | 2,000   |  |                    |  |       |                |  |  | 2,000       |  |            | $              | 19.94/share |  |  |  | 179,350 | 
|                       
|                       
|                       
|                       
|April 2005              |  |                | 33,000  |  |                    |  |       |                |  |  | 33,000      |  |            | $              | 29.81/share |  |  |  | 212,350 | 
|                       
|                       
|                       
|                       
|June 2005               |  |                | 2,000   |  |                    |  |       |                |  |  | 2,000       |  |            | $              | 29.81/share |  |  |  | 214,350 | 





19



---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|     |                      
|---- | ---------------------
|(13) | Phantom Stock Program





| |                           
| | --------------------------
| | Initial Phantom Stock Plan





|                            |  |                   |    |   |          |  |    |  
|--------------------------- |  | ----------------- | -- | - | -------- |  | -- | -
|                            |  | The Vested Amount |   
|                            |  | for Grant in      |   
|                            |  |                   |   
|                            |  | February          |    |   | November | 
|Anniversary from Grant Date |  | 2003              |    |   | 2003     | 
|                            |  |                   |    |   |          | 
|1st                         |  |                   |   |   |          |  | 20 | %
|                           
|                           
|                           
|                           
|2nd                         |  |                   |   |   |          |  | 20 | %
|                           
|                           
|                           
|                           
|3rd                         |  |                   | 50 | % |          |  | 20 | %
|                           
|                           
|                           
|                           
|4th                         |  |                   | 25 | % |          |  | 20 | %
|                           
|                           
|                           
|                           
|5th                         |  |                   | 25 | % |          |  | 20 | %



|                        |  |               |         |  |               |  |         | 
|----------------------- |  | ------------- | ------- |  | ------------- |  | ------- | 
|                        |  | Shares of     |         |  | Cumulative    | 
|                        |  | Phantom Stock |         |  | Shares of     | 
|                        |  | Awarded to    |         |  | Phantom Stock | 
|Effective Date of Grant |  | Employees     |         |  | Awarded       | 
|                        |  |               |         |  |               | 
|February 11, 2003       |  |               | 171,000 |  |               |  | 171,000 | 
|                       
|                       
|                       
|                       
|November 11, 2003       |  |               | 52,685  |  |               |  | 223,685 | 





| |                          
| | -------------------------
| | Second Phantom Stock Plan





20



---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                        |  |               |         |     |               |  |         | 
|----------------------- |  | ------------- | ------- | --- | ------------- |  | ------- | 
|                        |  | Shares of     |         |     | Cumulative    | 
|                        |  | Phantom Stock |         |     | Shares of     | 
|                        |  | Awarded to    |         |     | Phantom Stock | 
|Effective Date of Grant |  | Employees     |         |     | Awarded       | 
|                        |  |               |         |     |               | 
|February 1, 2005        |  |               | 207,778 | (1) |               |  | 207,778 | 
|                       
|                       
|                       
|                       
|February 1, 2005        |  |               | 103,414 | (2) |               |  | 314,152 | 






|    |                                           
|--- | ------------------------------------------
|(1) | Shares of performance share phantom stock.
|   
|(2) | Shares of retention share phantom stock.  





| |                            
| | ---------------------------
| | Director Phantom Stock Plan









21



---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










|     |                                               
|---- | ----------------------------------------------
|(14) | Segment Information and Customer Concentration







|     |                      
|---- | ---------------------
|(15) | Business Combinations



| |                              
| | -----------------------------
| | Fiscal Year 2003 Acquisitions





| |                              
| | -----------------------------
| | Fiscal Year 2004 Acquisitions



| |                                                           
| | ----------------------------------------------------------
| | Acquisition of Innovative Technology Solutions Corporation

not-to


22



---



##### Table of Contents



ALION SCIENCE AND TECHNOLOGY




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                           
| | ------------------------------------------
| | Acquisition of Identix Public Sector, Inc.





| |                              
| | -----------------------------
| | Fiscal Year 2005 Acquisitions



| |                                               
| | ----------------------------------------------
| | Acquisition of Assets of Countermeasures, Inc.





| |                                                      
| | -----------------------------------------------------
| | Acquisition of ManTech Environmental Technology, Inc.





| |                                                 
| | ------------------------------------------------
| | Acquisition of Carmel Applied Technologies, Inc.

not-to not-to




| |                                 
| | --------------------------------
| | Investment in VectorCommand Ltd.





| |                                                                               
| | ------------------------------------------------------------------------------
| | Acquisition of John J. McMullen Associates, Inc. and Pro
    Forma Information



23



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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                |                     |               |      |      | 
|------------------------------- | ------------------- | ------------- | ---- | ---- | 
|Form of Consideration           |                     | Fair Value    |     
|                                |                     |               |     
|                                |                     | (In millions) |     
|                               
|                               
|                               
|                               
|Cash paid, net of cash acquired |                     | $             | 52.9 |     
|                               
|                               
|                               
|                               
|Stock issued                    |                     |               | 37.3 |     
|                               
|                               
|                               
|                               
|Future payments                 |                     |               | 8.3  |     
|                               
|                               
|                               
|                               
|Acquisition costs               |                     |               | 1.3  |     
|                                |                     |               |     
|                                | Total consideration |               | $    | 99.8 | 
|                                |                     |               |     



|                                               |       |   |       |      | 
|---------------------------------------------- | ----- | - | ----- | ---- | 
|                                              
|                                              
|                                              
|                                              
|Accounts receivable                            |       | $ | 21.5  |     
|                                              
|                                              
|                                              
|                                              
|Property and equipment                         |       |   | 1.0   |     
|                                              
|                                              
|                                              
|                                              
|Other assets                                   |       |   | 1.4   |     
|                                              
|                                              
|                                              
|                                              
|Identifiable intangible assets                 |       |   | 29.6  |     
|                                              
|                                              
|                                              
|                                              
|Goodwill                                       |       |   | 57.8  |     
|                                              
|                                              
|                                              
|                                              
|Accounts payable and other accrued liabilities |       |   | (11.5 | )   
|                                               |       |   |      
|                                               | Total |   | $     | 99.8 | 
|                                               |       |   |      





|     |                              
|---- | -----------------------------
|(16) | Commitments and Contingencies



| |                     
| | --------------------
| | Earn Out Commitments





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | AB Technologies (AB Tech)  Earn out was based on an
    agreed-upon formula applied to net income of the business units
    that formerly comprised AB Tech. For the three month periods
    ended December 31, 2005 and 2004, the Company recognized
    zero and approximately $1.2 million, respectively, in earn
    out obligation associated with this agreement. The earn out
    obligation expired on February 7, 2005, the fifth
    anniversary of the original acquisition date.
|
| | ITSC  Earn out is based on a portion of the gross
    revenue of the business units that formerly comprised ITSC. For
    the three month periods ended December 31, 2005 and 2004,
    the Company recognized zero and approximately $0.3 million,
    respectively, in earn out obligation associated with this
    agreement. The obligation expired September 30, 2005.                                                                                                                 

24



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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | CATI  Earn-out is based on the performance of the
    business units that formerly comprised CATI. The transaction is
    subject to an earn-out provision
    not-to-exceed a
    cumulative amount of $9.0 million based on attaining
    certain revenue goals for fiscal years 2006 and 2007, and a
    second earn-out provision
    not-to-exceed
    $1.5 million for attaining certain revenue goals in the
    commercial aviation industry. For each of the three month
    periods ended December 31, 2005 and 2004, the Company
    recognized no earn out obligation associated with this
    agreement. The obligation continues through February 25,
    2007.





| |                  
| | -----------------
| | Legal Proceedings



| |                   
| | ------------------
| | AB Tech settlement











| |                                                     
| | ----------------------------------------------------
| | Joseph Hudert vs. Alion; Frank Stotmeister vs. Alion





25



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##### Table of Contents



ALION SCIENCE AND TECHNOLOGY




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










| |                  
| | -----------------
| | Government Audits



26



---



##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations



10-K 333-89756)






| |                                           
| | ------------------------------------------
| | Critical Accounting Estimates and Policies

10-K








| |                                                 
| | ------------------------------------------------
| | Revenue Recognition, Cost Estimation and Payment



27



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##### Table of Contents











| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Cost-reimbursement contracts  revenue is recognized
    as costs are incurred and include an estimate of applicable fees
    earned.                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Fixed-price contracts  revenue is recognized using
    the
    percentage-of-completion
    method based on various performance measures. From time to time,
    facts develop that require the Company to revise its estimated
    total costs or revenues expected. The cumulative effect of
    revised estimates is recorded in the period in which the facts
    requiring revisions become known. The full amount of anticipated
    losses on any type of contract is recognized in the period in
    which they become known.
|
| |  | Time-and-material contracts  revenue is recognized at
    contractually billable rates as labor hours and direct expenses
    are incurred. Labor and related costs are reimbursed at
    negotiated, fixed hourly rates.                                                                                                                                                                                                                                                                                                            



|                   |       |                      |    |      |  |  |     |      |  |   |    |    |  |  |     |      | 
|------------------ | ----- | -------------------- | -- | ---- |  |  | --- | ---- |  | - | -- | -- |  |  | --- | ---- | 
|Contract Type      |       |                      |    |      |  |  |     |     
|                   |       |                      |    |      |  |  |     |     
|                   |       | 2005                 |    |      |  |  |    
|                   |       |                      |    |      |  |  |    
|                   |       | For the Three Months |   
|                   |       | Ended December 31,   |   
|                   |       |                      |   
|                   |       |                      |    | 2004 | 
|                   |       |                      |    |      | 
|                   |       | )                    |   
|                   |       | (In millions         |   
|                  
|                  
|                  
|                  
|Cost-reimbursement |       | $                    | 63 |      |  |  | 62% |      |  | $ | 41 |    |  |  | 59% |     
|                  
|                  
|                  
|                  
|Fixed-price        |       | $                    | 19 |      |  |  | 19% |      |  | $ | 13 |    |  |  | 18% |     
|                  
|                  
|                  
|                  
|Time-and-material  |       | $                    | 19 |      |  |  | 29% |      |  | $ | 15 |    |  |  | 23% |     
|                   |       |                      |    |      |  |  |     |      |  |   |    |   
|                   | Total |                      | $  | 101  |  |  |     | 100% |  |   | $  | 69 |  |  |     | 100% | 
|                   |       |                      |    |      |  |  |     |      |  |   |    |   







28



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##### Table of Contents













|                                           |       |                      |    |      |  |  |     |      |  |   |    |    |  |  |     |      | 
|------------------------------------------ | ----- | -------------------- | -- | ---- |  |  | --- | ---- |  | - | -- | -- |  |  | --- | ---- | 
|Contract Type                              |       |                      |    |      |  |  |     |     
|                                           |       |                      |    |      |  |  |     |     
|                                           |       | 2005                 |    |      |  |  |    
|                                           |       |                      |    |      |  |  |    
|                                           |       | For the Three Months |   
|                                           |       | Ended December 31,   |   
|                                           |       |                      |   
|                                           |       |                      |    | 2004 | 
|                                           |       |                      |    |      | 
|                                           |       | )                    |   
|                                           |       | (In millions         |   
|                                          
|                                          
|                                          
|                                          
|U.S. Department of Defense (DoD)           |       | $                    | 94 |      |  |  | 93% |      |  | $ | 64 |    |  |  | 93% |     
|                                          
|                                          
|                                          
|                                          
|Other Federal Civilian Agencies            |       | $                    | 5  |      |  |  | 5%  |      |  | $ | 3  |    |  |  | 4%  |     
|                                          
|                                          
|                                          
|                                          
|Commercial/ State/ Local and International |       | $                    | 2  |      |  |  | 2%  |      |  | $ | 2  |    |  |  | 3%  |     
|                                           |       |                      |    |      |  |  |     |      |  |   |    |   
|                                           | Total |                      | $  | 101  |  |  |     | 100% |  |   | $  | 69 |  |  |     | 100% | 
|                                           |       |                      |    |      |  |  |     |      |  |   |    |   

Accounting for Performance on
Construction-Type and Certain Production-Type Contracts.




| |                                            
| | -------------------------------------------
| | Goodwill and Identifiable Intangible Assets



29



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##### Table of Contents







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







| |                         
| | ------------------------
| | Stock-Based Compensation





| |                                    
| | -----------------------------------
| | Comparison of Results of Operations



30



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##### Table of Contents







| |                                                                                                      
| | -----------------------------------------------------------------------------------------------------
| | Three Month Period Ended December 31, 2005 Compared to
    Three Month Period Ended December 31, 2004



|                               |                                             |                                      |       |           |                      |              |                 |                     |           |              |                     |     |      |           |      |      |      |   |           |      |      |  |       |       |       |   |      |      |      |  |       |       |       | 
|------------------------------ | ------------------------------------------- | ------------------------------------ | ----- | --------- | -------------------- | ------------ | --------------- | ------------------- | --------- | ------------ | ------------------- | --- | ---- | --------- | ---- | ---- | ---- | - | --------- | ---- | ---- |  | ----- | ----- | ----- | - | ---- | ---- | ---- |  | ----- | ----- | ----- | 
|                               |                                             | Three Months Ended December 31, 2005 |       |           | December 31, 2004    |             
|                               |                                             |                                      |       |           | Three Months Ended   |             
|                               |                                             |                                      |       |           |                      |              |                
|                               |                                             |                                      |       |           |                      | Consolidated |                 |                     |          
|                               |                                             | Consolidated                         |       |           |                      |              | Operations Less |                     |           | Consolidated |                    
|Financial Information          |                                             | Operations of Alion                  |       |           | Acquired Operations* |              |                 | Acquired Operations |           |              | Operations of Alion |    
|                               |                                             |                                      |       |           |                      |              |                 |                     |           |              |                     |    
|                               |                                             | (Dollars in millions)                |      
|                               |                                             |                                      |      
|                               |                                             |                                      |       | % revenue |                      |              |                 |                     | % revenue |              |                     |     |      | % revenue |      |      |      |   | % revenue |     
|                              
|                              
|                              
|                              
|Total revenue                  |                                             | $                                    | 101.3 |           |                      |              |                 |                     |           | $            | 30.3                |     |      |           |      |      |      | $ | 71.0      |      |      |  |       |       |       | $ | 69.2 |      |      |  |       |      
|                              
|                              
|                              
|                              
|                               | Material and subcontract revenue            |                                      |       | 32.8      |                      |              |                 | 32.4                | %         |              |                     | 9.7 |      |           |      | 32.0 | %    |   |           | 23.1 |      |  |       | 32.5% |       |   |      | 16.9 |      |  |       | 24.4% |      
|                              
|                              
|                              
|                              
|Total direct contract expenses |                                             |                                      | 76.3  |           |                      |              | 75.3            | %                   |           |              | 22.4                |     |      |           | 73.9 | %    |      |   | 53.9      |      |      |  | 75.9% |       |       |   | 50.2 |      |      |  | 72.5% |      
|                               | Major components of direct contract expense |                                      |       |           |                      |              |                 |                     |           |              |                     |     |      |           |      |      |      |   |           |      |      |  |       |       |       |   |      |      |      |  |       |       |      
|                              
|                              
|                              
|                              
|                               |                                             | Direct labor cost                    |       |           | 41.4                 |              |                 |                     | 40.9      | %            |                     |     | 12.3 |           |      |      | 40.6 | % |           |      | 29.2 |  |       |       | 41.1% |   |      |      | 31.8 |  |       |       | 46.0% | 
|                              
|                              
|                              
|                              
|                               |                                             | Other direct cost (ODC)              |       |           | 2.6                  |              |                 |                     | 2.6       | %            |                     |     | 0.6  |           |      |      | 2.0  | % |           |      | 2.0  |  |       |       | 2.8%  |   |      |      | 2.0  |  |       |       | 2.8%  | 
|                              
|                              
|                              
|                              
|                               |                                             | Material and subcontract (M&S) cost  |       |           | 32.3                 |              |                 |                     | 31.8      | %            |                     |     | 9.5  |           |      |      | 31.4 | % |           |      | 22.8 |  |       |       | 32.1% |   |      |      | 16.4 |  |       |       | 23.7% | 
|                              
|                              
|                              
|                              
|Gross profit                   |                                             |                                      | 25.0  |           |                      |              | 24.7            | %                   |           |              | 7.8                 |     |      |           | 25.7 | %    |      |   | 17.2      |      |      |  | 24.2% |       |       |   | 19.0 |      |      |  | 27.5% |      
|                              
|                              
|                              
|                              
|Total operating expense        |                                             |                                      | 27.8  |           |                      |              | 27.4            | %                   |           |              | 7.4                 |     |      |           | 24.4 | %    |      |   | 20.4      |      |      |  | 28.7% |       |       |   | 18.0 |      |      |  | 26.0% |      
|                               | Major components of operating expense       |                                      |       |           |                      |              |                 |                     |           |              |                     |     |      |           |      |      |      |   |           |      |      |  |       |       |       |   |      |      |      |  |       |       |      
|                              
|                              
|                              
|                              
|                               |                                             | Indirect personnel and facilities    |       |           | 10.3                 |              |                 |                     | 10.2      | %            |                     |     | 3.8  |           |      |      | 12.5 | % |           |      | 6.5  |  |       |       | 9.2%  |   |      |      | 6.9  |  |       |       | 10.0% | 
|                              
|                              
|                              
|                              
|                               |                                             | General and administrative           |       |           | 9.6                  |              |                 |                     | 9.5       | %            |                     |     | 3.5  |           |      |      | 11.6 | % |           |      | 6.1  |  |       |       | 8.6%  |   |      |      | 6.7  |  |       |       | 9.7%  | 
|                              
|                              
|                              
|                              
|                               |                                             | Depreciation and amortization        |       |           | 4.8                  |              |                 |                     | 4.7       | %            |                     |     | 1.1  |           |      |      | 3.6  | % |           |      | 3.7  |  |       |       | 5.2%  |   |      |      | 3.5  |  |       |       | 5.1%  | 
|                              
|                              
|                              
|                              
|                               |                                             | Stock-based compensation             |       |           | 2.8                  |              |                 |                     | 2.8       | %            |                     |     |     |           |      |      | 0.0  | % |           |      | 2.8  |  |       |       | 3.9%  |   |      |      | 0.5  |  |       |       | 0.7%  | 
|                              
|                              
|                              
|                              
|Income (loss) from operations  |                                             | $                                    | (2.8  | )         |                      |              | (2.8            | )%                  |           | $            | (0.7                | )   |      |           | 2.3  | %    |      | $ | (2.1      | )    |      |  | (5.0  | )%    |       | $ | 1.1  |      |      |  | 1.5%  |      






|  |                                                                                                                                                                                                                                                                                                       
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | For the three month period ended December 31, 2005, the
    operations of the acquired entities, METI, CATI and JJMA,
    respectively, have been fully integrated within Alion on a
    consolidated basis. The financial information attributed to
    these entities is the estimate of management.

Contract Revenues.


|  |  |                                                                   |  |              
|- |  | ----------------------------------------------------------------- |  | -------------
| 
| 
| 
| 
| |  | Revenue generated by the activities of acquired operations        |  | $30.3 million
| 
| 
| 
| 
| |  | Revenue generated by the activities of the non-acquired operation |  | $1.8 million 
| 
| 
| 
| 
|  |  | Total:                                                            |  | $32.1 million



31



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##### Table of Contents







Direct Contract Expenses.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Direct labor costs for the three month period ended
    December 31, 2005 increased by $9.6 million, or 30.2%,
    to $41.4 million from $31.8 million for the three
    month period ended December 31, 2004. As a percentage of
    revenue, direct labor cost was 40.9% for the three month period
    ended December 31, 2005 as compared to 46.0% for the three
    month period ended December 31, 2004. The percentage
    decrease in direct labor cost results from a shift in direct
    costs from direct labor costs and M&S costs.                                                                                                                                                                                                                                          
|
| |  | M&S cost increased approximately $15.9 million, or
    97.0%, to $32.3 million for the three month period ended
    December 31, 2005, compared to $16.4 million for the
    three month period ended December 31, 2004. As a percentage
    of revenue, M&S cost was 31.8% for the three month period
    ended December 31, 2005 as compared to 23.7% for the three
    month period ended December 31, 2004. The percentage
    increase in M&S cost is directly associated with the
    relative percentage increase in M&S revenues associated with
    the MSIAC and Night Vision contracts, as described above. As a
    percentage of M&S revenue, M&S cost was approximately
    98.2% and 97.0% for the three month periods ended
    December 31, 2005 and 2004, respectively.

32



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##### Table of Contents



Gross Profit.


|  |  |                                                                                         |  |               
|- |  | --------------------------------------------------------------------------------------- |  | --------------
| 
| 
| 
| 
| |  | Increase in gross profit generated by the activities of the
    acquired operations     |  | $7.8 million  
| 
| 
| 
| 
| |  | Decrease in gross profit generated by the activities of the
    non-acquired operations |  | $(1.8) million
| 
| 
| 
| 
|  |  | Total:                                                                                  |  | $6.0 million  



Operating Expenses.


|  |  |                                                                             |  |             
|- |  | --------------------------------------------------------------------------- |  | ------------
| 
| 
| 
| 
| |  | Operating expense incurred by the activities of the acquired
    operations |  | $8.5 million
| 
| 
| 
| 
| |  | Operating expense incurred by activities of the non-acquired
    operations |  | $1.3 million
| 
| 
| 
| 
|  |  | Total:                                                                      |  | $9.8 million





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Stock-based compensation and deferred compensation relate
    primarily to the expense associated with the stock appreciation
    rights and phantom stock plans. Stock-based compensation
    increased approximately $2.3 million, or 460% to
    $2.8 million for the three month period ended
    December 31, 2005, from approximately $0.5 million for
    the three month period ended December 31, 2004. The
    increase in stock-based compensation and deferred compensation
    is a result of the increase in the value of Alions common
    stock and the increase in awards granted. Stock-based
    compensation was approximately 2.8% and 0.7% of revenue for the
    three month periods ended December 31, 2005 and 2004,
    respectively.                                                                                                                                                                
|
| |  | Operating expenses for indirect personnel and facilities costs
    related to rental and occupancy expenses increased approximately
    $3.4 million, or 49.3%, to $10.3 million for the three
    month period ended December 31, 2005, from
    $6.9 million for the three month period ended
    December 31, 2004. As a percentage of revenue, operating
    expenses relating to indirect personnel and facilities expense
    was 10.2% for the three month period ended December 31,
    2005 as compared to 10.0% for the three month period ended
    December 31, 2004. The increase, as a percentage of
    revenue, is partially attributable to the increase in facility
    lease costs associated with certain acquisitions completed in
    the second quarter of fiscal year 2005. Management is taking
    steps to reduce these acquired facility lease costs through
    efforts to sublet the excess space.
|
| |  | General and administrative (G&A) expense increased
    approximately $2.9 million, or 43.3%, to $9.6 million
    for the three month period ended December 31, 2005,
    compared to $6.7 million for the three month period ended
    December 31, 2004. As a percentage of revenues, general and
    administrative expenses were 9.5% for the three month period
    ended December 31, 2005, compared to 9.7% for the three
    month period ended December 31, 2004. The costs associated
    with providing G&A activities for the acquired operations
    have been partially absorbed by the existing G&A
    infrastructure, resulting in a decrease in expense expressed as
    a percentage of revenue.                                                                                                                                                                                                              
|
| |  | Depreciation and amortization expense increased approximately
    $1.3 million, or 37.1%, to $4.8 million for the three
    month period ended December 31, 2005, as compared to
    $3.5 million for the three month period ended
    December 31, 2004. Depreciation is associated primarily
    with the value assigned to fixed assets while amortization
    expense is associated primarily with the intangible asset value
    assigned to the                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

33



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##### Table of Contents



| |  |                                                                                                                            
| |  | ---------------------------------------------------------------------------------------------------------------------------
| |  | purchased contracts of the acquired entities. The
    $1.3 million increase is primarily attributable to the
    following:

|                                                 |         |               |     |     |      |   |     |     |     | 
|------------------------------------------------ | ------- | ------------- | --- | --- | ---- | - | --- | --- | --- | 
|                                                 |         | Three Months  |    
|                                                 |         | Ended         |    
|                                                 |         | December 31,  |    
|                                                 |         |               |    
|                                                 |         | 2005          |     |     | 2004 |  
|                                                 |         |               |     |     |      |  
|                                                 |         | (In millions) |    
|                                                
|                                                
|                                                
|                                                
|Depreciation expense                             |         | $             | 1.3 |     |      | $ | 0.8 |    
|                                                
|                                                
|                                                
|                                                
|Amortization expense for purchased contracts of: |         |               |     |     |      |   |     |    
|                                                
|                                                
|                                                
|                                                
|                                                 | - IITRI |               | $   | 2.3 |      |   | $   | 2.5 |    
|                                                
|                                                
|                                                
|                                                
|                                                 | - IPS   |               | $   | 0.1 |      |   | $   | 0.1 |    
|                                                
|                                                
|                                                
|                                                
|                                                 | - JJMA  |               | $   | 0.9 |      |   |     |    |    
|                                                
|                                                
|                                                
|                                                
|Amortization expense for software                |         | $             | 0.1 |     |      |   |    |    
|                                                
|                                                
|                                                
|                                                
|Amortization expense for non-compete agreements  |         | $             | 0.1 |     |      |   |    |    
|                                                 |         |               |     |     |      |  
|                                                 |         | Total         |     | $   | 4.8  |   |     | $   | 3.5 | 
|                                                 |         |               |     |     |      |  



Loss from Operations.


|  |  |                                                            |  |               
|- |  | ---------------------------------------------------------- |  | --------------
| 
| 
| 
| 
| |  | Operating income generated from the acquired operations    |  | $ 0.4  million
| 
| 
| 
| 
| |  | Operating loss generated from the non-acquired operations* |  | $(4.3) million
| 
| 
| 
| 
|  |  | Total:                                                     |  | $(3.9) million






|  |                                                                                                                                                                                                              
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | For the three month period ended December 31, 2005, the
    operating loss from non-acquired operations was partially
    attributable to stock-based compensation expense of
    approximately $2.8 million.

Other Income and Expense.


34



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##### Table of Contents





|                                   |                                            |               |     |     |      |   |     |     |     | 
|---------------------------------- | ------------------------------------------ | ------------- | --- | --- | ---- | - | --- | --- | --- | 
|                                   |                                            | Three Month   |    
|                                   |                                            | Period Ended  |    
|                                   |                                            | December 31,  |    
|                                   |                                            |               |    
|                                   |                                            | 2005          |     |     | 2004 |  
|                                   |                                            |               |     |     |      |  
|                                   |                                            | (In millions) |    
|                                  
|                                  
|                                  
|                                  
|Revolving facility                 |                                            | $             |    |     |      | $ | 0.1 |    
|                                  
|                                  
|                                  
|                                  
|Senior term loan                   |                                            |               | 2.6 |     |      |   | 1.1 |    
|                                  
|                                  
|                                  
|                                  
|Mezzanine Note  cash-pay interest |                                            |               |    |     |      |   | 1.7 |    
|                                  
|                                  
|                                  
|                                  
|                                   | - accretion of debt discount               |               |     | 0.0 |      |   |     | 2.1 |    
|                                  
|                                  
|                                  
|                                  
|Subordinated note  PIK interest   |                                            |               | 0.6 |     |      |   | 0.6 |    
|                                  
|                                  
|                                  
|                                  
|                                   | - accretion of long-term deferred interest |               |     | 0.2 |      |   |     | 0.1 |    
|                                  
|                                  
|                                  
|                                  
|                                   | - accretion of debt discount               |               |     | 0.2 |      |   |     | 0.2 |    
|                                  
|                                  
|                                  
|                                  
|Agreements with officers           |                                            |               |    |     |      |   | 0.1 |    
|                                  
|                                  
|                                  
|                                  
|Accretion of warrants(a)           |                                            |               | 1.8 |     |      |   | 0.9 |    
|                                  
|                                  
|                                  
|                                  
|Other                              |                                            |               |    |     |      |   | 0.1 |    
|                                   |                                            |               |     |     |      |  
|                                   |                                            | Total         |     | $   | 5.4  |   |     | $   | 7.0 | 
|                                   |                                            |               |     |     |      |  






|    |                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Reflects change in value assigned to the detachable warrants
    associated with Mezzanine and Subordinated notes based on the
    change in the value of Alion common stock.

Income Tax (Expense) Benefit.


Net Loss.




| |                                
| | -------------------------------
| | Liquidity and Capital Resources









35



---



##### Table of Contents







| |                             
| | ----------------------------
| | Discussion of Debt Structure







| |                              
| | -----------------------------
| | Term B Senior Credit Facility





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a senior term loan in the approximate amount of
    $142.6 million, (which includes the incremental term loan),
    all of which was drawn down as of December 31, 2005;                                                                                                                                                                                                                                                                            
|
| |  | a senior revolving credit facility, in the amount of
    $30.0 million, of which approximately $2.6 million was
    deemed borrowed as of December 31, 2005, through the
    issuance of letters of credit issued under the Companys
    prior senior credit facility which remain outstanding under the
    Term B Senior Credit Facility and the issuance of one
    additional letter of credit under the Term B Senior Credit
    Facility; and
|
| |  | an uncommitted incremental term loan accordion
    facility in the amount of $150.0 million.                                                                                                                                                                                                                                                                                                                                                      







36



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##### Table of Contents









Use of Proceeds.




Security.


Interest and Fees.


37



---



##### Table of Contents





Eurodollar Prime Rate


|               |                                                                      |                   |     |  |                   |  |     |                   |  |  |     |  | 
|-------------- | -------------------------------------------------------------------- | ----------------- | --- |  | ----------------- |  | --- | ----------------- |  |  | --- |  | 
|               |                                                                      | Spread            |     |  | ABR Spread        |  |     | ABR Spread        | 
|Leverage Ratio |                                                                      | (in basis points) |     |  | (in basis points) |  |     | (in basis points) | 
|               |                                                                      |                   |     |  |                   |  |     |                   | 
|Category 1     |                                                                      |                   | 275 |  |                   |  | 225 |                   |  |  | 175 | 
|               | Greater than or equal to 3.00 to 1.00                                |                   |     |  |                   |  |     |                   |  |  |     |  | 
|              
|              
|              
|              
|Category 2     |                                                                      |                   | 250 |  |                   |  | 200 |                   |  |  | 150 | 
|               | Greater than or equal to 2.50 to 1.00 but less than 3.00 to
    1.00 |                   |     |  |                   |  |     |                   |  |  |     |  | 
|              
|              
|              
|              
|Category 3     |                                                                      |                   | 225 |  |                   |  | 175 |                   |  |  | 125 | 
|               | Greater than or equal to 2.00 to 1.00 but less than 2.50 to
    1.00 |                   |     |  |                   |  |     |                   |  |  |     |  | 
|              
|              
|              
|              
|Category 4     |                                                                      |                   | 200 |  |                   |  | 150 |                   |  |  | 100 | 
|               | Less than 2.00 to 1.00                                               |                   |     |  |                   |  |     |                   |  |  |     |  | 









38



---



##### Table of Contents















Covenants.


Leverage Ratio.


|                                        |  |       |              | 
|--------------------------------------- |  | ----- | ------------ | 
|Period                                  |  | Ratio |             
|                                        |  |       |             
|August 2, 2004 through March 31, 2005   |  |       | 3.85 to 1.00 | 
|                                       
|                                       
|                                       
|                                       
|April 1, 2005 through December 31, 2005 |  |       | 3.75 to 1.00 | 
|                                       
|                                       
|                                       
|                                       
|January 1, 2006 through March 31, 2006  |  |       | 3.50 to 1.00 | 
|                                       
|                                       
|                                       
|                                       
|April 1, 2006 through March 31, 2007    |  |       | 3.25 to 1.00 | 
|                                       
|                                       
|                                       
|                                       
|April 1, 2007 through March 31, 2008    |  |       | 2.75 to 1.00 | 
|                                       
|                                       
|                                       
|                                       
|Thereafter                              |  |       | 2.25 to 1.00 | 

Interest Coverage Ratio.






| |   |                                                                                 
| | - | --------------------------------------------------------------------------------
| |  | incur additional indebtedness other than permitted additional
    indebtedness; 
|
| |  | consolidate, merge or sell all or substantially all of the
    Companys assets;

39



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | make certain loans and investments including acquisitions of
    businesses, other than permitted acquisitions;                                                                                                                                                                                          
|
| |  | pay dividends or distributions other than distributions needed
    for the ESOP to satisfy its repurchase obligations, for the
    Company to satisfy any put right if exercised by mezzanine
    warrant holders and for certain payments required under the
    Companys equity based incentive plans;
|
| |  | enter into transactions with the Companys shareholders and
    affiliates;                                                                                                                                                                                                                              
|
| |  | enter into certain transactions not permitted under ERISA;                                                                                                                                                                                                                                               
|
| |  | grant certain liens and security interests;                                                                                                                                                                                                                                                              
|
| |  | enter into sale and leaseback transactions;                                                                                                                                                                                                                                                              
|
| |  | change lines of business;                                                                                                                                                                                                                                                                                
|
| |  | repay subordinated indebtedness and redeem or repurchase certain
    equity; or                                                                                                                                                                                                                          
|
| |  | use the proceeds of the Companys borrowings other than as
    permitted by the Term B Senior Credit Facility.                                                                                                                                                                                           

Events of Default.




| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | payment default;                                                                                                 
|
| |  | breach of representations and warranties;                                                                        
|
| |  | uncured covenant breaches;                                                                                       
|
| |  | default under certain other debt exceeding an agreed amount;                                                     
|
| |  | bankruptcy and insolvency events;                                                                                
|
| |  | notice of debarment, suspension or termination under a material
    government contract;                         
|
| |  | certain ERISA violations;                                                                                        
|
| |  | unstayed judgments in excess of an agreed amount;                                                                
|
| |  | failure of the subordinated note to be subordinated to the Term
    B Senior Credit Facility;                    
|
| |  | failure of the guarantee of the Term B Senior Credit Facility to
    be in effect;                               
|
| |  | failure of the security interests to be valid, perfected first
    priority security interests in the collateral;
|
| |  | failure of the Company to remain an S-corporation;                                                               
|
| |  | the Trust is subject to certain taxes in excess of an agreed
    amount;                                         
|
| |  | final negative determination that the ESOP is not a qualified
    plan; or                                       
|
| |  | change of control (as defined below).                                                                            



40



---



##### Table of Contents







| |               
| | --------------
| | Mezzanine Note







| |                  
| | -----------------
| | Subordinated Note

paid-in




| |         
| | --------
| | Warrants





41



---



##### Table of Contents











| |                           
| | --------------------------
| | Other Notes and Agreements





|                               |                |                      |       |       |      |  |        |        |  |  |        |        |  |      |         |         |  |  |        |        | 
|------------------------------ | -------------- | -------------------- | ----- | ----- | ---- |  | ------ | ------ |  |  | ------ | ------ |  | ---- | ------- | ------- |  |  | ------ | ------ | 
|                               |                | 5-Fiscal Year Period |      
|                               |                |                      |      
|                               |                | 2006*                |       |       | 2007 |  |        | 2008   |  |  | 2009   |        |  | 2010 |        
|                               |                |                      |       |       |      |  |        |        |  |  |        |        |  |      |        
|                               |                | ($ In thousands)     |      
|Bank revolving credit facility |                |                      |       |       |      |  |        |        |  |  |        |        |  |      |         |         |  |  |        |       
|                              
|                              
|                              
|                              
|                               | - Interest(1)  |                      | $     | 112   |      |  | $      | 150    |  |  | $      | 150    |  |      | $       | 150     |  |  | $      |       | 
|Senior Secured Term B Loan     |                |                      |       |       |      |  |        |        |  |  |        |        |  |      |         |         |  |  |        |       
|                              
|                              
|                              
|                              
|                               | - Interest(2)  |                      |       | 7,494 |      |  |        | 9,876  |  |  |        | 9,913  |  |      |         | 5,108   |  |  |        |       | 
|                              
|                              
|                              
|                              
|                               | - Principal(3) |                      |       | 1,080 |      |  |        | 1,440  |  |  |        | 1,440  |  |      |         | 138,600 |  |  |        |       | 
|Subordinated note              |                |                      |       |       |      |  |        |        |  |  |        |        |  |      |         |         |  |  |        |       
|                              
|                              
|                              
|                              
|                               | - Interest(4)  |                      |       |      |      |  |        |       |  |  |        |       |  |      |         | 6,384   |  |  |        | 3,192  | 
|                              
|                              
|                              
|                              
|                               | - Principal(4) |                      |       |      |      |  |        |       |  |  |        |       |  |      |         | 27,132  |  |  |        | 27,132 | 
|                               |                |                      |       |       |      |  |        |        |  |  |        |        |  |      |        
|Total cash  Pay interest      |                |                      | 7,606 |       |      |  | 10,026 |        |  |  | 10,063 |        |  |      | 11,642  |         |  |  |       |       
|                              
|                              
|                              
|                              
|Total cash  Pay principal     |                |                      | 1,080 |       |      |  | 1,440  |        |  |  | 1,440  |        |  |      | 163,932 |         |  |  | 27,132 |       
|                               |                |                      |       |       |      |  |        |        |  |  |        |        |  |      |        
|                               | Total          |                      | $     | 8,686 |      |  | $      | 11,466 |  |  | $      | 11,503 |  |      | $       | 175,574 |  |  | $      | 30,324 | 
|                               |                |                      |       |       |      |  |        |        |  |  |        |        |  |      |        






|  |                                                            
|- | -----------------------------------------------------------
|* | Estimated interest expense for the remainder of fiscal 2006



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We anticipate accessing, from time to time, our
    $30.0 million bank revolving credit facility to finance our
    ongoing working capital needs. The term of the revolving credit
    facility is five years. For the fiscal years 2006 through 2009,
    we anticipate the balance drawn on the revolving credit facility
    to be minimal. The interest expense value includes an estimate
    for the unused balance fee on the $30.0 million revolving
    credit facility.                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(2) | The projected average annual balance which we estimate will be
    drawn under the Senior Secured Term B Loan is as follows:
    $141.3 million, $140.0 million, $138.6 million,
    and $69.5 million for the remainder of fiscal year 2006 and
    for fiscal years ending September 30, 2007, 2008, and 2009,
    respectively. Given the structure of the Term B senior
    credit facility, the Company expects that it will need to
    refinance the Term B Senior Credit Facility before the end
    of fiscal year 2008 and, therefore, interest expense would
    continue at levels similar to those set forth for prior years.
    Based on an estimated LIBOR rate plus the CSFB Eurodollar
    spread, the effective annual interest rate for the remainder of
    fiscal year 2006 and for fiscal years 2007, 2008, and 2009 is
    estimated to be approximately 7.2%, 7.1%, 7.2%, and 7.4%,

42



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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | respectively. The effective interest rate takes into account the
    interest rate cap agreements which limit the interest rate we
    will pay on a portion, but not all, of the outstanding principal
    balance of the Term B Senior Credit Facility. The current cap
    agreements expire in September 2007. Outstanding principal
    balances not under the cap agreements have interest expense
    based on the Eurodollar rate. The term of the Senior Secured
    Term B Loan is five years. The approximate impact of a 1%
    increase in the interest rate, as applied to principal balances
    drawn under the Senior Secured Term B Loan not covered by the
    current interest rate cap agreements would be $0.6 million,
    $0.8 million, $1.4 million, and $0.7 million for
    the remainder of fiscal year 2006 and for fiscal years ending
    September 30, 2007, 2008, and 2009, respectively. The
    estimated interest expense value includes an estimate for the
    commitment fee on the Senior Secured Term B Loan.                             
|   
|(3) | The Term B senior credit facility requires us to repay
    1 percent of the principal balance outstanding under the
    senior term loan during the first four years (i.e. fiscal years
    2005 through 2008) of its term and 96 percent of the
    principal balance outstanding during the fifth and final year
    (i.e. 2009) of the term. The table reflects the balance drawn of
    $142.6 as of December 31, 2005, resulting in expected
    annual principal payments of approximately $1.1 million for
    the remainder of fiscal year 2006 and $1.4 million in each
    of fiscal years 2007, and 2008. During the fifth year, or 2009,
    we are scheduled to pay principal in the amount of
    $138.6 million. The Term B Senior Credit Facility also
    requires us to make mandatory prepayments of principal depending
    upon whether we generate certain excess cash flow in a given
    fiscal year, we issue certain equity, we issue or incur certain
    debt or we sell certain assets. As of December 31, 2005, no
    mandatory prepayments are due.
|   
|(4) | Interest expense on the subordinated note during the four fiscal
    years from 2005 to 2008 is 6% simple interest,
    paid-in-kind by the
    issuance of the PIK notes. These interest amounts accrue to
    principal increasing the principal value of the subordinated
    note. PIK notes do not bear interest. Interest obligations paid
    by issuance of the PIK notes will not be compounded. In the
    years 2005 through 2008, the PIK interest on the Subordinated
    Note will be approximately $2.4 million in each year.
    During the eight-year term of the Subordinated Note,
    approximately $14.2 million of principal accretes to the
    note through the PIK notes. These amounts are included in the
    principal payments in fiscal years 2009 and 2010. In years 2009
    and 2010, interest will be 16% paid quarterly in cash on the
    original principal of $39.9 million. The principal,
    together with the outstanding balance of the PIK notes, will be
    paid in equal amounts at the end of fiscal years 2009 and 2010.          

Other Obligations




| |          
| | ---------
| | Earn-outs





not-to not-to


43



---



##### Table of Contents



not-to




| |               
| | --------------
| | Lease Payments







| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | Repurchase obligations under the KSOP;                                                                
|
| |  | Obligations related to the holders put rights associated
    with the Mezzanine Note warrants;       
|
| |  | Obligations related to the holders put rights associated
    with the Subordinated Note warrants; and
|
| |  | Obligations relating to our stock appreciation rights and
    phantom stock programs.                 



|               |  |                  |         |  |             |   |             |           |  |   |           | 
|-------------- |  | ---------------- | ------- |  | ----------- | - | ----------- | --------- |  | - | --------- | 
|               |  | Number of Shares |         |  |             |   | Total Value |          
|Date           |  | Repurchased      |         |  | Share Price |   |             | Purchased | 
|               |  |                  |         |  |             |   |             |           | 
|June 2003      |  |                  | 5,248   |  |             | $ | 11.13       |           |  | $ | 58,412    | 
|              
|              
|              
|              
|July 2003      |  |                  | 2,696   |  |             | $ | 11.13       |           |  | $ | 30,000    | 
|              
|              
|              
|              
|December 2003  |  |                  | 50,031  |  |             | $ | 14.71       |           |  | $ | 735,956   | 
|              
|              
|              
|              
|May 2004       |  |                  | 117     |  |             | $ | 16.56       |           |  | $ | 1,945     | 
|              
|              
|              
|              
|June 2004      |  |                  | 727     |  |             | $ | 16.56       |           |  | $ | 12,039    | 
|              
|              
|              
|              
|June 2004      |  |                  | 743     |  |             | $ | 16.56       |           |  | $ | 12,297    | 
|              
|              
|              
|              
|July 2004      |  |                  | 48,309  |  |             | $ | 16.56       |           |  | $ | 799,997   | 
|              
|              
|              
|              
|December 2004  |  |                  | 46,816  |  |             | $ | 19.94       |           |  | $ | 933,505   | 
|              
|              
|              
|              
|March 2005     |  |                  | 5,691   |  |             | $ | 19.94       |           |  | $ | 113,486   | 
|              
|              
|              
|              
|June 2005      |  |                  | 45,846  |  |             | $ | 29.81       |           |  | $ | 1,366,674 | 
|              
|              
|              
|              
|August 2005    |  |                  | 1,090   |  |             | $ | 33.78       |           |  | $ | 36,803    | 
|              
|              
|              
|              
|September 2005 |  |                  | 170,657 |  |             | $ | 33.78       |           |  | $ | 5,764,784 | 
|              
|              
|              
|              
|December 2005  |  |                  | 211,537 |  |             | $ | 35.89       |           |  | $ | 7,592,079 | 





44



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##### Table of Contents







| |                                                          
| | ---------------------------------------------------------
| | Contract performance  Joint Spectrum Center
    Contract








|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures About Market
    Risk

Interest rate risk






45



---



##### Table of Contents









| |                      
| | ---------------------
| | Foreign currency risk



Risk associated with the value of Alion common stock






| |   |                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------
| |  | Obligations related to the holders put rights associated
    with the Mezzanine Note warrants; and
|
| |  | Obligations related to the holders put rights associated
    with the Subordinated Note warrants. 










|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

Disclosure Controls and
Procedures. 15d-15(e)


Internal Control Over
Financial Reporting. 15d-15(f)


46



---



##### Table of Contents






PART II  OTHER INFORMATION







|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings





















47



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##### Table of Contents










|        |                                                                
|------- | ---------------------------------------------------------------
|Item 2. | Unregistered Sales of Equity Securities and Use of
    Proceeds

8-K.







|        |                                
|------- | -------------------------------
|Item 3. | Defaults Upon Senior Securities








|        |                                                    
|------- | ---------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security Holders








|        |                  
|------- | -----------------
|Item 5. | Other Information






|        |         
|------- | --------
|Item 6. | Exhibits

|            |    |             |  |                                                                                                                                                                         
|----------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Description
|            |    |            
|            | 2  | .1          |  | Stock Purchase Agreement by and among Identix Public Sector,
    Inc. Identix Incorporated and Alion Science and Technology
    Corporation, dated February 13, 2004.(4)
|            | 3  | .1          |  | Third Amended and Restated Certificate of Incorporation of Alion
    Science and Technology Corporation.(16)                                                            
|            | 3  | .2          |  | Amended and Restated By-laws of Alion Science and Technology
    Corporation.(18)                                                                                       
|            | 4  | .1          |  | Amended and Restated Alion Science and Technology Corporation
    Employee Ownership, Savings and Investment Plan.(1)                                                   
|            | 4  | .2          |  | First Amendment to The Alion Science and Technology Corporation
    Employee Ownership, Savings and Investment Plan.(2)                                                 
|            | 4  | .3          |  | Second Amendment to The Alion Science and Technology Corporation
    Employee Ownership, Savings and Investment Plan.(3)                                                
|            | 4  | .4          |  | Third Amendment to The Alion Science and Technology Corporation
    Employee Ownership, Savings and Investment Plan.(3)                                                 
|            | 4  | .5          |  | Fourth Amendment to The Alion Science and Technology Corporation
    Employee Ownership, Savings and Investment Plan.(3)                                                
|            | 4  | .6          |  | Fifth Amendment to The Alion Science and Technology Corporation
    Employee Ownership, Savings and Investment Plan.(5)                                                 
|            | 4  | .7          |  | Sixth Amendment to The Alion Science and Technology Corporation
    Employee Ownership, Savings and Investment Plan.(5)                                                 
|            | 4  | .8          |  | Seventh Amendment to The Alion Science and Technology
    Corporation Employee Ownership, Savings and Investment Plan.(5)                                               
|            | 4  | .9          |  | Eighth Amendment to The Alion Science and Technology Corporation
    Employee Ownership, Savings and Investment Plan.(5)                                                
|            | 4  | .10         |  | Ninth Amendment to The Alion Science and Technology Corporation
    Employee Ownership, Savings and Investment Plan.(9)                                                 
|            | 4  | .11         |  | Tenth Amendment to The Alion Science and Technology Corporation
    Employee Ownership, Savings and Investment Plan.(18)                                                
|            | 4  | .12         |  | Eleventh Amendment to The Alion Science and Technology
    Corporation Employee Ownership, Savings and Investment Plan.(18)                                             
|            | 10 | .5          |  | Seller Note Securities Purchase Agreement by and
    between IITRI and Alion Science and Technology
    Corporation.(2)                                                 
|            | 10 | .8          |  | Rights Agreement.(2)                                                                                                                                                    
|            | 10 | .9          |  | First Amendment to The Alion Science and Technology Corporation
    2002 Stock Appreciation Rights Plan.(3)*                                                            

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|            |    |             |  |                                                                                                                                                                                                                                        
|----------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Description
|            |    |            
|            | 10 | .14         |  | Employment Agreement between Alion Science and Technology
    Corporation and Bahman Atefi.(2)*                                                                                                                                        
|            | 10 | .15         |  | Employment Agreement between Alion Science and Technology
    Corporation and Stacy Mendler.(2)*                                                                                                                                       
|            | 10 | .16         |  | Employment Agreement between Alion Science and Technology
    Corporation and Randy Crawford.(2)*                                                                                                                                      
|            | 10 | .17         |  | Employment Agreement between Alion Science and Technology
    Corporation and Barry Watson.(2)*                                                                                                                                        
|            | 10 | .18         |  | Employment Agreement between Alion Science and Technology
    Corporation and John Hughes.(2)*                                                                                                                                         
|            | 10 | .23         |  | Alion Executive Deferred Compensation Plan.(2)*                                                                                                                                                                                        
|            | 10 | .24         |  | Alion Director Deferred Compensation Plan.(2)*                                                                                                                                                                                         
|            | 10 | .25         |  | First Amendment to The Alion Science and Technology Corporation
    Director Deferred Compensation Plan.(3)*                                                                                                                           
|            | 10 | .26         |  | Alion Science and Technology Corporation Phantom Stock Plan.(2)*                                                                                                                                                                       
|            | 10 | .27         |  | First Amendment to The Alion Science and Technology Corporation
    Employee Phantom Stock Plan.(9)*                                                                                                                                   
|            | 10 | .29         |  | First Amendment to the Credit Agreement by and among LaSalle
    Bank National Association as agent, various lenders and Alion
    Science and Technology Corporation.(6)                                                              
|            | 10 | .30         |  | Second Amendment to the Credit Agreement by and among LaSalle
    Bank National Association as agent, various lenders and Alion
    Science and Technology Corporation.(8)                                                             
|            | 10 | .31         |  | Agreement between Alion Science and Technology Corporation and
    James Fontana.(8)*                                                                                                                                                  
|            | 10 | .32         |  | Employment Agreement between Alion Science and Technology
    Corporation and Leroy R. Goff III.(8)*                                                                                                                                   
|            | 10 | .33         |  | Third Amendment to the Credit Agreement by and among LaSalle
    Bank National Association as agent, various lenders and Alion
    Science and Technology Corporation.(7)                                                              
|            | 10 | .34         |  | Addendum to Employment Agreement between Alion Science and
    Technology Corporation and James Fontana.(7)*                                                                                                                           
|            | 10 | .35         |  | Second Amendment to the Alion Science and Technology Corporation
    Phantom Stock Plan.(7)*                                                                                                                                           
|            | 10 | .36         |  | Senior Secured Credit facility that includes a revolving credit
    facility and Term B note, by and among Credit Suisse First
    Boston as arranger, various lenders, and Alion Science and
    Technology Corporation.(9)           
|            | 10 | .37         |  | First Amendment to the Mezzanine Warrant Agreement.(9)                                                                                                                                                                                 
|            | 10 | .38         |  | First Amendment to the Seller Warrant Agreement.(9)                                                                                                                                                                                    
|            | 10 | .39         |  | First Amendment to the Alion Mezzanine Warrant Agreement between
    Alion Science and Technology Corporation, Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Trust, and Bahman Atefi.(9)*
|            | 10 | .40         |  | Third Amendment to the Alion Science and Technology Corporation
    Phantom Stock Plan.(10)*                                                                                                                                           
|            | 10 | .41         |  | Alion Science and Technology Corporation Performance Shares and
    Retention Phantom Stock Plan. (10)*                                                                                                                                
|            | 10 | .42         |  | Second Amendment to the Alion Science and Technology Corporation
    2002 Stock Appreciation Rights Plan. (10)*                                                                                                                        
|            | 10 | .43         |  | Alion Science and Technology Corporation 2004 Stock Appreciation
    Rights Plan. (10)*                                                                                                                                                
|            | 10 | .44         |  | Second Amendment to the Alion Science and Technology Corporation
    Directors Deferred Compensation Plan. (10)*                                                                                                                      
|            | 10 | .45         |  | Second Amendment to the Alion Science and Technology Corporation
    Executive Deferred Compensation Plan. (10)*                                                                                                                       
|            | 10 | .46         |  | Second Amendment to the Seller Warrant Agreement.(10)                                                                                                                                                                                  

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|            |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|----------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Description
|            |    |            
|            | 10 | .47         |  | Second Amendment to the Mezzanine Warrant Agreement.(10)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            | 10 | .48         |  | Second Amendment to the Alion Mezzanine Warrant Agreement
    between Alion Science and Technology Corporation, Alion Science
    and Technology Corporation Employee Ownership, Savings and
    Investment Trust, and Bahman Atefi.(10)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            | 10 | .49         |  | Commitment letter by and between Alion Science and Technologies,
    Inc. and Credit Suisse First Boston for the $72 million
    Term Loan Facility, for Amendment One to existing Term
    Loan Facility. (11)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            | 10 | .50         |  | Third Amendment to the Seller Warrant Agreement.(12)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            | 10 | .51         |  | Third Amendment to Mezzanine Warrant Agreement.(12)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | 10 | .52         |  | Third Amendment to the Alion Mezzanine Warrant Agreement between
    Alion Science and Technology Corporation, Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Trust, and Bahman Atefi.(12)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            | 10 | .53         |  | Stock Purchase Agreement by and among Alion Science and
    Technology, Inc, John J. Mc Mullen Associates, Inc., Marshall
    and Ilsley Trust Company, N.A. as Trustee to the John J.
    McMullen, Inc. Employee Stock Ownership Trust and P. Thomas
    Diamant, Anthony Serro, and David Hanafourde.(13)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 10 | .54         |  | Incremental Term Loan Assumption Agreement and Amendment
    Number One to existing Term Loan Facility with Credit
    Suisse First.(14)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            | 10 | .55         |  | Employment Agreement between Alion Science and Technology, Inc.
    and Anthony Serro. (15)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 10 | .56         |  | Employment Agreement between Alion Science and Technology, Inc.
    and P. Thomas Diamant. (15)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            | 10 | .57         |  | Alion Science and Technology Corporation Board of Directors
    Phantom Stock Plan. (16)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            | 10 | .58         |  | Amended and Restated Alion Science and Technology Corporation
    Phantom Stock Plan. (16)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            | 10 | .59         |  | Amended and Restated Alion Science and Technology Corporation
    Performance Shares and Retention Phantom Stock Plan. (16)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 10 | .60         |  | Amended and Restated Alion Science and Technology Corporation
    2002 Stock Appreciation Rights Plan. (16)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 10 | .61         |  | Amended and Restated Alion Science and Technology Corporation
    2004 Stock Appreciation Rights Plan. (16)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 10 | .62         |  | Amended and Restated Alion Science and Technology Corporation
    Executive Deferred Compensation Plan. (16)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            | 10 | .63         |  | Amended and Restated Alion Science and Technology Corporation
    Director Deferred Compensation Plan. (16)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 21 |             |  | Subsidiaries of Alion Science and Technology Corporation:(i)
    Human Factors Applications, Inc., incorporated in the
    Commonwealth of Pennsylvania, (ii) Innovative Technology
    Solutions Corporation, incorporated in the State of New Mexico,
    (iii) Alion-IPS Corporation, incorporated in the
    Commonwealth of Virginia, (iv) Alion-METI Corporation,
    incorporated in the Commonwealth of Virginia,
    (v) Alion-CATI Corporation, incorporated in the State of
    California, (vi) Alion-JJMA Corporation, incorporated in
    the State of New York, (vii) Alion Technical Services
    Corporation, incorporated in the Commonwealth of Virginia,
    (viii) Alion Canada (U.S.), Inc., incorporated in the State
    of Delaware, and (ix) Alion Science and Technology (Canada)
    Corporation, incorporated in the Province of Nova Scotia, are
    wholly-owned (either directly or indirectly) by Alion Science
    and Technology Corporation.
|            | 31 | .1          |  | Certification of Chief Executive Officer of Alion Science and
    Technology Corporation pursuant to Rule 15d-14(a)
    promulgated under the Securities Exchange Act of 1934, as
    amended.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            | 31 | .2          |  | Certification of Chief Financial Officer of Alion Science and
    Technology Corporation pursuant to 15d-14(a) promulgated under
    the Securities Exchange Act of 1934, as amended.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

50



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##### Table of Contents



|            |    |             |  |                                                                                                                                                                                                           
|----------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Description
|            |    |            
|            | 32 | .1          |  | Certification of Chief Executive Officer of Alion Science and
    Technology Corporation, pursuant to 18 U.S.C.
    Section 1350 as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.
|            | 32 | .2          |  | Certification of Chief Financial Officer of Alion Science and
    Technology Corporation, pursuant to 18 U.S.C.
    Section 1350 as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.






| |     |                                                                                                                                                                                                                                                                                                            
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to the Companys
    Pre-Effective Amendment No. 3 to the Registration Statement
    on Form S-1 filed
    with the Securities and Exchange Commission on October 7,
    2002 (File no. 333-89756).              
|
| | (2) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to the Companys
    Post-Effective Amendment No. 3 to the Registration
    Statement on
    Form S-1 filed
    with the Securities and Exchange Commission on March 24,
    2003 (File no. 333-89756).          
|
| | (3) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to the Companys quarterly
    report on
    Form 10-Q for the
    quarterly period ended July 4, 2003, filed with the
    Securities and Exchange Commission on August 15, 2003 (File
    no. 333-89756).       
|
| | (4) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to Companys current report
    on Form 8-K/A,
    filed with the Securities and Exchange Commission on
    March 5, 2004 (File no.
    333-89756).                                                              
|
| | (5) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to the Companys
    Registration Statement on
    Form S-8 filed
    with the Securities and Exchange Commission on April 28,
    2004 (File no. 333-89756).                                                    
|
| | (6) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to the Companys quarterly
    report on
    Form 10-Q for the
    quarterly period ended December 31, 2003, filed with the
    Securities and Exchange Commission on February 17, 2004
    (File no. 333-89756).
|
| | (7) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to the Companys quarterly
    report on
    Form 10-Q for the
    quarterly period ended June 30, 2004, filed with the
    Securities and Exchange Commission on August 13, 2004 (File
    no. 333-89756).      
|
| | (8) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to the Companys quarterly
    report on
    Form 10-Q for the
    quarterly period ended March 31, 2004, filed with the
    Securities and Exchange Commission on May 17, 2004 (File
    no. 333-89756).        
|
| | (9) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to the Companys annual
    report on
    Form 10-K for the
    fiscal year ended September 30, 2004, filed with the
    Securities and Exchange Commission on December 28, 2004
    (File no. 333-89756).       



|     |                                                                                                                                                                                                                                                                                                    
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Companys Post-effective Amendment No. 5 to the
    Registration Statement on
    Form S-1 filed
    with the Securities and Exchange Commission on January 24,
    2005 (File no. 333-89756).                                                                                                     
|    
|(11) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to the Companys
    Form 8-K filed
    with the Securities and Exchange Commission on March 9,
    2005 (File no. 333-89756).                                                                           
|    
|(12) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to the Companys
    Form 8-K filed
    with the Securities and Exchange Commission on March 14,
    2005 (File no. 333-89756).                                                                          
|    
|(13) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to the Companys
    Form 8-K filed
    with the Securities and Exchange Commission on April 6,
    2005 (File no. 333-89756).                                                                           
|    
|(14) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to the Companys
    Form 8-K filed
    with the Securities and Exchange Commission on April 6,
    2005 (File no. 333-89756).                                                                           
|    
|(15) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to the Companys
    Form 8-K filed
    with the Securities and Exchange Commission on April 7,
    2005 (File no. 333-89756).                                                                           
|    
|(16) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to the Companys quarterly
    report on
    Form 10-Q for the
    quarterly period ended March 31, 2005, filed with the
    Securities and Exchange Commission on May 13, 2005 (File
    no. 333-89756).

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##### Table of Contents





|     |                                                                                                                                                                                                                                                                                                    
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(17) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to the Companys
    Form 8-K filed
    with the Securities and Exchange Commission on December 2,
    2005, 2005 (File no.
    333-89756).                                                              
|    
|(18) | Incorporated by reference to the corresponding exhibit
    previously filed as an exhibit to the Companys annual
    report on
    Form 10-K for the
    fiscal year ended September 30, 2004, filed with the
    Securities and Exchange Commission on January 31, 2005
    (File no. 333-89756).



| |   |                                                                  
| | - | -----------------------------------------------------------------
| | * | Denotes management contract and/or compensatory plan/arrangement.

52



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##### Table of Contents



SIGNATURES






| |                                             
| | --------------------------------------------
| | Alion Science and
    Technology Corporation



| |     |                   
| | --- | ------------------
| | By: | /s/ John M. Hughes

| |                     
| | --------------------
| |                     
| | Name: John M. Hughes

| |        |                        
| | ------ | -----------------------
| | Title: | Chief Financial Officer

| |                                                                             
| | ----------------------------------------------------------------------------
| | (Principal Financial and Accounting Officer and Duly
    Authorized Officer)



53