##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, DC
    20549
      Form 10-Q
   þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended
    June 30, 2006.   Commission File Number 333-89756
      
  Alion Science and Technology
    Corporation
 (Exact Name of Registrant as
    Specified in Its Charter)
  Delaware(State or Other
    Jurisdiction of
    Incorporation of Organization)

54-2061691(I.R.S. Employer
    Identification No.)   10 West
    35th Street
    Chicago, IL 60616
    (312) 567-4000

1750 Tysons Boulevard,
    Suite 1300
    McLean, VA  22102
    (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
   o o þ
  Rule 12b-2 o þ




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##### 



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  FORM 10-Q
  FOR THE
    THREE MONTHS AND NINE MONTHS ENDED JUNE 30, 2006
  
  PART I 
    Financial Information


2Item 1.


Financial
    Statements


2Condensed
    Consolidated Balance Sheets


2Condensed
    Consolidated Statements of Operations


3Condensed
    Consolidated Statements of Cash Flows


4Notes to Financial
    Statements


5Item 2.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


35Item 3.


Quantitative and
    Qualitative Disclosures About Market Risk


53Item 4.


Controls and
    Procedures


54PART II 
    Other Information


55Item 1.


Legal
    Proceedings


55Item 2.


Unregistered Sales
    of Equity Securities and Use of Proceeds


55Item 3.


Defaults Upon
    Senior Securities


55Item 4.


Submission of
    Matters to a Vote of Security Holders


55Item 5.


Other
    Information


55Item 6.


Exhibits


55EX-4.13EX-4.14EX-10.73EX-10.74EX-10.75EX-10.76EX-10.77EX-10.78EX-31.1EX-31.2EX-32.1EX-32.2   1




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##### Table of Contents



PART I 
    FINANCIAL INFORMATION  Item 1.
    Financial
    Statements  ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  CONDENSED CONSOLIDATED BALANCE SHEETS
  June 30,


September 30,2006


2005(In thousands, except share and per share information)(Unaudited)Current assets:Cash and cash equivalents

$
2,754


$
37,778Accounts receivable, less
    allowance of $3,854 and $3,539 at June 30, 2006 and
    September 30, 2005, respectively


112,034



80,898Stock subscriptions receivable






1,733Prepaid expenses


2,710



1,944Other current assets


2,402



2,802Total current assets


119,900



125,155Property, plant and equipment, net


16,082



11,174Intangible assets, net


75,348



30,198Goodwill


390,132



163,419Other assets


2,374



1,860Deferred compensation assets


2,548



2,443Total assets


606,384



334,249Current liabilities:Notes payable to bank


5,975



Current portion, Term B Senior
    Credit Facility note payable


2,573



1,404Current portion, Acquisition
    obligations


8,198



3,616Trade accounts payable and accrued
    liabilities


37,240



27,312Accrued payroll and related
    liabilities


26,469



29,161ESOP liabilities


1,991



274Current portion of accrued loss on
    operating leases


963



1,054Billings in excess of costs and
    estimated earnings on uncompleted contracts


1,810



2,559Total current liabilities


85,219



65,380Acquisition obligations, excluding
    current portion


4,029



7,100Term B Senior Credit Facility note
    payable, excluding current portion


252,349



137,945Bridge Loan note payable


164,680



Subordinated note payable


45,906



42,888Deferred compensation liability


3,300



2,465Accrued compensation, excluding
    current portion


15,229



6,356Accrued postretirement benefit
    obligations


3,698



3,357Non-current portion of lease
    obligations


4,412



3,694Redeemable common stock warrants


32,396



44,590Total liabilities


611,218



313,775Shareholders equity:Common stock $0.01 par value,
    8,000,000 shares authorized; 4,920,133 shares and
    5,149,840 shares issued and outstanding at June 30,
    2006 and September 30, 2005, respectively


49



51Additional paid-in capital


80,115



88,479Accumulated deficit


(84,998
)


(68,056
)Total shareholders equity


(4,834
)


20,474Total liabilities and
    shareholders equity

$
606,384


$
334,249    2




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##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  CONDENSED CONSOLIDATED STATEMENTS OF
    OPERATIONS
  Three Months Ended


Nine Months EndedJune 30,


June 30,


June 30,


June 30,2006


2005


2006


2005(In thousands, except share and per share information)(Unaudited)Contract revenue

$
116,830


$
110,795


$
329,308


$
260,707Direct contract expense


87,192



80,184



244,544



189,821Gross profit


29,638



30,611



84,764



70,886Operating expenses:Indirect contract expense


7,212



10,539



19,370



19,668Research and development


531



123



1,301



394General and administrative


11,793



8,967



32,951



23,365Rental and occupancy expense


5,390



3,578



15,443



8,530Depreciation and amortization


2,543



5,459



9,734



12,718Stock-based compensation(1)


3,260



3,402



8,282



7,604Bad debt expense


292



114



507



529Total operating expenses


31,021



32,182



87,588



72,808Operating income (loss)


(1,383
)


(1,571
)


(2,824
)


(1,922
)Other income (expense):Interest income


108



136



569



192Interest expense


(6,998
)


(9,418
)


(14,915
)


(32,303
)Other


38



90



254



(9
)Loss before income taxes


(8,235
)


(10,763
)


(16,916
)


(34,042
)Income tax expense


(7
)






(26
)


(51
)Net loss


(8,242
)


(10,763
)


(16,942
)


(34,093
)Basic and diluted loss per share

$
(1.60
)

$
(2.21
)

$
(3.34
)

$
(8.84
)Basic and diluted weighted average
    common shares outstanding


5,157,009



4,863,099



5,076,060



3,854,543     (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
  CONDENSED CONSOLIDATED STATEMENTS OF CASH
    FLOWS
  Nine Months Ended June 30,2006


2005(In thousands)(Unaudited)Cash flows from operating
    activities:Net loss

$
(16,942
)

$
(34,093
)Adjustments to reconcile net loss
    to net cash (used in) provided by operating activities:Depreciation and amortization


9,734



12,718Accretion of debt to face value


689



2,835Amortization of debt issuance costs


1,260



633(Decrease) increase value of
    interest rate cap agreement


(364
)


73Change in fair value of redeemable
    common stock warrants


1,450



20,618Stock-based compensation


8,282



7,604(Gain) loss on disposal of assets


(1
)


27Gain on investments, net


(21
)


(37
)Changes in assets and liabilities,
    net of effect of acquisitions:Accounts receivable, net


(21,365
)


(1,856
)Other assets


5,430



885Trade accounts payable and accruals


2,669



7,064Other liabilities


2,223



154Net cash (used in) provided by
    operating activities


(6,956
)


16,625Cash flows from investing
    activities:Cash paid for acquisitions, net of
    cash acquired


(278,805
)


(70,644
)Capital expenditures


(4,497
)


(1,762
)Purchase of investment securities






(1,194
)Net cash used in investing
    activities


(283,302
)


(73,600
)Cash flows from financing
    activities:Proceeds from Term B Senior Credit
    Facility


118,000



94,000Proceeds from bridge loan


170,000



Payment of debt issuance costs


(7,758
)


(1,307
)Repayment of Term B Credit Facility


(1,250
)


(720
)Repayment of mezzanine note






(20,201
)Repayment of mezzanine note warrants


(13,643
)


Payment of agreements with officers






(1,823
)Borrowings under revolving credit
    facility


5,975



Purchase interest rate cap agreement


(44
)


Purchase common stock from ESOP
    Trust


(17,739
)


(2,281
)Cash received from issuance of
    common stock to ESOP Trust


1,693



2,441Net cash provided by financing
    activities


255,234



70,109Net (decrease) increase in cash


(35,024
)


13,134Cash at beginning of period


37,778



4,718Cash at end of period

$
2,754


$
17,852Supplemental disclosure of cash
    flow information:Cash paid for interest


8,869



7,138Cash paid for taxes


610



367Non-cash financing activities:Common stock issued to ESOP Trust
    in satisfaction of employer contribution liability


3,587



4,019Common stock issued for acquisitions






37,250    4




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##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (1)
    Description
    and Formation of the Business    not-for-profit
  (2)
    Summary
    of Significant Accounting Policies  Basis
    of Presentation and Principles of Consolidation
  Form 10-K No. 333-89756)
    
    Human Factors Application, Inc. (HFA), acquired in the
    Transaction,
    Innovative Technology Solution Corporation (ITSC) and
    Alion  IPS Corporation (IPS), which were
    acquired during the fiscal year ended September 30, 2004,
    Alion  METI Corporation (METI), Alion 
    CATI Corporation (CATI), Alion Canada (U.S.), Inc., Alion
    Science and Technology (Canada) Corporation, and
    Alion  JJMA Corporation (JJMA), acquired or
    established during the fiscal year ended September 30, 2005,
    Alion  BMH Corporation (BMH) and Washington
    Consulting, Inc. (WCI), acquired in February 2006, and
    Alion  MA&D Corporation (MA&D) acquired in
    May 2006.  Fiscal
    and Quarter Periods
    Use of
    Estimates
   5




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##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Cash
    and Cash Equivalents
    Revenue
    Recognition
  time-and-material
  time-and-material time-and-material
  percentage-of-completion
        SOP 81-1, Accounting for Performance on Construction-Type and Certain
    Production-Type Contracts.
  Income
    Taxes
   6




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##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Accounts
    Receivable and Billings in Excess of Costs and Estimated
    Earnings on Uncompleted Contracts
    Goodwill
    and Other Intangibles
  Goodwill and Other Intangible
    Assets Business Combinations.
  Property,
    Plant and Equipment
    Fair
    Value of Financial Instruments
   7




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##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Cash,
    cash equivalents, accounts payable and accounts
    receivable
    Marketable
    securities
    Senior
    long-term debt
    Interest
    rate caps
    Redeemable
    common stock warrants
    Stock-based
    compensation
  Share Based
    Payments.
 8




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##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   (3)
    Accounts
    Receivable    June 30,


September 30,2006


2005(In thousands)Billed receivables

$
83,662


$
65,156Unbilled receivables:Amounts currently billable


18,193



13,376Revenues recorded in excess of
    milestone billings on fixed price contracts


5,137



3,707Revenues recorded in excess of
    estimated contract value or funding


6,825



1,323Retainages and other amounts
    billable upon contract completion


2,071



875Allowance for doubtful accounts


(3,854
)


(3,539
)Total Accounts Receivable

$
112,034


$
80,898     (4)
    Employee
    Stock Ownership Plan (ESOP) and Stock Ownership Trust    (5)
    Postretirement
    Benefits       9




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##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     (6)
    Loss Per
    Share    (7)
    Shareholders
    Equity      (8)
    Property,
    Plant and Equipment    June 30,


September 30,2006


2005(In millions)Leasehold improvements

$
2.7


$
2.3Equipment and software


25.7



17.4Total cost


28.4



19.7Less accumulated depreciation and
    amortization


(12.3
)


(8.5
)Net fixed assets

$
16.1


$
11.2    10




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##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   (9)
    Goodwill
    and Intangible Assets    Total(In millions)Balance as of September 30,
    2005

$
163.4Goodwill acquired during the nine
    month period ended June 30, 2006


225.6Adjustment to initial allocation
    made during the nine month period ended June 30, 2006


1.1Balance as of June 30, 2006

$
390.1       AccumulatedGross


Amortization


Net(In millions)Purchased contracts

$
110.4


$
37.4


$
73.0Internal use software and
    engineering designs


2.2



0.3



1.9Non-compete agreements


0.7



0.3



0.4Total

$
113.3


$
38.0


$
75.3     (In millions)For the remaining three months:

2006

$
3.8For the year ending
    September 30:

2007


15.32008


14.82009


14.62010


14.52011


8.6and thereafter


3.7Total:

$
75.3  11




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##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   (10)
    Long-Term
    Debt      Term B
    Senior Credit Facility
    
    a senior term loan in the current approximate amount of
    $259.7 million;
    a $50.0 million senior revolving credit facility
    approximately $6.0 million of which was actually borrowed
    and approximately $5.9 million of which was deemed borrowed
    as of June 30, 2006, for letters of credit; and
    a $150.0 million uncommitted incremental term loan
    accordion facility in addition to the three
    incremental term loans the Company entered into as of
    April 1, 2005, March 24, 2006, and June 30, 2006.      Bridge
    Loan Agreement
 12




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##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Use of Proceeds.
    Security.
 13




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##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Interest and Fees.
  Eurodollar


Federal Funds


Prime RateSpread


ABR Spread


ABR SpreadLeverage Ratio

(in basis points)


(in basis points)


(in basis points)Category 1


275



225



175Greater than or equal to 3.00 to
    1.00Category 2


250



200



150Greater than or equal to 2.50 to
    1.00but less than 3.00 to 1.00Category 3


225



175



125Greater than or equal to 2.00 to
    1.00but less than 2.50 to 1.00Category 4


200



150



100Less than 2.00 to 1.00     Interest Rate Cap Agreements.
     14




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##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          Other Fees and Expenses.
    Financial Covenants. Form 10-Q
     15




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##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        
    Consolidated EBITDA does not reflect the Companys cash
    expenditures, or future requirements for capital expenditures or
    contractual commitments;
    Consolidated EBITDA does not reflect changes in, or cash
    requirements for, the Companys working capital needs;
    Consolidated EBITDA does not reflect interest expense, or the
    cash requirements necessary to service interest or principal
    payments, on the Companys debt; and
    although depreciation and amortization are non-cash charges, the
    assets being depreciated and amortized will often have to be
    replaced in the future, and Consolidated EBITDA does not reflect
    any cash requirements for such replacements.    Alion
    Science and Technology Corporation
    Non-GAAP Measures  EBITDA and Consolidated
    EBITDA
    For the Twelve Months Ended June 30, 2006 and
    2005
  Calculation of EBITDA

2006


2005(Dollars in thousands) (Unaudited)Net loss


(23,087
)

$
(38,670
)Plus: Interest expense


21,309



39,718Plus: Income tax expense


41



64Plus: Depreciation and
    amortization expense


14,728



16,276EBITDA

$
12,991


$
17,388   16




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##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Calculation of Consolidated EBITDA

2006


2005EBITDA

$
12,991


$
17,388Plus: Cash contributions to ESOP
    in respect of the repurchase liability


2,380



Plus: Non-cash expenses with
    respect to the stock appreciation rights and phantom stock plans
    (Stock-based compensation less cash settlements)


11,307



8,758Plus: Non-cash contributions to
    the ESOP (including Company
    401-k match)


6,839



4,914Plus: Any nonrecurring charges and
    adjustments by third-party valuation firm that prepares
    valuation reports in connection with the ESOP


10,091



1,180Plus: Acquisition-related pro
    forma adjustment to EBITDA attributable to the METI, CATI, JJMA,
    BMH WCI and Anteon Contracts acquisitions


28,974



Consolidated EBITDA

$
72,583


$
32,240   Leverage Ratio.
  Period

RatioJune 30, 2006 through
    September 30, 2007


6.50 to 1.00October 1, 2007 through
    June 30, 2008


6.00 to 1.00July 1, 2008 through
    June 30, 2009


5.75 to 1.00Thereafter


5.25 to 1.00     Alion
    Science and Technology Corporation
    Computation of Leverage Ratio
    Under the Term B Senior Credit Facility
    For the Twelve Months Ended June 30, 2006 and
    2005
  Numerator:

2006


2005(Dollars in thousands) (Unaudited)Revolving credit facility

$
11,858


$
Term B Senior Credit facility debt
    outstanding, at face value


259,670



143,280Bridge loan


170,000



Total debt outstanding

$
441,528


$
143,280   Denominator:Consolidated EBITDA

$
72,583


$
32,240Leverage ratio:


6.07



4.44  17




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##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Interest Coverage Ratio.
  Period

RatioJune 30, 2006 through
    September 30, 2007


1.65 to 1.00October 1, 2007 through
    September 30, 2008


1.75 to 1.00Thereafter


2.00 to 1.00     Alion
    Science and Technology Corporation
    Computation of Interest Coverage Ratio
    Under the Term B Senior Credit Facility
    For the Twelve Months Ended June 30, 2006 and
    2005
  Numerator:

2006


2005(Dollars in thousands) (Unaudited)Consolidated EBITDA

$
72,583


$
32,240Less: Capital expenditures


4,968



2,654Consolidated EBITDA less capital
    expenditures

$
67,615


$
29,586   Denominator:Annual cash pay interest

$
10,777


$
7,354Interest coverage ratio


6.27



4.02     
    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 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; 18




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##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   
    pay certain earn outs in connection with permitted
    acquisitions 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 any 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;
    imposition on the Trust of certain taxes in excess of an agreed
    amount;
    final determination that the ESOP is not a qualified plan;
    incurrence of a civil or criminal liability in excess of
    $5 million of the Company or any subsidiary arising from a
    government investigation;
    the actual termination of a material contract due to alleged
    fraud,, willful misconduct, negligence, default or any other
    wrongdoing; or
    change of control (as defined below).     19




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##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Mezzanine
    Note
    Subordinated
    Note
    paid-in-kind
  Bridge
    Loan Agreement
      Use of Proceeds.
 20




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##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Interest and Prepayment.
  EurodollarSpread


PrepaymentBasis


Premium inFrom

Through

Points


Basis PointsJuly 1, 2006

December 31, 2006


550



-0-January 1, 2007

June 30, 2007


625



100July 1, 2007

December 31, 2007


700



200January 1, 2008

December 31, 2008


900



100January 1, 2009

December 31, 2009


900



200January 1, 2010

December 31, 2011


900



300   Financial Covenants.
  Leverage Ratio.
  Period

RatioJune 30, 2006 through
    September 30, 2007


7.00 to 1.00October 1, 2007 through
    June 30, 2008


6.50 to 1.00July 1, 2008 through
    June 30, 2009


6.25 to 1.00July 1, 2009 through
    September 30, 2010


5.75 to 1.00Thereafter


4.75 to 1.00  21




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##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Interest Coverage Ratio.
  Period

RatioJuly 1, 2006 through
    September 30, 2007


1.40 to 1.00October 1, 2007 through
    September 30, 2008


1.50 to 1.00October 1, 2008 through
    September 30, 2009


1.75 to 1.00October 1, 2009 through
    September 30, 2010


1.90 to 1.00Thereafter


2.00 to 1.00     
    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 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;
    use the proceeds other than as permitted by the Bridge
    Loan; and
    pay certain earn-outs in connection with permitted acquisitions.  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;
    incurrence of a Government investigation resulting in a criminal
    or civil liability of the Company, or any subsidiary, in excess
    of $10.0 million;
    the actual termination of a material contract due to alleged
    fraud, misconduct or any other wrongdoing;
    certain ERISA violations;
    failure of the subordinated note to be subordinated to the
    Bridge Loan Agreement;
    failure of the Company to remain an S-corporation 22




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##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   
    imposition on the Trust of certain taxes in excess of an agreed
    amount; or
    final determination that the ESOP is not a qualified plan.    Other
    Notes and Agreements
        2006


2007


2008


2009


2010


2011


TotalSenior Secured Term B Loan(1)

$
0.7


$
2.6


$
2.6


$
253.8


$



$



$
259.7Bridge Loan(2)





















$
175.1



175.1Subordinated Seller Note(3)














19.9



19.9


$




39.8Subordinated Paid in Kind Note(4)














7.4



7.4


$




14.8Total principal payments

$
0.7


$
2.6


$
2.6


$
281.1


$
27.3


$
175.1


$
489.4     (1)
    
    The table reflects the balance drawn of $259.7 million as
    of June 30, 2006, expected annual principal payments of
    approximately $0.7 million for the remainder of fiscal year
    2006 and $2.6 million for fiscal years 2007 and 2008.
    During 2009, we expect to pay approximately $253.8 million
    in principal. The table does not reflect any prepayments of the
    Term B Senior Credit Facility based on excess cash flow or other
    conditions as the timing and amount of any such payments are
    uncertain. The approximate $254.9 million on the face of
    the balance sheet includes, as of June 30, 2006,
    approximately $10.1 million of unamortized debt issue costs
    which totaled approximately $12.3 million.(2)
    
    The table reflects the balance drawn of $170.0 million as
    of June 30, 2006. The principal amount, plus applicable
    prepayment premium, is due and payable on December 31,
    2011. The principal amount of $175.1 million includes
    $170.0 million principal at par value plus prepayment
    premium of $5.1 million (3% of par). The approximate
    $164.7 million on the face of the balance sheet includes,
    as of June 30, 2006, approximately zero unamortized debt
    issue costs which totaled approximately $5.3 million.(3)
    
    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 June 30, 2006,
    approximately $4.6 million of unamortized debt discount
    assigned to fair value of the detachable warrants. On the date
    of issuance, December 20, 2002, approximately
    $7.1 million was assigned as 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.(4)
    
    During the eight-year term of the Subordinated Note,
    approximately $14.8 million of principal accretes to the
    note and is included in the principal payments in fiscal years
    2009 and 2010. 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. 23




---



##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   (11)
    Redeemable
    Common Stock Warrants  00-19,
  (12)
    Leases    Fiscal Years Ending

(In millions)2006 (for the remainder of fiscal
    year)

$
6.52007


25.42008


21.92009


17.82010


12.92011


10.0and thereafter


12.5Gross lease payments

$
107.0Less: non-cancelable subtenant
    receipts


6.7Net lease payments

$
100.3    24




---



##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   (13)
    Stock
    Appreciation Rights        10-year
       25




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##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Alion
    Science and Technology Corporation
    Stock-based Compensation Disclosures per FAS 123
    Stock Appreciation Rights
    As of June 30, 2006
  Shares


Shares


Total



































RemainingDate of

Granted to


Granted to


Shares


Exercise


Outstanding


Outstanding











Vested


Exercisable


Risk Free





Expected


LifeGrant

Employees


Directors


Granted


Price


at 10/1/05


6/30/06


Forfeited


Exercised


Expired


6/30/06


at 6/30/06


Interest Rate


Volatility


Life


(months)December 2002


64,250



29,400



93,650


$
10.00



53,450



47,325



140



5,985







26,825



860



4.06%-4.49%



60
%


5 yrs



16.4May 2003


300







300


$
11.13



300



240







60







60







2.70%-3.30%



55
%


5 yrs



21.8June 2003


300







300


$
11.13



300



300















120







2.70%-3.30%



55
%


5 yrs



22.6November 2003


129,550



12,600



142,150


$
14.71



127,920



109,850



3,530



14,540







45,680



4,120



4.06%-4.49%



60
%


5 yrs



28.3November 2004






12,600



12,600


$
19.94



12,600



12,600















4,200



4,200



3.10%-3.60%



45
%


3 yrs



16.5February 2005


164,750







164,750


$
19.94



152,400



144,475



263



7,663







30,175







3.10%-3.60%



45
%


4 yrs



30.9March 2005


2,000







2,000


$
19.94



2,000



2,000















500







3.10%-3.60%



45
%


4 yrs



32.0April 2005


33,000







33,000


$
29.81



30,250



24,750



2,750



2,750







4,125







4.10%-4.20%



45
%


4 yrs



32.9June 2005


2,000







2,000


$
29.81



2,000



2,000















500







4.10%-4.20%



45
%


4 yrs



35.1December 2005


272,675







272,675


$
35.89



267,075



261,475



5,600



















4.20%-4.20%



40
%


4 yrs



41.7February 2006


13,000







13,000


$
35.89



13,000



13,000























4.20%-4.20%



40
%


4 yrs



43.4February 2006


7,500







7,500


$
35.89



7,500



7,500























4.20%-4.20%



40
%


4 yrs



43.8Total


689,325



54,600



743,925







668,795



625,515



12,283



30,998







112,185



9,180Wtd Avg Exercise Price

$
25.31


$
13.38


$
24.43






$
25.47


$
25.87


$
27.81


$
16.43


$



$
15.83


$
16.66















34.1  26




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##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (14)
    Phantom
    Stock Plans        Initial
    Phantom Stock Plan
      The Vested Amountfor Grant inFebruary


NovemberAnniversary from Grant Date

2003


20031st






20
%2nd






20
%3rd


50
%


20
%4th


25
%


20
%5th


25
%


20
%     Second
    Phantom Stock Plan
     27




---



##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
         Director
    Phantom Stock Plan
           28




---



##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Alion
    Science and Technology Corporation
    Stock-based Compensation Disclosures per FAS 123
    Phantom Stock
    as of June 30, 2006
  Shares


Shares


Total


Grant Date


























Free








RemainingGranted to


Granted to


Shares


Price


Outstanding


Outstanding


Outstanding











Vested at


Exercisable


Interest





Expected


LifeDate of Grant

Employees


Directors


Granted


per Share


at 10/1/04


at 9/30/05


at 6/30/06


Forfeited


Exercised


Expired


6/30/06


at 6/30/06


Rate


Volatility


Life


(months)February 2003


171,000







171,000


$
10.00



171,000



171,000



85,000



6,232



79,768







16,500







4.06%-4.49%



60
%


5 yrs



18.8November 2003


52,685







52,685


$
14.71



52,685



52,685



32,971



2,107



17,607







3,331







4.06%-4.49%



60
%


5 yrs



28.3January 2005


202,763







202,763


$
19.94







202,763



202,763























3.10%-3.60%



45
%


3 yrs



18.6January 2005


103,414







103,414


$
19.94







103,414



103,414























3.10%-3.60%



45
%


3 yrs



18.6January 2005


5,015







5,015


$
19.94







5,015



5,015















1,254







3.10%-3.60%



45
%


4 yrs



30.6August 2005


2,960







2,960


$
33.78







2,960



2,960























3.72%-3.77%



45
%


3 yrs



25.0November 2005


66,592



7,808



74,400


$
35.89











74,400























4.20%-4.20%



40
%


3 yrs



28.2November 2005


55,726







55,726


$
35.89











55,726























4.20%-4.20%



40
%


5 yrs



52.2Total


660,156



7,808



667,964







223,685



537,838



562,249



8,340



97,375







21,085



Wtd Avg Grant Date Fair Value Price
    per Share

$
19.97


$
35.89


$
20.15






$
11.11


$
16.34


$
21.89


$
11.19


$
10.85


$



$
11.34


$
















23.9  29




---



##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (15)
    Segment
    Information and Customer Concentration      (16)
    Business
    Combinations  Fiscal
    Year 2005 Acquisitions
  Acquisition
    of Assets of Countermeasures, Inc.
    Acquisition
    of ManTech Environmental Technology, Inc.
    Acquisition
    of Carmel Applied Technologies, Inc.
  not-to-exceed not-to-exceed
 30




---



##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Investment
    in VectorCommand Ltd.
    Acquisition
    of John J. McMullen Associates, Inc.
    Form of Consideration

Fair Value(In millions)Cash paid, net of cash acquired

$
52.9Stock issued


37.3Future payments


8.3Acquisition costs


1.3Total consideration

$
99.8     Accounts receivable

$
21.5Property and equipment


1.0Other assets


1.4Identifiable intangible assets


29.6Goodwill


57.8Accounts payable and other accrued
    liabilities


(11.5
)Total

$
99.8     Weighted AverageEstimated


Residual


RemainingAmounts in Millions

Fair Value


Value


Amortization PeriodPurchased contracts

$
28.0


$




5 yearsInternal use software and designs


0.9







3 yearsNot to Compete Agreements


0.7







1 yearsTotal

$
29.6


$




5 years    31




---



##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Fiscal
    Year 2006 Acquisitions
  Acquisition
    of BMH Associates, Inc.
    Acquisition
    of Washington Consulting, Inc.
    Acquisition
    of Micro Analysis and Design, Inc.
    Acquisition
    of certain assets of Anteon Corporation
      (17)
    Commitments
    and Contingencies  Earn
    Out Commitments
     32




---



##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
              Legal
    Proceedings
  AB Tech
    Settlement
    Joseph
    Hudert vs. Alion; Frank Stotmeister vs. Alion
       33




---



##### Table of Contents



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Government
    Audits
   34




---



##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations    and/or and/or and/or Form 10-K No. 333-89756)
    Critical
    Accounting Estimates and Policies
  Form 10-K
      Revenue
    Recognition, Cost Estimation and Payment
   35




---



##### Table of Contents



time-and-material
  
    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.    For the Nine Months Ended June 30,Contract Type

2006


2005(In thousands)Cost-reimbursement

$
199,532



61
%

$
155,445



60
%Fixed-price


65,626



20
%


49,639



19
%Time-and-material


64,150



19
%


55,623



21
%Total

$
329,308



100
%

$
260,707



100
%          36




---



##### Table of Contents



For the Nine Months Ended June 30,Customer Type

2006


2005(In thousands)U.S. Department of Defense
    (DoD)

$
287,919



88
%

$
239,904



92
%Other Federal Civilian Agencies


24,063



7
%

$
13,924



5
%Commercial/State/Local and
    International


17,326



5
%

$
6,879



3
%Total

$
329,308



100
%

$
260,707



100
%     SOP 81-1, Accounting for Performance on Construction-Type and Certain
    Production-Type Contracts.
  Goodwill
    and Identifiable Intangible Assets
    
    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. 37




---



##### Table of Contents



Stock-Based
    Compensation
  Share Based
    Payments.
  Comparison
    of Results of Operations
   38




---



##### Table of Contents



Quarter
    Ended June 30, 2006 Compared to Quarter Ended June 30,
    2005
  ,
  Quarter Ended June 30, 2006


Quarter Ended June 30, 2005Consolidated








ConsolidatedConsolidated





Operations Less


Consolidated





Operations LessOperations


Acquired


Acquired


Operations of


Acquired


Acquiredof Alion


Operations*


Operations


Alion


Operations*


Operations(Dollars in millions)


(Dollars in millions)%





%





%





%





%





%Financial information




revenue





revenue





revenue





revenue





revenue





revenueTotal revenue

$
116.8






$
46.0






$
70.8






$
110.8






$
30.7






$
80.1Material and subcontract revenue


38.0



32.5
%


16.0



34.8
%


22.1



31.1
%


29.9



26.9
%


8.1



26.5
%


21.7



27.1
%Total direct contract expenses


87.2



74.6
%


33.8



73.5
%


53.4



75.4
%


80.2



72.4
%


22.2



72.4
%


58.0



72.4
%Major components of direct contract
    expenseDirect labor expense


47.8



40.9
%


17.6



38.2
%


30.2



42.6
%


47.6



43.0
%


12.9



41.9
%


34.7



43.4
%Other direct expense (ODC)


3.1



2.6
%


0.8



1.7
%


2.3



3.3
%


3.4



3.1
%


1.3



4.4
%


2.0



2.6
%Material and subcontract (M&S)
    expense


36.3



31.1
%


15.5



33.6
%


20.9



29.5
%


29.2



26.4
%


8.0



26.1
%


21.2



26.5
%Gross profit


29.6



25.3
%


12.2



26.5
%


17.4



24.6
%


30.6



27.6
%


8.5



26.1
%


22.1



26.5
%Total operating expense


31.0



26.6
%


11.5



25.0
%


19.5



27.6
%


32.2



29.0
%


7.7



25.2
%


24.5



30.5
%Major components of operating
    expenseIndirect personnel and facilities


12.6



10.8
%


5.5



12.0
%


7.1



10.0
%


14.1



12.7
%


3.2



10.4
%


10.9



13.6
%General and administrative


11.8



10.1
%


5.4



11.7
%


6.4



7.0
%


9.0



8.1
%


2.9



9.6
%


6.0



7.5
%Depreciation and amortization


2.5



2.2
%


0.9



2.0
%


1.6



2.3
%


5.5



4.9
%


1.6



5.2
%


3.9



4.8
%Stock-based compensation


3.3



2.8
%






0.0
%


3.3



4.6
%


3.4



3.1
%






0.0
%


3.4



4.2
%Income (loss) from operations

$
(1.4
)


(1.2
)%

$
0.7



1.6
%

$
(2.1
)


(2.9
)%

$
(1.6
)


(1.4
)%

$
0.8



2.5
%

$
(2.3
)


(2.9
)%     *
    
    For the quarters ended June 30, 2006 and 2005, METI, CATI,
    JJMA, BMH ,WCI and MA&D have been fully integrated within
    Alion on a consolidated basis.  Revenues.
  

Increase in revenue generated by
    the activities of the acquired operations

$
15.3
million

Decrease in revenue generated by
    the activities of the non-acquired operations

$
(9.3
) millionTotal:

$
6.0
million    39




---



##### Table of Contents



Direct Contract Expenses.
  
    Direct labor expense for the quarter ended June 30, 2006
    increased by $0.2 million, or 0.4%, to $47.8 million
    from $47.6 million for the quarter ended June 30,
    2005. Direct labor expense declined to 40.9% from 43.0% of
    revenue for the quarters ended June 30, 2006, and 2005.
    This decrease was due partially to the decrease in content of
    direct labor expense from acquired operations and partially to
    decreased total contract revenue from non-acquired operations.
    Direct labor expense under the JSC and Guam Ordnance Services
    contracts was higher in the quarter ended June 30, 2006,
    than in the quarter ended June 30, 2005.
    M&S expense increased approximately $7.1 million, or
    24.3%, to $36.3 million for the quarter ended June 30,
    2006, compared to $29.2 million for the quarter ended
    June 30, 2005. M&S expense increased to 31.1% from
    26.4% of revenue for the quarters ended June 30, 2006 and
    2005. The percent increase in M&S expense was due partially
    to the increase in content of M&S expense to total direct
    contract expense of the acquired operations and partially to
    decreased total contract revenue from non-acquired operations.
    M&S expense under the JSC and Guam Ordnance Services
    contracts was lower in the quarter ended June 30, 2006,
    than in the quarter ended June 30, 2005. M&S expense
    was approximately 95.6% and 97.7% of M&S revenue for the
    quarters ended June 30, 2006 and 2005.    Gross Profit.
  Operating Expenses.
  
    Operating expenses for indirect personnel and rental and
    occupancy expenses decreased approximately $1.5 million, or
    11.9%, to $12.6 million from $14.1 million for the
    quarter ended June 30, 2006, compared to the quarter ended
    June 30, 2005. Operating expenses for indirect personnel
    and facilities declined to 10.7% from 12.7% of revenue for the
    quarters ended June 30, 2006 and 2005, respectively. 40




---



##### Table of Contents




    General and administrative (G&A) expense increased
    approximately $2.8 million, or 31.1%, to $11.8 million
    for the quarter ended June 30, 2006, compared to
    $9.0 million for the quarter ended June 30, 2005.
    G&A expenses were 10.1% and 8.1% of revenue for the quarters
    ended June 30, 2006 and 2005, respectively. Approximately
    $1.4 million of the $2.8 million increase is due to
    increased fringe benefit expenses and approximately
    $0.5 million was due to third-party legal and accounting
    fees associated with acquisitions. These additional expenses
    represent approximately 1.5% of revenue. The remaining
    $0.9 million increase in G&A expense is associated to
    infrastructure costs to accommodate recent acquisitions.
    Depreciation and amortization expense decreased approximately
    $3.0 million, or 54.6%, to $2.5 million for the
    quarter ended June 30, 2006, compared to $5.5 million
    for the quarter ended June 30, 2005, principally related to
    amortization of purchased contracts. For the quarters ended
    June 30, 2006 and 2005, there were zero and approximately
    $2.5 million in amortization expense associated with the
    contracts purchased from IITRI. Depreciation and
    amortization expense was 2.1% and 4.9% of revenue for the
    quarters ended June 30, 2006 and 2005, respectively.
    Stock-based compensation expense relates to the SAR and phantom
    stock plans. This expense decreased approximately
    $0.1 million, or 2.9% to $3.3 million for the quarter
    ended June 30, 2006, compared to approximately
    $3.4 million for the quarter ended June 30, 2005.  Income loss) from Operations.
  Other Income (Expense).
  Quarter EndedJune 30,2006


2005(In millions)Revolving facility

$
0.4


$
Senior term loan


4.1



2.6Bridge loan


0.1



Subordinated Note


1.0



1.0Accretion of warrants(a)


1.2



5.8Other


0.2



Total

$
7.0


$
9.4     (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 and the number of
    warrants outstanding.  Income Tax (Expense) Benefit.
  Net Loss.
 41




---



##### Table of Contents



Nine
    Months Ended June 30, 2006 Compared to Nine Months Ended
    June 30, 2005
    Nine Months Ended June 30, 2006


Nine Months Ended June 30, 2005Consolidated











ConsolidatedOperations Less


Consolidated





Operations LessConsolidated


Acquired


Acquired


Operations of


Acquired


AcquiredOperations of Alion


Operations*


Operations


Alion


Operations*


Operations(Dollars in millions)


(Dollars in millions)%





%





%





%





%





%Financial information




revenue





revenue





revenue





revenue





revenue





revenueTotal revenue

$
329.3






$
112.2






$
217.1






$
260.7






$
32.9






$
227.8Material and subcontract revenue


103.9



31.6
%


35.7



31.8
%


68.2



31.4
%


68.5



26.3
%


8.4



25.5
%


60.1



26.4
%Total direct contract expenses


244.2



74.2
%


81.5



72.7
%


162.8



75.0
%


189.8



72.8
%


23.7



71.9
%


166.1



72.9
%Major components of direct contract
    expenseDirect labor expense


136.4



41.4
%


45.2



40.3
%


91.3



42.0
%


115.2



44.2
%


14.1



42.7
%


101.2



44.4
%Other direct expense (ODC)


8.3



2.5
%


2.0



1.8
%


6.2



2.8
%


7.2



2.8
%


1.4



4.1
%


5.8



2.5
%Material and subcontract (M&S)
    expense


99.5



30.2
%


34.3



30.6
%


65.2



30.0
%


67.4



25.8
%


8.3



25.1
%


59.1



25.9
%Gross profit


85.1



25.8
%


30.8



27.4
%


54.3



25.0
%


70.9



27.2
%


9.2



28.1
%


61.7



27.1
%Total operating expense


87.9



26.7
%


30.3



27.0
%


57.5



26.5
%


72.8



27.9
%


8.3



25.2
%


64.5



28.3
%Major components of operating
    expenseIndirect personnel and facilities


34.8



10.6
%


13.8



12.3
%


21.0



9.7
%


28.2



10.8
%


3.5



10.8
%


24.7



10.8
%General and administrative


32.9



10.0
%


13.3



11.8
%


19.6



9.0
%


23.4



9.0
%


3.2



9.6
%


20.2



8.9
%Depreciation and amortization


9.7



3.0
%


3.2



2.9
%


6.5



3.0
%


12.7



4.9
%


1.6



4.8
%


11.1



4.9
%Stock-based compensation


8.3



2.5
%






0.0
%


8.3



3.8
%


7.6



2.9
%






0.0
%


7.6



3.3
%Income (loss) from operations

$
(2.8
)


(0.8
)%

$
0.5



0.4
%

$
(3.1
)


(1.4
)%

$
(1.9
)


(0.7
)%

$
0.9



2.9
%

$
(2.8
)


(1.2
)%     *
    
    For the nine month periods ended June 30, 2006 and 2005,
    the operations of the acquired entities, METI, CATI, JJMA, BMH,
    WCI and MA&D, respectively, have been fully integrated
    within Alion on a consolidated basis.  Revenues.
 42




---



##### Table of Contents



Direct Contract Expenses.
  
    Direct labor expense for the nine months ended June 30,
    2006 increased by $21.2 million, or 18.4%, to
    $136.4 million from $115.2 million for the nine months
    ended June 30, 2005. Direct labor expense decreased to
    41.4% from 44.2% of revenue for the nine-month periods ended
    June 30, 2006 and 2005 due to a shift from direct labor to
    M&S expense. This was partially due to the decrease in
    content of direct labor expense from acquired operations and
    partially due to decreased total contract revenue from
    non-acquired operations. Direct labor expense under the JSC and
    Guam Ordnance Services contracts was higher in the months ended
    June 30, 2006 than in the nine months ended June 30,
    2005.
    M&S expense increased approximately $32.4 million, or
    48.1%, to $99.8 million for the nine months ended
    June 30, 2006, compared to $67.4 million for the nine
    months ended June 30, 2005. M&S expense was 30.3% and
    25.9% of revenue for the nine months ended June 30, 2006
    and 2005, respectively. The percent increase in M&S expense
    was due partially to the increase in content of M&S expense
    to total direct contract expense for acquired operations and
    partially to decreased total contract revenue from non-acquired
    operations (related to the issues described above). M&S
    expense, as a percentage of M&S revenue, declined to
    approximately 95.8% from 98.4% for the nine months ended
    June 30, 2006 and 2005, primarily due to increased profit
    margins on M&S work by acquired operations.  Gross Profit.
  Operating Expenses.
  
    Operating expenses for indirect personnel and rental and
    occupancy expenses increased approximately $6.6 million, or
    23.4%, to $34.8 million for the nine months ended
    June 30, 2006, from $28.2 million for the nine months
    ended June 30, 2005. Operating expenses for indirect
    personnel and facilities were 10.6% and 10.8% of revenue for the
    nine months ended June 30, 2006 and 2005. The increase is
    partially attributable costs associated with integrating the
    BMH, WCI and MA&D.
    G &A expense increased approximately $9.6 million,
    or 41.3%, to $33.0 million for the nine months ended
    June 30, 2006, compared to $23.4 million for the nine
    months ended June 30, 2005. G&A expenses were 10.0% and
    9.0% of revenue for the nine months ended June 30, 2006 and
    2005. Approximately $1.4 million 43




---



##### Table of Contents




    Depreciation and amortization expense decreased approximately
    $3.0 million, or 23.6%, to $9.7 million for the nine
    months ended June 30, 2006, compared to $12.7 million
    for the nine months ended June 30, 2005. Depreciation
    expense primarily arises from fixed assets while amortization
    expense derives primarily from purchased contracts. Amortization
    expense decreased because amortization of contracts purchased
    from IITRI ended in December 2005. For the nine months
    ended June 30, 2006 and 2005, approximately
    $1.5 million and $7.5 million in amortization expense
    was associated with the contracts purchased from IITRI.
    This decrease of approximately $6.0 million was offset by
    an increase of approximately $3.0 million for amortization
    of METI, CATI, and JJMA purchased contracts. Depreciation and
    amortization expense was 3.0% and 4.9% of revenue for the nine
    months ended June 30, 2006 and 2005.
    Stock-based compensation expense relates to the SAR and phantom
    stock plans. This expense increased approximately
    $0.7 million, or 9.2% to $8.3 million for the nine
    months ended June 30, 2006, compared to approximately
    $7.6 million for the nine months ended June 30, 2005.
    The increase in stock-based compensation expense results from
    the relative change in price of a share of Alion common stock in
    the nine months ended June 30, 2006 and 2005 and, to a
    lesser extent, the increase in awards granted. Stock-based
    compensation was approximately 2.5% and 2.9% of revenue for the
    nine months ended June 30, 2006 and 2005, respectively.  Operating Loss.
  Other Income (Expense).
  For Nine Months EndedJune 30,2006


2005Revolving facility

$
0.7


$
0.3Senior term loan


9.4



4.7Bridge loan


0.1



Mezzanine note  cash
    pay interest






1.8- accretion of debt discount






2.2Subordinated note  PIK
    interest


1.8



1.8- accretion of long-term deferred
    interest


0.5



0.4- accretion of debt discount


0.7



0.7Accretion of warrant liability(a)


1.5



20.4Other


0.2



0.0$
14.9


$
32.3     (a)
    
    Reflects change in value assigned to the outstanding detachable
    warrants associated with the Mezzanine and Subordinated notes
    based on the change in the value of Alion common stock. 44




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##### Table of Contents



Income Tax (Expense) Benefit.
  Net Loss.
  Liquidity
    and Capital Resources
            Discussion
    of Debt Structure
   45




---



##### Table of Contents



Term B
    Senior Credit Facility
    2006


2005Senior term loan

$
259.7


$
142.9Less: Unamortized debt issuance
    costs


(4.8
)


(3.6
)Term B Senior Credit Facility
    Note Payable

$
254.9


$
139.3Less current maturities, net of
    unamortized debt issue costs


(2.6
)


(1.4
)Term B Senior Credit Facility
    Note Payable, less current maturities

$
252.3


$
137.9     
    senior term loan in the current approximate amount of
    $259.7 million including the incremental term loans of
    which approximately $259.7 million had been drawn down as
    of June 30, 2006;
    a $50.0 million senior revolving credit facility, approximately
    $6.0 of which was actually borrowed and approximately
    $5.9 million of which was deemed borrowed as of
    June 30, 2006, for letters of credit; and
    a $150.0 million uncommitted incremental term loan
    accordion facility in addition to the three
    incremental term loan facilities we entered into as of
    April 1, 2005, March 24, 2006 and June 30, 2006.      Bridge Loan Agreement
   46




---



##### Table of Contents



Use of Proceeds.
    Security.
  Interest and Fees.
  47




---



##### Table of Contents



Eurodollar


Federal Funds


Prime Rate ABRSpread


ABR Spread


SpreadLeverage Ratio

(in basis points)


(in basis points)


(in basis points)Category 1


275



225



175Greater than or equal to 3.00 to
    1.00Category 2


250



200



150Greater than or equal to 2.50 to
    1.00 but less than 3.00 to 1.00Category 3


225



175



125Greater than or equal to 2.00 to
    1.00 but less than 2.50 to 1.00Category 4


200



150



100Less than 2.00 to 1.00     Interest Rate Cap Agreements.
         48




---



##### Table of Contents



Other Fees and Expenses.
    Covenants.
  Bridge
    Loan Agreement
      Use of Proceeds.
  Interest and Prepayment.
  49




---



##### Table of Contents



EurodollarSpread


PrepaymentBasis


Premium inFrom

Through

Points


Basis PointsJuly 1, 2006

December 31, 2006


550



-0-January 1, 2007

June 30, 2007


625



100July 1, 2007

December 31, 2007


700



200January 1, 2008

December 31, 2008


900



100January 1, 2009

December 31, 2009


900



200January 1, 2010

December 31, 2011


900



300   Covenants.
    7-Fiscal Year Period2006*


2007


2008


2009


2010


2011


2012($ In thousands)Bank revolving credit facility- Interest(1)

$
99


$
250


$
250


$
250


$
250


$
250


$
250Senior Secured Term B Loan- Interest(2)


5,306



20,634



20,772



10,491











- Principal(3)


655



2,620



2,620



253,775











Bridge Loan- Interest(4)


4,702



19,803



23,618



24,681



24,961



25,250



1,597- Principal(4)


























175,100Subordinated note- Interest(5)














6,384



3,192







- Principal(5)














27,352



27,352







Total cash  Pay interest


10,107



40,687



44,640



41,806



28,403



25,500



1,847Total cash  Pay
    principal


655



2,620



2,620



281,127



27,352



0



175,100Total

$
10,762


$
43,307


$
47,260


$
322,933


$
55,755


$
25,500


$
176,947     *
    
    Estimated interest expense for the remainder of fiscal 2006(1)
    
    We anticipate accessing, from time to time, our
    $50.0 million bank revolving credit facility to finance our
    ongoing working capital needs. The remaining term of the
    revolving credit facility is approximately three years; however,
    we expect to review the revolving credit facility as an on-going
    requirement to fund working capital. For the remainder of fiscal
    year 2006, we anticipate the balance drawn on the revolving
    credit facility will be approximately $3.3 million, which
    will decline during the remainder of fiscal year 2006 as we
    anticipate improved collections on outstanding accounts
    receivable. For the fiscal years 2007 through 2009, we
    anticipate the balance drawn on the revolving credit facility
    will be minimal. Interest expense value includes an estimate for
    the unused balance fee on the $50.0 million revolving
    credit facility.(2)
    
    The projected average annual balance we estimate will be drawn
    under the Senior Secured Term B Loan is as follows:
    $259.3 million, $257.7 million, $255.1 million,
    and $126.9 million for the remainder of fiscal year 2006
    and for fiscal years ending September 30, 2007, 2008, and
    2009, respectively. The Company expects it will need to
    refinance the Term B Senior Credit Facility before the end of
    fiscal year 2008 and expects interest expense to continue at
    levels similar to prior years. Based on an estimated LIBOR rate
    plus the CS Eurodollar spread, the effective annual interest
    rate for the remainder of fiscal year 2006 and for fiscal years
    2007, 2008, 50




---



##### Table of Contents



and 2009 is estimated to be approximately 7.9%, 7.8%, 7.9%, and
    8.0%, respectively. The effective interest rate takes into
    account the interest rate cap agreements which limit the
    interest rate 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 had interest
    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 $0.4 million,
    $1.7 million, $2.6 million, and $1.3 million for
    the remainder of fiscal year 2006 and for fiscal years ending
    September 30, 2007, 2008, and 2009, respectively. Estimated
    interest expense 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 each of the fiscal years 2006 through
    2008 and 96 percent of the principal balance outstanding
    during fiscal year 2009 of the term. The table reflects the
    balance drawn of $259.67 million as of June 30, 2006,
    resulting in expected annual principal payments of approximately
    $0.6 million for the remainder of fiscal year 2006 and
    $2.62 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 $253.8 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 June 30, 2006, no mandatory
    prepayments are due.(4)
    
    The table reflects the balance drawn under the Bridge Loan of
    $170.0 million as of June 30, 2006 with the principal
    amount, plus applicable prepayment premium, due and payable on
    December 31, 2011. The principal amount of
    $175.1 million includes $170.0 million at par value
    plus prepayment premium of $5.1 million (3% of par). Based
    on an estimated Eurodollar rate plus the CS Eurodollar spread,
    the effective annual interest rate for the remainder of fiscal
    year 2006 and for fiscal years 2007, 2008, 2009, 2010, 2011 and
    2012 is estimated to be approximately 11.1%, 11.6%, 13.9%,
    14.5%, 14.7%, 14.8% and 15.0%, respectively. The approximate
    impact of a 1% increase in the interest rate, as applied to
    principal balance drawn under the Bridge Loan, would be
    $0.4 million for the remainder of fiscal year 2006,
    $1.7 million for each fiscal year 2007 through 2011, and
    $0.4 million for the partial period of fiscal year 2012.(5)
    
    Interest expense on the subordinated note during the four fiscal
    years from 2006 to 2008 is 6% simple interest,
    paid-in-kind
    by the issuance of 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 does not compound. In the years
    2006 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
       51




---



##### Table of Contents



Lease
    Payments
    Other
    Obligations
    
    Repurchase obligations under the KSOP;
    Obligations related to the holders put rights associated
    with the Subordinated Note warrants; and
    Obligations relating to our stock based compensation plans.    Number of Shares





Total ValueDate

Repurchased


Share Price


PurchasedJune 2003


5,248


$
11.13


$
58,412July 2003


2,696


$
11.13


$
30,000December 2003


50,031


$
14.71


$
735,956May 2004


117


$
16.56


$
1,945June 2004


727


$
16.56


$
12,039June 2004


743


$
16.56


$
12,297July 2004


48,309


$
16.56


$
799,997December 2004


46,816


$
19.94


$
933,505March 2005


5,691


$
19.94


$
113,486June 2005


45,846


$
29.81


$
1,366,674August 2005


1,090


$
33.78


$
36,803September 2005


170,657


$
33.78


$
5,764,784December 2005


211,537


$
35.89


$
7,592,079June 2006


273,800


$
37.06


$
10,147,043Total









$
27,605,031    52




---



##### Table of Contents



Contract
    performance  Joint Spectrum Center
    Contract
    Item 3.
    Quantitative
    and Qualitative Disclosures About Market Risk       53




---



##### Table of Contents



Foreign
    currency risk
    Risk
    associated with the value of Alion common stock
      Item 4.
    Controls
    and Procedures  Disclosure Controls and
    Procedures. Rule 15d-15(e)
  Internal Control Over Financial
    Reporting. Rule 15d-15(f)
 54




---



##### Table of Contents



PART II 
    OTHER INFORMATION   Item 1.
    Legal
    Proceedings         Item 2.
    Unregistered
    Sales of Equity Securities and Use of Proceeds  Form 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.

Description4
.13

Twelfth Amendment to The Alion
    Science and Technology Corporation Employee Ownership, Savings
    and Investment Plan.4
.14

Thirteenth Amendment to The Alion
    Science and Technology Corporation Employee Ownership, Savings
    and Investment Plan.10
.69

Asset Purchase Agreement dated as
    of June 4, 2006, by and between Anteon Corporation, Alion
    Technical Services Corporation and Alion Science and Technology
    Corporation. (1)10
.73

Separation Agreement between Alion
    Science and Technology Corporation and Barry Watson.10
.74

Second Addendum to Employment
    Agreement between Alion Science and Technology Corporation and
    James Fontana.10
.75

Commitment letter by and between
    Alion Science and Technology Corporation, Credit Suisse and
    Credit Suisse Securities (USA) LLC.10
.76

Amendment to Offer of Promotion
    between Alion Science and Technology Corporation and Leroy R.
    Goff III.10
.77

Offer Letter between Alion Science
    and Technology Corporation and Scott A. Fry.10
.78

Addendum to Offer Letter between
    Alion Science and Technology Corporation and Scott A. Fry.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-14a)
    promulgated under the Securities Exchange Act of 1934, as
    amended.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 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.     (1)
    
    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
    June 7, 2006 (File no.
    333-89756). 55




---



##### Table of Contents



SIGNATURES
      By:
    /s/  John
    M. Hughes            56