##### 



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
    December 31, 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)
  o þ
    o o þ
  Rule 12b-2 o þ




---



##### 



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  FORM 10-Q
  FOR THE
    THREE MONTHS DECEMBER 31, 2006
  PART I 
    Financial InformationItem 1.


Financial Statements (unaudited)Condensed
    Consolidated Balance Sheets


2Condensed
    Consolidated Statements of Operations


3Condensed
    Consolidated Statements of Cash Flows


4Notes to Condensed
    Consolidated Financial Statements


5Item 2.


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


25Item 3.


Quantitative and
    Qualitative Disclosures About Market Risk


45Item 4.


Controls and
    Procedures


46PART II 
    Other Information


47Item 1.


Legal
    Proceedings


47Item 1A.


Risk
    Factors


47Item 2.


Unregistered Sales
    of Equity Securities and Use of Proceeds


48Item 3.


Defaults Upon
    Senior Securities


48Item 4.


Submission of
    Matters to a Vote of Security Holders


48Item 5.


Other
    Information


49Item 6.


Exhibits


49   1




---



##### 



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  CONDENSED
    CONSOLIDATED BALANCE SHEETS
 As of
    December 31, 2006 and September 30, 2006
  December 31,


September 30,2006


2006(In thousands, except share and per share information)(Unaudited)Current assets:Cash and cash equivalents

$
340


$
2,755Accounts receivable, less
    allowance of $4,277 and $3,961 at December 31, 2006 and
    September 30, 2006, respectively


183,092



150,412Stock subscriptions receivable






8,990Prepaid expenses and other current
    assets


6,449



6,028Total current assets


189,881



168,185Property, plant and equipment, net


14,238



14,644Intangible assets, net


71,151



75,403Goodwill


391,166



387,927Other assets


6,050



4,810Total assets


672,486



650,969Current liabilities:Book cash overdraft


3,261



Current portion, Term B Senior
    Credit Facility note payable


3,430



2,816Current portion, acquisition
    obligations


9,172



11,457Trade accounts payable and accrued
    liabilities


77,287



62,803Accrued payroll and related
    liabilities


27,897



35,135Billings in excess of costs and
    estimated earnings on uncompleted contracts


2,212



2,163Total current liabilities


123,259



114,374Acquisition obligations, excluding
    current portion


2,562



3,568Notes payable to bank


32,550



12,300Term B Senior Credit Facility note
    payable, excluding current portion


251,853



252,100Bridge loan payable


163,830



164,680Subordinated note payable


48,022



46,963Accrued compensation, excluding
    current portion


26,446



21,026Accrued postretirement benefit
    obligations


4,086



3,722Non-current portion of lease
    obligations


4,114



4,292Redeemable common stock warrants


37,258



35,234Total liabilities


693,980



658,259Shareholders deficit:Common stock, $0.01 par
    value, 8,000,000 shares authorized, 5,207,883 and
    5,210,126 shares issued and outstanding at
    December 31, 2006 and September 30, 2006


52



52Additional paid-in capital


91,737



91,829Accumulated deficit


(113,283
)


(99,171
)Total shareholders deficit


(21,494
)


(7,290
)Total liabilities and
    shareholders deficit

$
672,486


$
650,969    2




---



##### 



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  CONDENSED
    CONSOLIDATED STATEMENTS OF OPERATIONS
  Three Months Ended December 31,2006


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

$
181,139


$
101,289Direct contract expense


140,101



76,305Gross profit


41,038



24,984Operating expenses:Indirect contract expense


9,475



5,355Research and development


654



245General and administrative


16,613



12,359Rental and occupancy expense


8,265



4,957Depreciation and amortization


5,655



4,790Bad debt expense


333



106Total operating expenses


40,995



27,812Operating income (loss)


43



(2,828
)Other income (expense):Interest income


116



372Interest expense


(14,358
)


(5,445
)Other


74



140Loss before income taxes


(14,125
)


(7,761
)Income tax benefit (expense)


13



(19
)Net loss

$
(14,112
)

$
(7,780
)Basic and diluted loss per share

$
(2.71
)

$
(1.52
)Basic and diluted weighted average
    common shares outstanding


5,209,858



5,123,744    3




---



##### 



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  CONDENSED
    CONSOLIDATED STATEMENTS OF CASH FLOWS
  Three Months Ended December 31,2006


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

$
(14,112
)

$
(7,780
)Adjustments to reconcile net loss
    to net cash used in operating activities:Depreciation and amortization


5,655



4,790Accretion of debt to face value


234



221Amortization of debt issuance costs


408



249Decrease in value of interest rate
    cap agreement


76



50Change in fair value of redeemable
    common stock warrants


2,024



1,800Stock-based compensation


3,592



2,756Gain on disposal of assets


(18
)


Gain on sale of investments, net


(10
)


(25
)Changes in assets and liabilities,
    net of effect of acquisitions:Accounts receivable, net


(32,536
)


(11,830
)Other assets


(1,729
)


(149
)Trade accounts payable and accruals


10,130



(3,950
)Other liabilities


1,060



(787
)Net cash used in operating
    activities


(25,226
)


(14,655
)Cash flows from investing
    activities:Cash paid for acquisitions, net of
    cash acquired


(6,560
)


Capital expenditures


(1,533
)


(1,605
)Net cash used in investing
    activities


(8,093
)


(1,605
)Cash flows from financing
    activities:Book overdraft


3,261



Repayment of Term B Credit
    Facility note payable


(655
)


(360
)Payment of debt issuance costs


(850
)


Borrowings under revolving credit
    facility


20,250



Purchase of shares of common stock
    from ESOP Trust


(92
)


(7,592
)Cash received from issuance of
    common stock to ESOP Trust


8,990



1,693Net cash provided by (used in)
    financing activities


30,904



(6,259
)Net decrease in cash


(2,415
)


(22,519
)Cash and cash equivalents at
    beginning of period


2,755



37,778Cash and cash equivalents at end
    of period

$
340


$
15,259Supplemental disclosure of cash
    flow information:Cash paid for interest


10,038



2,375Cash paid for taxes


156



19    4




---



##### 



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    (UNAUDITED)
  (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
    
    Human Factors Application, Inc. (HFA)  acquired
    November 1998
    Innovative Technology Solution Corporation (ITSC) 
    acquired October 2003
    Alion  IPS Corporation  acquired
    February 2004
    Alion  METI Corporation (METI)  acquired
    February 2005
    Alion  CATI Corporation (CATI)  acquired
    February 2005
    Alion Canada (US) Corporation  established February
    2005
    Alion Science and Technology (Canada) Corporation 
    established February 2005
    Alion  JJMA Corporation (JJMA)  acquired
    April 2005
    Alion Technical Services Corporation (Virginia) 
    established July 2005
    Alion Technical Services Corporation (Delaware) 
    established May 2006
    Alion  BMH Corporation (BMH)  acquired
    February 2006
    Washington Consulting, Inc. (WCI)  acquired February
    2006
    Alion  MA&D Corporation (MA&D) 
    acquired May 2006 5




---



##### 



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    (UNAUDITED)  (Continued)
   Fiscal
    and Quarter Periods
    Use of
    Estimates
    Reclassifications
    Revenue
    Recognition
  time-and-material
  time-and-material
     6




---



##### 



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    (UNAUDITED)  (Continued)
     SOP 81-1, Accounting for Performance on Construction-Type and Certain
    Production-Type Contracts .
  Income
    Taxes
    Cash
    and Cash Equivalents
    Accounts
    Receivable and Billings in Excess of Costs and Estimated
    Earnings on Uncompleted Contracts
    Property,
    Plant and Equipment
   7




---



##### 



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    (UNAUDITED)  (Continued)
   Goodwill
    and Other Intangibles
  Goodwill and Other Intangible
    Assets
  Postretirement
    Benefits
  Employers Accounting for Postretirement Benefits Other
    Than Pension Employers Accounting for Defined
    Benefit Pension and Other Postretirement Plans
  Fair
    Value of Financial Instruments
    Cash,
    cash equivalents, accounts payable and accounts
    receivable
    Marketable
    securities
    Senior
    long-term debt
    Interest
    rate caps
    Redeemable
    common stock warrants
   8




---



##### 



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    (UNAUDITED)  (Continued)
   Alion
    Stock
    (3)  Business
    Combinations
  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.
    WeightedAverageRemainingEstimated


Residual


AmortizationAmounts in Millions

Fair Value


Value


PeriodPurchased contracts

$
54.7


$




4 years  9




---



##### 



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    (UNAUDITED)  (Continued)
  (4)  Employee
    Stock Ownership Plan (ESOP) and Stock Ownership Trust
    (5)  Postretirement
    Benefits
      (6)  Loss
    Per Share
    (7)  Shareholders
    Equity
     10




---



##### 



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    (UNAUDITED)  (Continued)
   (8)  Accounts
    Receivable
  December 31,


September 30,2006


2006(In thousands)Billed receivables

$
114,717


$
106,310Unbilled receivables:Amounts currently billable


50,825



36,548Revenues recorded in excess of
    milestone billings on fixed price contracts


5,881



5,591Revenues recorded in excess of
    estimated contract value or funding


14,362



3,354Retainages and other amounts
    billable upon contract completion


1,584



2,570Allowance for doubtful accounts


(4,277
)


(3,961
)Total Accounts Receivable

$
183,092


$
150,412     (9)  Property,
    Plant and Equipment
    December 31,


September 30,2006


2006(In thousands)Leasehold improvements

$
3,266


$
2,709Equipment and software


26,125



25,188Total cost


29,391



27,897Less accumulated depreciation and
    amortization


15,153



13,253Net fixed assets

$
14,238


$
14,644    11




---



##### 



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    (UNAUDITED)  (Continued)
   (10)  Goodwill
    and Intangible Assets
    Total(In thousands)Balance as of September 30,
    2006

$
387,927Adjustment to initial allocation
    made during the three months ended December 31, 2006
    (earnout obligations)


3,239Balance as of December 31,
    2006

$
391,166       AccumulatedGross


Amortization


Net(In thousands)Purchased contracts

$
115,246


$
45,986


$
69,260Internal use software and
    engineering designs


2,155



498



1,657Non-compete agreements


650



416



234Total

$
118,051


$
46,900


$
71,151     (In thousands)For the remaining nine months:

2007

$
12,506For the year ending
    September 30:

2008


16,4572009


15,2732010


14,5042011


8,5992012


1,049and thereafter


2,763Total:

$
71,151  12




---



##### 



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    (UNAUDITED)  (Continued)
  (11)  Long-Term
    Debt
    Term B
    Senior Credit Facility
    December 31,


September 30,2006


2006(In thousands)Senior term loan

$
258,360


$
259,015Less: Unamortized debt issuance
    costs


(3,077
)


(4,099
)Term B Senior Credit Facility
    Note Payable

$
255,283


$
254,916Less current maturities, net of
    unamortized debt issue costs


(3,430
)


(2,816
)Term B Senior Credit Facility
    Note Payable, less current maturities

$
251,853


$
252,100     
    a senior term loan in the approximate amount of
    $258.4 million;
    a $50.0 million senior revolving credit facility under
    which approximately $32.6 million was outstanding as of
    December 31, 2006, and approximately $4.5 million of
    which was allocated for letters of credit and as such is not
    available to be borrowed; and
    a $150.0 million uncommitted incremental term loan
    accordion facility.     13




---



##### 



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    (UNAUDITED)  (Continued)
       Use of Proceeds.
    Security.
  Interest and Fees.
    Interest Rate Cap Agreements.
  Other Fees and Expenses.
 14




---



##### 



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    (UNAUDITED)  (Continued)
      Financial Covenants.
  Subordinated
    Note
    paid-in-kind
  Bridge
    Loan Agreement
    Use of Proceeds.
  Interest and Prepayment.
 15




---



##### 



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    (UNAUDITED)  (Continued)
   Financial Covenants.
    2007


2008


2009


2010


2011


2012


Thereafter


Total(In thousands)Senior Secured Term B Loan(1)

$
1,965


$
2,620


$
2,620


$
2,620


$
2,620


$
2,620


$
243,295


$
258,360Bridge Loan(2)


























175,100



175,100Subordinated Seller Note(3)










19,950



19,950















39,900Subordinated Paid in Kind Note(4)










7,402



7,402















14,804Total principal payments

$
1,965


$
2,620


$
29,972


$
29,972


$
2,620


$
2,620


$
418,395


$
488,164     (1)
    
    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 $255.3 million on the face of the balance sheet
    (current and long-term portion) includes, as of
    December 31, 2006, approximately $3.1 million of
    unamortized debt issue costs which totaled approximately
    $12.3 million. The Company expects that it will need to
    refinance the Term B Senior Credit Facility before the end of
    fiscal year 2012.(2)
    
    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
    $163.8 million on the face of the balance sheet includes,
    as of December 31, 2006, approximately $6.2 million in
    unamortized debt issue costs. The Company expects to refinance
    the Bridge Loan Agreement before the end of February 2007
    through the issuance of up to $250.0 million of senior
    unsecured notes expected to mature in 2015. The Company intends
    to use the net proceeds to repay the Bridge Loan and a portion
    of the senior term loan. (See discussion of debt amendment in
    Subsequent Events, Note 18).(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 December 31, 2006,
    approximately $3.6 million of unamortized debt discount
    assigned to fair value of the detachable warrants. On
    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.  (12)  Redeemable
    Common Stock Warrants
  No. 00-19, Accounting for Derivative Financial Instruments Indexed to,
    and Potentially Settled in, a Companys Own
    Stock.
 16




---



##### 



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    (UNAUDITED)  (Continued)
    (13)  Leases
  sub-lease
  Fiscal Years Ending

(In thousands)2007 (for the remainder of fiscal
    year)

$
19,8432008


25,4882009


22,1972010


16,4532011


14,3092012


9,743and thereafter


22,829Gross lease payments

$
130,862Less: non-cancelable subtenant
    receipts


5,281Net lease payments

$
125,581     (14)  Stock
    Appreciation Rights
    Accounting for Stock-Based
    Compensation. Share-Based
    Payment.
 17




---



##### 



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    (UNAUDITED)  (Continued)
  Alion
    Science and Technology Corporation
    Stock-based Compensation Disclosures per FAS 123
    Stock Appreciation Rights
    As of December 31, 2006
  Shares


Shares


TotalGranted to


Granted to


Shares


Exercise


Outstanding


Outstanding











Vested at


Exercisable atDate of Grant

Employees


Directors


Granted


Price


at 9/30/06


at 12/31/06


Forfeited


Exercised


Expired


12/31/06


12/31/06December 2002


64,250







64,250


$
10.00



47,785



43,060



1,060



3,665







33,750



18,960December 2002






29,400



29,400


$
10.00



























May 2003


300







300


$
11.13



240



150







90







30



30June 2003


300







300


$
11.13



300



300















180



60November 2003


129,550







129,550


$
14.71



100,466



91,786



1,520



7,160







51,418



19,250November 2003






12,600



12,600


$
14.71



2,800



2,800















2,800



2,800November 2004






12,600



12,600


$
19.94



12,600



12,600















8,400



8,400February 2005


164,750







164,750


$
19.94



135,588



129,463



4,575



550







28,025



March 2005


2,000







2,000


$
19.94



2,000



2,000















500



April 2005


33,000







33,000


$
29.81



27,500



27,500















5,000



June 2005


2,000







2,000


$
29.81



2,000



2,000















500



December 2005


276,675







276,675


$
35.89



257,900



250,350



7,550











63,150



February 2006


13,000







13,000


$
35.89



10,250



10,250



















February 2006


7,500







7,500


$
35.89



7,500



7,500



















May 2006


7,000







7,000


$
37.06



7,000



7,000



















July 2006


15,000







15,000


$
37.06



15,000



15,000



















August 2006


1,250







1,250


$
37.06



1,250



1,250



















Total


716,575



54,600



771,175







630,179



603,009



14,705



12,465







193,753



49,500Wtd Avg Exercise Price

$
25.75


$
13.38


$
24.87






$
26.39


$
26.64


$
26.87


$
13.95


$



$
22.21


$
13.79   18




---



##### 



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    (UNAUDITED)  (Continued)
  Alion
    Science and Technology Corporation
    Stock-based Compensation Disclosures per FAS 123
    Stock Appreciation Rights
    As of December 31, 2006
  Risk Free






Remaining LifeDate of Grant

Interest Rate

Volatility


Expected Life

(months)December 2002

4.06% - 4.49%


60%


5 yrs


10.3December 2002

4.06% - 4.49%


60%


3 yrs


0.0May 2003

2.70% - 3.30%


55%


5 yrs


15.7June 2003

2.70% - 3.30%


55%


5 yrs


16.5November 2003

4.06% - 4.49%


60%


5 yrs


22.2November 2003

4.06% - 4.49%


60%


3 yrs


0.0November 2004

3.10% - 3.60%


45%


3 yrs


10.3February 2005

3.10% - 3.60%


45%


4 yrs


24.7March 2005

3.10% - 3.60%


45%


4 yrs


25.9April 2005

4.10% - 4.20%


45%


4 yrs


26.7June 2005

4.10% - 4.20%


45%


4 yrs


28.9December 2005

4.20% - 4.20%


40%


4 yrs


35.5February 2006

4.20% - 4.20%


40%


4 yrs


37.2February 2006

4.20% - 4.20%


40%


4 yrs


37.7May 2006

4.82% - 4.83%


35%


4 yrs


40.5July 2006

4.82% - 4.83%


35%


4 yrs


41.9August 2006

4.82% - 4.83%


35%


4 yrs


43.8Wtd Avg Exercise Price










28.5   19




---



##### 



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    (UNAUDITED)  (Continued)
  (15)  Phantom
    Stock Plans
    Accounting for Stock-Based
    Compensation. Share-Based Payment.
 20




---



##### 



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    (UNAUDITED)  (Continued)
  Alion
    Science and Technology Corporation
    Stock-based Compensation Disclosures per FAS 123
    Phantom Stock
    as of December 31, 2006
  GrantShares


Shares


Total


DateGranted to


Granted to


Shares


Price per


Outstanding


Outstanding











Vested at


Exercisable atDate of Grant

Employees


Directors


Granted


Share


at 9/30/06


at 12/31/06


Forfeited


Exercised


Expired


12/31/06


12/31/06February 2003


171,000







171,000


$
10.00



85,000



85,000















16,500



16,500November 2003


52,685







52,685


$
14.71



32,971



26,513







6,458







8,158



8,158February 2005


202,763







202,763


$
19.94



202,763



202,763



















February 2005


103,414







103,414


$
19.94



103,414



103,414



















February 2005


5,015







5,015


$
19.94



5,015



5,015















1,254



August 2005


2,960







2,960


$
33.78



2,960



2,960















987



November 2005


66,592







66,592


$
35.89



66,592



66,592



















November 2005






7,808



7,808


$
35.89



6,832



6,832















2,277



2,277November 2005


55,726







55,726


$
35.89



55,726



55,726



















Total


660,156



7,808



667,964







561,274



554,816







6,458







29,176



26,935Wtd Avg Grant Date Fair Value
    Price per Share

$
19.97


$
35.89


$
20.15






$
21.87


$
21.95


$



$
14.71


$



$
14.57


$
13.62   21




---



##### 



ALION
    SCIENCE AND TECHNOLOGY CORPORATION



NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    (UNAUDITED)  (Continued)  Alion
    Science and Technology Corporation
    Stock-based Compensation Disclosures per FAS 123
    Phantom Stock
    as of December 31, 2006
  Risk Free







RemainingDate of Grant

Interest Rate

Volatility


Expected Life


Life (Months)February 2003

4.06% - 4.49%


60
%


5 yrs



12.7November 2003

4.06% - 4.49%


60
%


5 yrs



21.8February 2005

3.10% - 3.60%


45
%


3 yrs



12.7February 2005

3.10% - 3.60%


45
%


3 yrs



12.7February 2005

3.10% - 3.60%


45
%


4 yrs



24.7August 2005

3.72% - 3.77%


45
%


3 yrs



18.9November 2005

4.20% - 4.20%


40
%


3 yrs



22.1November 2005

4.20% - 4.20%


40
%


3 yrs



22.1November 2005

4.20% - 4.20%


40
%


5 yrs



46.1Wtd Avg Grant Date Fair Value
    Price per Share












17.9   (16)  Segment
    Information and Customer Concentration
      (17)  Commitments
    and Contingencies
  Earn
    Out Commitments
       22




---



##### 



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    (UNAUDITED)  (Continued)
         Legal
    Proceedings
  Estate of Joseph Hudert vs. Alion Science and Technology
    Corporation; Estate of Frank Stotmeister vs. Alion Science and
    Technology Corporation.
           23




---



##### 



ALION
    SCIENCE AND TECHNOLOGY CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    (UNAUDITED)  (Continued)
   Government
    Audits
    (18)  Subsequent
    Events
       24




---



##### 



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Form 10-K
  Overview
    For the ThreeMonths Ended December 31,2006


2005(In millions)Revenue

$
181.1


$
101.3Net loss


(14.1
)


(7.8
)     For the Three Months Ended December 31,Contract Type

2006


2005(In millions)Cost-reimbursement

$
124.7



68.9
%

$
63.1



62.3
%Fixed-price


30.4



16.7
%


19.3



19.0
%Time-and-material


26.0



14.4
%


18.9



18.7
%Total

$
181.1



100.0
%

$
101.3



100.0
%     For the Three Months Ended December 31,Customer Type

2006


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

$
163.9



90.5
%

$
94.0



92.8
%Other Federal Civilian Agencies


6.9



3.8
%


5.6



5.5
%Commercial / State / Local and
    International


10.3



5.7
%


1.7



1.7
%Total

$
181.1



100.0
%

$
101.3



100.0
%    25




---



##### 



Results
    of Operations
  Three
    Months Ended December 31, 2006 Compared to Three Months
    Ended December 31, 2005
  ,
  Three Months Ended December 31, 2006


Three Months Ended December 31, 2005ConsolidatedConsolidated





Operations LessOperations


Acquired


Acquired


Consolidatedof Alion


Operations*


Operations


Operations of Alion(Dollars in millions)


(Dollars in millions)%





%





%





%Financial information




revenue





revenue





revenue





revenueTotal Revenue

$
181.1






$
79.5






$
101.6






$
101.3Material and subcontract revenue


78.5



43.3
%


38.4



48.3
%


40.1



39.5
%


32.8



32.4
%Total direct contract expenses


140.1



77.4
%


62.7



78.9
%


77.4



76.2
%


76.3



75.3
%Major components of direct contract
    expenses Direct labor expense


61.2



33.8
%


24.1



30.3
%


37.1



36.5
%


41.4



40.9
%Other direct labor expense (ODC)


4.9



2.7
%


1.3



1.6
%


3.6



3.5
%


2.6



2.6
%Material and subcontract (M&S)
    expense


74.0



40.9
%


37.3



46.9
%


36.7



36.1
%


32.3



31.9
%Gross profit


41.0



22.6
%


16.8



21.1
%


24.2



23.8
%


25.0



24.7
%Total operating expense


41.0



22.6
%


15.2



19.1
%


25.7



25.3
%


27.8



27.4
%Major components of operating
    expense Indirect personnel and facilities


17.7



9.8
%


7.8



9.8
%


9.9



9.7
%


10.3



10.2
%General and administrative


13.0



7.2
%


4.5



5.7
%


8.5



8.4
%


9.6



9.5
%Stock-based compensation (included
    in G&A expense)


3.6



2.0
%










3.6



3.5
%


2.8



2.8
%Depreciation and amortization


5.6



3.1
%


2.9



3.6
%


2.7



2.7
%


4.8



4.7
%Income (loss) from operations

$
0.0



0.1
%

$
1.6



2.0
%

$
(1.5
)


(1.5
)%

$
(2.8
)


(2.8
)%     *
    
    For the three months ended December 31, 2006, the
    operations of acquired entities and the operating results
    generated in support of the acquired Anteon contracts have been
    fully integrated within Alion on a consolidated basis. The
    selected financial information provided in the table represent
    actual results for the acquired and non-acquired operations
    rounded to the nearest one hundred thousand dollars.  Revenues.
  

Increase in revenue generated by
    the activities of the acquired operations

$
79.5
million

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

$
0.3
millionTotal:

$
79.8
million    26




---



##### 



Direct Contract Expenses.
  
    Direct labor expense for the three months ended
    December 31, 2006 increased $19.8 million, or 47.8%,
    over the three months ended December 31, 2005. Direct labor
    expense declined to 33.8% from 40.9% of total revenue for the
    three months ended December 31, 2006 and 2005,
    respectively. This decrease was due to the decrease in content
    of direct labor expense from acquired operations primarily
    related to WCI and for work provided in support of the Anteon
    contracts.
    M&S expense for the three months ended December 31,
    2006 increased $41.7 million, or 129.1%, over the three
    month period ended December 31, 2005. M&S expense
    increased to 40.9% from 31.9% of total revenue for the three
    months ended December 31, 2006 and 2005, respectively. The
    percent increase in M&S expense was due to the increase in
    content of M&S expense to total direct contract expense of
    the acquired operations, primarily related to WCI and for work
    provided in support of the Anteon contracts. M&S expense was
    approximately 94.3% and 98.5% of M&S revenue for the three
    months ended December 31, 2006 and 2005, respectively.    Gross Profit.
  Operating Expenses.
  
    Operating expenses for indirect personnel and rental and
    occupancy expenses for the three months ended December 31,
    2006 increased approximately $7.4 million, or 72.0%, from
    the three months ended December 31, 2005. Operating
    expenses for indirect personnel and facilities declined to 9.8%
    from 10.2% of total revenue for the three months ended
    December 31, 2006 and 2005, respectively.
    General and administrative (G&A) expense for the three
    months ended December 31, 2006 increased approximately
    $3.4 million, or 35.4%, over the three months ended
    December 31, 2005. G&A expenses were 7.2% and 9.5% of
    revenue for the three months ended December 31, 2006 and
    2005, respectively. Approximately $1.2 million of the
    $3.4 million increase is due to increased fringe benefit
    expenses and approximately $1.0 million was due to
    third-party legal and accounting fees associated with financing
    expense and approximately $0.3 million for third party
    legal expense for contract protests. These additional expenses
    represent approximately 1.4% of total revenue. The remaining
    $0.9 million increase in G&A expense is associated with
    infrastructure costs to accommodate recent acquisitions.
    Stock-based compensation expense (included in G&A expense)
    relates to the SAR and phantom stock plans. This expense for the
    three months ended December 31, 2006 increased
    approximately $0.8 million, or 28.6%, from the three months
    ended December 31, 2005. The increase in stock-based
    compensation expense results from the relative change in price
    of a share in Alion common stock and, to a lesser extent, the
    increase in the awards granted.
    Depreciation and amortization expense for the three months ended
    December 31, 2006 increased approximately
    $0.8 million, or 16.7%, from the three months ended
    December 31, 2005. Depreciation expense 27




---



##### 



primarily arises from fixed assets while amortization expense
    results primarily from purchase contracts. Depreciation and
    amortization expense was 3.1% and 4.7% of revenue for the three
    months ended December 31, 2006 and 2005, respectively.  Income loss) from Operations.
  Other Income (Expense).
  Three Months Ended December 31,2006


2005(In millions)Revolving facility

$
0.7


$
Senior term loan


5.7



2.6Bridge loan


4.6



Subordinated Note


1.0



1.0Accretion of warrants(a)


2.0



1.8Other


0.4



Total

$
14.4


$
5.4     (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.
  Liquidity
    and Capital Resources
         28




---



##### 



Discussion
    of Debt Structure
  Term
    B Senior Credit Facility
    
    a senior term loan in the approximate amount of
    $258.4 million;
    a $50.0 million senior revolving credit facility under
    which approximately $32.6 million was outstanding as of
    December 31, 2006, and approximately $4.5 million of
    which was allocated for letters of credit and as such is not
    available to be borrowed; and
    a $150.0 million uncommitted incremental term loan
    accordion facility.       29




---



##### 



Use of Proceeds.
    Security.
  Interest and Fees.
 30




---



##### 



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
    1.00
    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.
     31




---



##### 



Other Fees and Expenses.
    Financial Covenants. Form 10-Q
     32




---



##### 




    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 December 31, 2006 and
    2005
  Calculation of EBITDA

2006


2005(Dollars in thousands)Net loss

$
(37,447
)

$
(42,054
)Plus: Interest expense


38,604



37,148Plus: Income tax expense (benefit)


(6
)


34Plus: Depreciation and
    amortization expense


17,431



19,073EBITDA

$
18,582


$
14,201   33




---



##### 



Calculation of Consolidated EBITDA

2006


2005(Dollars in thousands)EBITDA

$
18,582


$
14,201Plus: Cash contributions to ESOP
    in respect of the repurchase liability






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


11,574



12,927Plus: Non-cash contributions to
    the ESOP (including Company
    401-k match)*


8,796



5,980Plus: Nonrecurring charges and
    adjustments by third-party valuation firm that prepares
    valuation reports in connection with the ESOP


17,340



4,425Consolidated EBITDA

$
56,292


$
37,533     *
    
    Non-cash expenses with respect to the stock appreciation rights
    and phantom stock plans and non-cash contributions to the ESOP
    constitute all the non-cash charges and expenses that are
    included in the calculation of Consolidated EBITDA.  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 December 31, 2006 and
    2005
  2006


2005(Dollars in thousands)Numerator:Revolving credit facility

$
33,404


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


258,360



142,560Bridge loan


170,000



Total debt outstanding

$
461,764


$
142,560Denominator:Consolidated EBITDA

$
56,292


$
37,533Plus: Acquisition-related pro
    forma adjustment


17,229



3,550Consolidated EBITDA with pro forma
    effect of acquisitions

$
73,521


$
41,083Leverage ratio:


6.28



3.47  34




---



##### 



Period

RatioFebruary 6, 2007 through
    September 30, 2007


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


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


3.25 to 1.00Thereafter


3.00 to 1.00   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 December 31, 2006 and
    2005
  2006


2005(Dollars in thousands)Numerator:Consolidated EBITDA

$
56,292


$
37,533Plus: Acquisition-related pro
    forma adjustment


17,229



3,550Consolidated EBITDA with pro forma
    effect of acquisitions


73,521



41,083Less: Capital expenditures


5,155



3,238Consolidated EBITDA with pro forma
    effect of acquisitions less capital expenditures

$
68,366


$
37,845   2006


2005(Dollars in thousands)Denominator:Consolidated interest expense

$
27,012


$
8,680Interest coverage ratio


2.53



4.36  35




---



##### 




    incur additional indebtedness other than permitted additional
    indebtedness after satisfying a leverage based incurrence test;
    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 certain 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 before it is due and redeem or
    repurchase certain equity;
    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 ESOP 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; 36




---



##### 




    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).      Bridge
    Loan Agreement
      Subordinated
    Note
    paid-in-kind
  Senior
    Unsecured Notes
    Use of Proceeds.
 37




---



##### 



Security.
  Ranking.
  Interest and Fees.
  Optional Redemption.
    12-month
  Period

Redemption Price2011


105.125
%2012


102.563
%2013 and thereafter


100.000
%   Covenants.
  
    incur or guarantee additional indebtedness;
    pay dividends on capital stock or redeem, repurchase or retire
    capital stock or subordinated indebtedness, except in certain
    circumstances for the junior subordinated notes and junior
    warrants;
    repurchase or redeem shares of Company stock in connection with
    distributions and diversifications from the ESOP component of
    the KSOP;
    transfer or sell assets including shares of stock of certain
    subsidiaries of the Company outside the ordinary course of
    business;
    make investments other than certain permitted investments;
    engage in business unrelated to the Companys existing
    business;
    incur certain liens and enter into sale/leaseback transactions;
    enter into certain transactions with affiliates; 38




---



##### 




    restrict the ability of subsidiaries to pay dividends and make
    their distributions and loans to the Company; and
    merge or consolidate with other companies.  Events of Default.
  
    payment default;
    uncured covenant breaches;
    default under an acceleration of certain other debt exceeding
    $30 million;
    certain bankruptcy and insolvency events;
    a judgment for payment in excess of $30 million entered
    against the Company or any material subsidiary that remains
    outstanding for a period of 60 days and is not discharged,
    waived or stayed; and
    failure of any guarantee of the Senior Unsecured Notes to be in
    effect or the denial or disaffirmation by any subsidiary
    guarantor of its guaranty obligations.  Exchange Offer; Registration
    Rights.
  
    file a registration statement with the SEC with respect to a
    registered offer to exchange the Notes for publicly registered
    notes, within 90 days after the issue date of the Senior
    Unsecured Notes;
    use reasonable best efforts to cause the registration statement
    to be declared effective under the Securities Act within
    240 days after the issue date of the Notes;
    commence the exchange offer as soon as practicable after the
    effectiveness of the registration statement; and
    keep the exchange offer open for not less than 30 days
    after the date notice of the exchange offer is mailed to the
    holders of the Notes.    Change of Control.
  
    subject to certain exceptions, a person, other than the ESOP
    Trust, is or become the beneficial owner, directly or
    indirectly, of more than 35% of the total voting power or voting
    stock of the Company;
    individuals who on the date of issuance of the Senior Unsecured
    Notes constituted the board of directors of the Company, cease
    for any reason to constitute a majority of the board of
    directors of the Company;
    the adoption of a plan relating to the liquidation or
    dissolution of the Company; and
    subject to certain exceptions, the merger or consolidation of
    the Company with or into another person or the merger of another
    person with or into the Company, or the sale of all or
    substantially all the assets of the Company to another person.    
    Additional borrowings of $15.0 million of senior term loans
    on January 4, 2007, under the Term B Senior Credit Facility;
    Extension of the maturity date of the senior term loans
    outstanding under the Term B Senior Credit Facility to
    February 6, 2013; 39




---



##### 




    Issuance of $250.0 million in Senior Unsecured Notes on
    February 8, 2007;
    Repayment of the entire outstanding balance of the Bridge Loan
    on February 8, 2007; and
    Re-payment of $51.0 million in outstanding principal of
    senior term loans on February 8, 2007, under the Term B
    Senior Credit Facility.  6-Fiscal Year Period2007*


2008


2009


2010


2011


2012


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

$
386


$
250


$
250


$
250


$
250


$
250


$
750Senior Secured Term B Loan- Interest(2)


12,979



16,398



16,274



16,292



16,554



16,712



8,482- Principal(3)


1,668



2,224



2,224



2,224



2,224



2,224



209,574Senior Unsecured Notes- Interest(4)


12,216



25,625



25,625



25,625



25,625



25,625



64,063- Principal(4)


























250,000Subordinated note- Interest(5)










6,384



3,192











- Principal(5)










27,352



27,352











Total cash  Pay interest


25,581



42,273



48,533



45,359



42,429



42,587



73,295Total cash  Pay
    principal


1,668



2,224



29,576



29,576



2,224



2,224



459,574Total

$
27,249


$
44,497


$
78,109


$
74,935


$
44,653


$
44,811


$
532,869     *
    
    Estimated interest and principal payments for the remainder of
    fiscal year 2007.(1)
    
    The Company anticipates accessing, from time to time, its
    $50.0 million bank revolving credit facility to finance the
    Companys ongoing working capital needs. The remaining term
    of the revolving credit facility is approximately two years;
    however, the Company expects to access a revolving credit
    facility as an on-going requirement to fund working capital at
    least through 2012. For the remainder of fiscal year 2007, the
    average balance drawn on the revolving credit facility is
    projected to be approximately $2.0 million. For the fiscal
    years 2008 through 2012, the Company anticipates the balance
    drawn on the Companys then revolving credit facility will
    be minimal. As of December 31, 2006, the Company has
    borrowed approximately $32.5 million under the revolving
    credit facility, approximately $4.5 million of which was
    allocated for letters of credit and as such is not available to
    be borrowed. Interest expense value includes an estimate for the
    unused balance fee on the $50.0 million revolving credit
    facility.(2)
    
    The projected average annual senior term loan balance the
    Company estimates will be drawn under the Term B Senior Credit
    Facility is as follows: $227.6 million,
    $219.6 million, $217.4 million, $215.1 million,
    $212.9 million, and $210.7 million for the remainder
    of fiscal year 2007 and for fiscal years ending
    September 30, 2008 through 2012, respectively. The Company
    expects it will need to refinance the Term B Senior Credit
    Facility before the end of fiscal year 2012 and expects interest
    expense to continue at levels similar to prior years. Based on
    an estimated LIBOR rate plus the Credit Suisse Eurodollar
    spread, the effective annual interest rate for the remainder of
    fiscal year 2007, and for fiscal years ending September 30,
    2008 through 2012 is estimated to be approximately 7.6%, 7.5%,
    7.5%, 7.6%, 7.8%, and 7.9%, 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 cap agreements expire in September 2007.
    Outstanding principal balances not under the cap agreements had
    interest based on the Eurodollar rate. The senior term loan
    matures February 6, 2013. The approximate impact of a 1%
    increase in the interest rate, as applied to principal balances
    drawn under the senior term loan not covered by the current
    interest rate cap agreements would be $1.4 million,
    $2.2 million, $2.2 million, $2.2 million,
    $2.1 million, and $2.1 million for the remainder of
    fiscal year 2007 and for fiscal years ending September 30,
    2008 through 2012, respectively. Estimated interest expense
    includes an estimate for the commitment fee on the senior term
    loan. 40




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##### 



(3)
    
    The Term B Senior Credit Facility requires the Company to repay
    approximately 1.0 percent of the principal balance
    outstanding under the senior term loan annually. Approximately
    6.0 percent of the principal will be paid during fiscal
    years 2007 through 2012 and the first quarter of fiscal year
    2013 and the remaining principal balance will be repaid on
    February 6, 2013, the senior term loan maturity date. The
    table reflects the balance drawn of $258.4 million as of
    December 31, 2006, plus the $15.0 million in
    additional term loans drawn under the Term B Senior Credit
    Facility on January 4, 2007, less a $51.0 million
    repayment of the Term B Senior loan on February 8, 2007
    from the proceeds of sale of $250.0 million Senior
    Unsecured Notes, resulting in expected aggregate annual
    principal payments of approximately $1.7 million for the
    remainder of fiscal year 2007 and approximately
    $2.2 million in each of fiscal years 2008 through 2012. The
    remaining principal balance of approximately $209.6 million
    is to be paid on February 6, 2013. 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 or
    incurs certain debt or sells certain assets. As of
    December 31, 2006, no mandatory prepayments are due.(4)
    
    The table reflects the issuance of $250.0 million of Senior
    Unsecured Notes on February 8, 2007. The principal amount
    of $250.0 million is due and payable on February 1,
    2015.(5)
    
    The Subordinated Note bears interest at (i) 6.0% through
    December 20, 2006, (ii) approximately 6.4% from
    December 21, 2006 through December 20, 2007, and
    (iii) 6.7% from December 21, 2007 through
    December 20, 2008. Interest is payable quarterly by the
    issuance of
    paid-in-kind
    or PIK notes maturing at the same time as the Subordinated Note.
    The issuance of the PIK notes has the effect of deferring the
    underlying cash interest expense on the Subordinated Note.
    Commencing December 2008, the Subordinated Note will bear
    interest at 16.0% per year payable quarterly in cash through the
    time of repayment in full of the Subordinated Note. Principal on
    the Subordinated Note will be payable in equal installments of
    $19.95 million in December 2009 and December 2010; the PIK
    notes are also due in equal installments of approximately
    $7.4 million on these same dates.  Other
    Obligations
  Earn
    outs
            Lease
    Payments
   41




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##### 



Other
    contingent obligations which will impact the Companys
    cash
    
    Obligations relating to deferred compensation programs for
    senior managers;
    Obligations related to the holders put rights associated
    with the Subordinated Note warrants;
    Obligations relating to the Companys stock based
    compensation plans; and
    Repurchase obligations under the KSOP.    Number ofShares





Total ValueDate

Repurchased


Share Price


Purchased(In thousands)June 2003


5,248


$
11.13


$
58July 2003


2,696


$
11.13



30December 2003


50,031


$
14.71



736May 2004


117


$
16.56



2June 2004


727


$
16.56



12June 2004


743


$
16.56



12July 2004


48,309


$
16.56



800December 2004


46,816


$
19.94



934March 2005


5,691


$
19.94



113June 2005


45,846


$
29.81



1,367August 2005


1,090


$
33.78



37September 2005


170,657


$
33.78



5,765December 2005


211,537


$
35.89



7,592June 2006


273,800


$
37.06



10,147July 2006


32,420


$
37.06



1,201August 2006


1,695


$
37.06



63December 2006


2,243


$
41.02



92Total









$
28,961        42




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##### 



Contract
    performance  Joint Spectrum Center
    Contract
    Summary
    of Critical Accounting Policies
  Revenue
    Recognition
  time-and-material
  time-and-material
     43




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##### 



SOP 81-1, Accounting for Performance on Construction-Type and Certain
    Production-Type Contracts .
  Goodwill
    and Intangible Assets
    Business Combinations.
      Forward
    Looking Statements
   44




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##### 




    changes to the ERISA laws related to the Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan;
    changes to the tax laws relating to the treatment and
    deductibility of goodwill, the Companys subchapter S
    status, or any change in the Companys effective tax rate;
    additional costs associated with compliance with provisions of
    the Sarbanes-Oxley Act of 2002, including any changes in the
    SECs rules, and other corporate governance requirements;
    failure of government customers to exercise options under
    contracts;
    funding decisions relating to U.S. Government projects;
    government contract procurement (such as bid protest) and
    termination risks;
    competitive factors such as pricing pressures
    and/or
    competition to hire and retain employees;
    the results of current
    and/or
    future legal proceedings and government agency proceedings which
    may arise out of our operations (including our contracts with
    government agencies) and the attendant risks of fines,
    liabilities, penalties, suspension
    and/or
    debarment;
    undertaking acquisitions that could increase our costs or
    liabilities or be disruptive;
    taking on additional debt to fund acquisitions;
    failure to adequately integrate acquired businesses;
    material changes in laws or regulations applicable to the
    Companys businesses;
    as well as other risk factors discussed in the Companys
    annual report on
    Form 10-K
    for the year ended September 30, 2006 filed with the SEC on
    December 1, 2006.    Item 3.
    Quantitative
    and Qualitative Disclosures About Market Risk       45




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##### 



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)
 46




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##### 



PART II 
    OTHER INFORMATION  Item 1.
    Legal
    Proceedings      Item 1A.
    Risk
    Factors  Our
    substantial leverage may limit our operational flexibility and
    negatively affect the value of your investment in
    us.
      
    making it more difficult for us to satisfy our obligations with
    respect to our debt, and any failure to comply with the
    obligations of any of our debt instruments, including
    restrictive and financial covenants, could result in an event of
    default under the agreements governing our debt;
    making it more difficult for us to satisfy our repurchase
    obligations to ESOP participants;
    increasing our vulnerability to general adverse economic and
    industry conditions by making it more difficult for us to react
    to changing conditions;
    limiting our ability to obtain additional financing to fund
    future working capital, capital expenditures, acquisitions and
    other business opportunities, introductions of new technologies
    and other general corporate requirements;
    requiring a substantial portion of our cash flow from operations
    for the payments of interest on our debt and reducing our
    ability to use our cash flow to fund future working capital,
    capital expenditures, acquisitions and other business
    opportunities, introductions of new technologies and other
    general corporate requirements;
    exposing us to risks inherent in interest rate fluctuations
    because some of our borrowings will be at variable rates of
    interest, which could result in higher interest expense in the
    event of increases in interest rates;
    limiting our flexibility in planning for, or reacting to,
    changes in our business and the industry in which we
    operate; and
    placing us at a competitive disadvantage compared with our
    competitors that have less debt.  Despite
    current indebtedness levels, we and our subsidiaries may still
    be able to incur more debt. This could further exacerbate the
    risks associated with our substantial leverage.
   47




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##### 



Our
    Term B Senior Credit Facility and the Indenture governing the
    Senior Unsecured Notes will restrict our
    operations.
    
    incur additional debt other than permitted additional debt;
    pay dividends or distributions on our capital stock or purchase,
    redeem or retire our capital stock other than distributions
    necessary for the ESOP to satisfy its repurchase obligations and
    certain payments required under our equity based compensation
    plans;
    make acquisitions and investments other than permitted
    acquisitions and permitted investments;
    issue or sell preferred stock of subsidiaries;
    make acquisitions and investments;
    create liens on our assets;
    enter into certain transactions with affiliates;
    merge or consolidate with another company; and
    transfer and sell assets outside the ordinary course of business.    and/or
  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   48




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##### 



Item 5.
    Other
    Information    Item 6.
    Exhibits  Exhibit No.

Description4
.16

Indenture dated as of
    February 8, 2007, among Alion Science and Technology
    Corporation, certain subsidiary guarantors and Wilmington Trust
    Company, as trustee.(1)4
.17

Form of 10.25% Senior Notes
    due 2015 (included as Exhibit 1 to Exhibit 4.16 of
    this quarterly report on
    Form 10-Q)(1)10
.80

Amendment No. 1 to the Bridge
    Loan Agreement dated as of December 11, 2006, by and among
    Alion Science and Technology Corporation, certain subsidiary
    guarantors, Credit Suisse, and the lenders party thereto.(2)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.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
    Form 8-K
    filed with the Securities and Exchange Commission on
    February 8, 2007.(2)
    
    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 14, 2006. 49




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##### 



SIGNATURES
      John
    M. Hughes
   Title:
    Chief Financial Officer      50