##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended September 30, 2006
 Alion Science and Technology Corporation
  Delaware
    
    333-89756
    
    54-2061691(State or Other Jurisdiction of
    
    (Commission File Number)
    
    (IRS EmployerIncorporation or Organization)
    
    
    
    Identification No.)
 10 West 35th Street
    
    
    
    1750 Tysons Boulevard, Suite 1300Chicago, IL 60616
    
    
    
    McLean, VA 22102(312) 567-4000
    
    
    
    (703) 918-4480
 
 
 
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PART IItem 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    18Item 1B. Unresolved Staff Comments
    
    
    27Item 2. Properties
    
    
    28Item 3. Legal Proceedings
    
    
    28Item 4. Submission of Matters to a Vote of Security Holders
    
    
    29PART IIItem 5. Market for Registrants Common Equity, Related Stockholders Matters and Issuer
Purchases of Equity Securities
    
    
    29Item 6. Selected Financial Data
    
    
    29Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    32Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    57Item 8. Financial Statements and Supplementary Data
    
    
    59Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    89Item 9A. Controls and Procedures
    
    
    89Item 9B. Other Information
    
    
    89PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    90Item 11. Executive Compensation
    
    
    94Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholders Matters
    
    
    106Item 13. Certain Relationships and Related Transactions
    
    
    106Item 14. Principal Accountant Fees and Services
    
    
    107Item 15. Exhibits and Financial Statement Schedules
    
    
    108
 2




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PART I
 Item 1. Business
    Overview
    3




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Estimated Revenue by Fiscal Year*(in millions)Core Business Area
    
    2006
    
    
    2005
    
    
    2004-Defense Operations
    
    $
    159.0
    
    
    
    32
    %
    
    $
    131.4
    
    
    
    36
    %
    
    $
    105.1
    
    
    
    39
    %-Wireless Communications
    
    
    47.0
    
    
    
    9
    %
    
    $
    56.0
    
    
    
    15
    %
    
    $
    37.8
    
    
    
    14
    %-Industrial Technology Solutions
    
    
    45.6
    
    
    
    9
    %
    
    $
    51.7
    
    
    
    14
    %
    
    $
    35.9
    
    
    
    14
    %-Naval Architecture and Marine
Engineering
    
    
    142.2
    
    
    
    28
    %
    
    $
    51.0
    
    
    
    14
    %
    
    $
    1.1
    
    
    
    0
    %-Modeling and Simulation
    
    
    47.5
    
    
    
    9
    %
    
    $
    34.9
    
    
    
    9
    %
    
    $
    22.1
    
    
    
    8
    %-Chemical, Biological, Nuclear, and
Environmental Sciences
    
    
    40.9
    
    
    
    8
    %
    
    $
    33.2
    
    
    
    9
    %
    
    $
    32.5
    
    
    
    12
    %-Information Technology
    
    
    26.4
    
    
    
    5
    %
    
    $
    11.0
    
    
    
    3
    %
    
    $
    35.4
    
    
    
    13
    %$
    508.6
    
    
    
    100
    %
    
    $
    369.2
    
    
    
    100
    %
    
    $
    269.9
    
    
    
    100
    %
 
 *
    
    Beginning 2005, the descriptions of the core business areas were modified as
compared to descriptions used in our annual report on Form 10-K for fiscal year 2004.
The results for 2004 have been re-categorized using the modified core business area
descriptions. Revenues and percentages are based on management estimates. Defense Operations.
 
    
    Military transformation:we identify and analyze issues and programs of major
importance for the Office of the Secretary of Defense and related U.S. military services
transformation initiatives such as joint warfare experimentation. We also integrate
Command, Control, Communication, and Computer Intelligence (C4I) initiatives and develop
net-centric initiatives.
    
    Logistics management:we provide support to the U.S. Army on a broad range of
requirements including infrastructure assessment,  defense
industrial base assessment, financial management, cost analysis, and base realignment, from
planning to implementation.
    
    Readiness assessments and operational support:we deliver strategic planning and
decision-making process improvements by providing technical assistance and decision support
tools, such as Full Spectrum Analysis and Distributed Information System Collaboration
Architecture.
    
    Training and education services:we assist the DoD in the development of its
department-wide education and training policies. We develop the necessary technology,
compile the information to be used in the courseware, and then translate this into an
electronic or web-based advanced distant learning medium so that the student can interact
with the courseware from a remote location.
    
    Critical infrastructure protection, risk and vulnerability analysis:we provide
techniques, tools, and operational support to assess vulnerabilities and defend
infrastructure, including ports, power plants and communications nodes.
 Wireless Communications.
 
    
    Wireless and communications-electronics engineering:we perform work for the government
communications-electronics and commercial wireless communities. The term
communications-electronics refers to all devices or systems that use the radio frequency
spectrum. Our work for the government sector includes such tasks as conducting modeling
and simulation of communications networks and
analyzing radar and space systems performance. For our commercial customers, both foreign
and domestic, we determine whether wireless communication networks have the geographic
coverage the customers desire, and whether the systems operate free of interference, and we
make recommendations designed to improve network performance. We also evaluate and make
recommendations for the design of radio transmitters, receivers and antennas for our
 4




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commercial customers. In the area of net-centric operations, we design next generation
wireless networks and devices, including frequency and bandwidth-adaptive systems.
 
    
    Spectrum management:we perform studies and analyses related to the manner in which the
radio frequency spectrum may be utilized without interruption or interference by both new
and existing users and technologies. In addition, we assess existing and new technologies
for their ability to utilize the radio frequency spectrum efficiently  in other words, to
accomplish designated tasks without using too much of the available radio frequency
spectrum. Our services, which include providing spectrum policy advice, are used to
support decisions of senior government officials in the U.S. and abroad.
    
    C4ISR system engineering:we deliver Command, Control, Communication and Computer
Intelligence, Surveillance, and Reconnaissance (C4ISR) engineering and analysis support for
radio frequency communications, radar, and Identification Friend or Foe, to DoD system
developers and integrators. We also develop automated spectrum management
software to assign frequencies to multiple users of the radio frequency spectrum in an
effort to minimize interference. Our software tool, Spectrum XXITM, is the
automated spectrum management system used worldwide by the DoD, and it is now also being
used by other agencies of the U.S. federal government. We also design, integrate and
deploy spectrum monitoring software to locate and track violators of the rules and
regulations of spectrum usage.
    
    Electromagnetic environmental effects:we perform studies and analyses to measure and
predict electromagnetic environmental effects for both government and commercial customers.
Our work has involved building automated tools designed to predict the effects of
potential hazards of electromagnetic radiation to ordnance, fuel and personnel. We also
analyze electronic components in automotive parts such as brakes and airbags for
electromagnetic interference issues on behalf of various commercial customers.
 Industrial
Technology Solutions.
 
    
    Reliability, material and manufacturing engineering:we apply technology to enhance
production, improve performance, reduce cost and extend life of complex engineered
products.
    
    Sensor technology development:we develop, evaluate, adapt and integrate sensor
technologies and provide support to the DoDs Night Vision and
Electronic Sensors Directorate.
    
    Facilities engineering/construction management:we provide expertise in engineering,
architecture and related disciplines (e.g., construction management, logistics, design
oversight and inspection).
    
    Research and analysis center management:we manage a
number of DoD information analysis
centers such as the: Advanced Materials, Manufacturing and Testing Information Analysis
Center (AMMTIAC) which is a recent combination of the Advanced Materials Processes
Technology Information Analysis Center (AMPTIAC), the Manufacturing Technology Information
Analysis Center (MTIAC), and the Non Destructive Testing Information Analysis Center
(NTIAC). We also manage the DuPage Manufacturing Research Center.
    
    Aerospace coating production and application:we develop and apply coatings to protect
government and commercial satellites.
    
    Innovative manufacturing technologies:we develop and integrate systems for low-volume
productivity (e.g., laser cladding of parts) and rapid manufacturing
systems.
  Naval Architecture and Marine Engineering.
 
    
    Ship design:we provide total ship design services for military and commercial
customers. The services encompass whole ship systems engineering including requirements
definition, concept analysis, feasibility studies and contract design, detail design and
production support.
 5




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
    
    Naval architecture:we provide systems engineering/design integration, hull form
development and performance analysis, structural design and analysis, weight engineering
and intact and damage stability analysis.
    
    Marine engineering:we design and engineer ship systems including propulsion,
electrical, fluids/piping, auxiliary, HVAC, deck machinery, and machinery automation and
control systems. We provide expertise for machinery integration, test and trials, failure
analysis, modeling and simulation, and integrated logistics support.
    
    Combat systems engineering:we provide services including mission and threat analysis,
evaluation of candidate warfare and combat systems, development of specifications and
installation drawings for topside and below-deck interface requirements, and ship
modernizations.
    
    Program management:we furnish acquisition planning, business and financial management,
configuration and data management, test and evaluation support, and production analysis and
management in all life cycle phases of equipment, systems, and ships.
 Modeling and Simulation.
 
    
    Wargaming, experimentation, scenario design and execution:we design and conduct
strategic and operations analytic wargames to evaluate future operational concepts and
force transformation initiatives, create and implement training scenarios for
two-dimensional and three-dimensional (3-D) simulation systems, support Joint Forces
Commands Millennium Challenge, and we support Joint Conflict and Tactical Simulation
(JCATS) scenarios.
    
    C4I integration:we design and develop policies for the DoD to enable standard automated
interfaces between simulation and C4I systems which support improved planning, training and
military operations.
    
    Analysis and visualization:we develop terrain modeling databases and realistic 3-D
visual systems for flight simulation and other training systems. We manage the Modeling
and Simulation Information Analysis Center (MSIAC) for the DoD.
    
    Phenomenological modeling:we develop phenomenological models for nuclear, chemical,
biological and electromagnetic environments.
 Chemical, Biological, Nuclear and Environmental Sciences.
 
    
    Chemical/biological agent detection and decontamination:we develop, test
and evaluate methods for detection and chemical decontamination of chemical,
biological and other toxic agents; and operate a chemical agent surety laboratory. We provide analytical methods to enhance safe
handling of chemical substances and design methods to convert harmful chemical and
biological materials into harmless materials.
    
    Laboratory support:using our laboratory facilities we analyze materials, wastes and
effluents to determine constituents and/or properties; develop and validate analytical
methods and instruments; and develop, test and implement methods for measuring air quality.
    
    Life sciences:we provide analysis, testing, operational and laboratory support in the
areas of: biotechnology, biomedical sciences and toxicology.
    
    Detection, recovery and disposal of unexploded ordnance and explosives:we demilitarize
conventional, toxic/radioactive and chemical warfare material; and we decontaminate and
demolish buildings and equipment contaminated with explosives. We provide these services
through our wholly-owned subsidiary, Human Factors Applications, Inc.
    
    Environmental sciences:we provide analysis, operational and laboratory support in: air
pollution research, toxicology, ecology and habitat, and quality assurance program support;
exhaust plume dispersion calculations and
modeling; emissions modeling; air and water
pollution equipment evaluations; and technology evaluations of waste streams.
    
    Nuclear safety and analysis:we provide nuclear safety and analysis services to the U.S.
Department of Energy and its National Laboratories as well as to the commercial nuclear
power industry.
 6




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Information Technology.
 
    
    Enterprise architecture development and integration:we design, develop and implement
enterprise information systems.
    
    Applications development:we develop web-based and stand-alone solutions, as well as
decision support tools.
    
    Knowledge management:we deliver solutions for data warehousing/mining, decision
support, and information analysis.
    
    Network design and secure network operations:we provide information assurance, business
continuity and disaster planning, network planning and designs for virtual private networks.
    
    Independent verification and validation:we implement modeling and simulation, test and
evaluation, and database monitoring.
    
    Medical informatics:we develop and integrate technologies for acquisition, storage and
use of information, including decision support in the field of biomedicine.
 Software Tools and Technology Products.
 
    
    Frequency Assignment & Certification Engineering Tool (FACET):this software tool
automates the assignment of radio frequencies, which we refer to as spectrum management, in
a way that is designed to minimize interference between multiple users of the radio
frequency spectrum.
    
    Advanced Cosite Analysis Tool (ACAT):this software tool is designed to permit
co-location of numerous antennas on towers, rooftops and other platforms by predicting
interference between the various systems and informing the user how to minimize
interference.
    
    Spectrum Monitoring Automatic Reporting and Tracking System (SMART):this system
characterizes the frequency usage in a given geographic area, allowing the customer to
remotely monitor the spectrum to identify unauthorized users and to look for gaps in the
spectrum usage.
    
    X-IG:this software provides 3-D images for managing and displaying visuals of terrain
and environment used in flight simulation and other training systems.
    
    MobSim / SimViewer:this software provides for tracking components across multiple
modes of transportation (e.g., air, sea, rail and truck).
    
    Virtual Ocean:this software provides visualization of ship motions based on
analytically correct representation of the seaway.
    
    Countermeasures:we provide vulnerability/risk assessment software used to analyze and
quantify physical or electronic security.
    
    CaveDog:this product is a small, remote-controlled hemispherical, multi-spectral
vision robot vehicle used for surveillance and reconnaissance.
    
    Real Time Location System (RTLS):this product is designed to enable customers to track
thousands of users in a defined area, such as a seaport, a football stadium or an office
building, using low cost antennas and badges.
 7




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
    
    Isis- 3D:we provide fire code software with specific models for weapon thermal hazard
response, including aerosol and radiation models.
    
    PRISM:we provide software used for system level failure rate modeling with the ability
to model both operating and non-operating failure rates. The system considers non-component
failure causes through process assessment.
 Corporate History
  The Acquisition and Deal Terms for the Purchase of Assets from IITRI (the Transaction)
 Acquired Business.
 Purchase Price.
 Assumption of Liabilities.
 Indemnification.
 The Purchase of Alion Common Stock by ESOP Trust
  Representations and Warranties.
 Covenants.
 
    
    we will not take any steps without the ESOP Trusts consent to change our status as an S
corporation;
    
    we will not enter into any transactions with any of our officers or directors without
approval from our board of directors or compensation committee;
    
    we will obtain the ESOP Trusts consent before effecting our first public offering of
stock to be listed on any securities exchange;
    
    we will not take actions that would prevent the ESOP Trust from acquiring any additional shares of our stock under the control share acquisition provisions of the Delaware General
Corporation Law;
 8




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
    
    we will repurchase any shares of common stock distributed to participants in the ESOP
component of the KSOP, to the extent required by the ESOP, any ESOP related documents and
applicable laws;
    
    we will maintain the KSOP and the ESOP Trust so that they will remain in compliance with
the qualification and tax exemption requirements under the Internal Revenue Code; and
    
    we will use our best efforts to ensure that the ESOP Trust fully enjoys its right to
elect a majority of our board of directors and to otherwise control Alion.
  Indemnification.
 The Alion ESOP
  Eligible employees of the Company can purchase beneficial interests in the Companys common
stock by:
    
    rolling over their eligible retirement account balances into the ESOP component of the
KSOP by making an individual one-time ESOP investment election available to new hires;
and/or
    
    directing a portion of their pre-tax payroll income to be invested in the ESOP component
of the KSOP.
     Business Strategy
  Broaden our existing core competencies .
 9




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Leverage experience and reputation to expand market share.
 Continue to improve financial performance and increase scale.
 Pursue a disciplined acquisition strategy.
 Market and Industry Background
 10




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Continuing Growth in Overall DoD Budget/Spending.
 Growing Spending in the DoD Operations and Maintenance Accounts.
 Projected Increases in Private Sector Information Technology Government Spending.
 Expected Growth in DoD Research and Development Expenditures.
 More Budget Dollars for Homeland Security.
 Increased Reliance on Technology Services Contractors.
 Growing Opportunities for Sophisticated Technology Solution Providers. st
 11




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
    
    Shift from an emphasis on ships, guns, tanks and planes to a focus on information,
knowledge, and timely, actionable intelligence.
    
    Implement enterprise-wide changes to ensure that organizations, processes and procedures
effectively support DoDs strategic direction.
    
    Emphasize joint command and control for homeland defense and civil support missions,
including communication and command and control systems that are interoperable with other
agencies and state and local governments.
    
    Nearly double unmanned aerial vehicle (UAV) coverage capacity by accelerating the
acquisition of Predator UAVs and Global Hawk UAVs.
    
    Build a larger naval fleet that includes 11 Carrier Strike Groups, balance the need to
transform and recapitalize the naval fleet, improve affordability and provide stability for
the shipbuilding industry.
    
    Accelerate procurement of Littoral Combat Ships to provide power projection capabilities
in littoral waters.
    
    Make additional investments in information assurance capabilities to protect information
and the DoDs computer networks.
    
    Improve DoDs information sharing with other U.S. agencies and with international allies
and partners by developing information protection policies and exploiting the latest
commercial technologies.
    
    Continue to pursue enabling technologies for transformational logistics and innovative
operational concepts such as Seabasing.
    
    Increase investment to implement the Global Information Grid, protect information and
networks and focus research and development on its protection.
    
    Develop a new bandwidth requirements model to determine optimum network size and
capability to best support operational forces.
    
    Expand training programs to accommodate planners from other agencies and working with
the DHS.
 Continuing Impact of U.S. Government Procurement Reform.
 We are primarily a government contractor.
   Contract Types.
 12




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
    
    Cost-reimbursement contracts are structured to allow us to recover our direct labor
and allocable indirect costs, plus a fee that may be fixed or variable depending on the
contract arrangement. Allocable indirect costs refer to those costs related to
operating our business that can be recovered under a contract.
    
    Fixed-price contracts oblige customers to pay us a fixed dollar amount to cover all
direct and indirect costs, and fees. Under fixed-price contracts we assume the risk of
any cost overruns and receive the benefit of any cost savings.
    
    Time-and-material contracts are structured to allow us to recover our labor costs,
related indirect expenses and a fee through fixed hourly labor billing rates, and to
recover certain material and other direct costs through cost reimbursable provisions
without fee.
   For the Year Ended September 30,(in
millions)Contract Type
    
    2006
    
    
    2005
    
    
    2004Cost-reimbursement
    
    $
    326.3
    
    
    
    64
    %
    
    $
    216.2
    
    
    
    58
    %
    
    $
    159.5
    
    
    
    59
    %Fixed-price
    
    $
    91.6
    
    
    
    18
    %
    
    $
    76.6
    
    
    
    21
    %
    
    $
    44.3
    
    
    
    16
    %Time-and-material
    
    $
    90.7
    
    
    
    18
    %
    
    $
    76.4
    
    
    
    21
    %
    
    $
    66.1
    
    
    
    25
    %Total
    
    $
    508.6
    
    
    
    100
    %
    
    $
    369.2
    
    
    
    100
    %
    
    $
    269.9
    
    
    
    100
    %
     13




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Government Oversight.
 Backlog.
 
    
    Funded backlog reflects amounts that have been awarded to us and whose funding has
been authorized by the customer, less revenue previously recognized under the same
contracts.
    
    Unfunded backlog represents the total estimated value of contracts awarded to us,
but whose funding has not yet been authorized by the customer.
  September 30,2006
    
    
    2005
    
    
    2004(In millions)Backlog:Funded
    
    $
    386
    
    
    $
    193
    
    
    $
    161Unfunded
    
    $
    3,861
    
    
    $
    2,581
    
    
    $
    1,793Total
    
    $
    4,247
    
    
    $
    2,774
    
    
    $
    1,954
  
    
    in-process backlog, which refers to proposals that we are preparing to submit
following a request from a customer, and
    
    submitted backlog, which refers to proposals that we have submitted to a customer
and for which we are awaiting an award decision.
  14




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September 30,2006
    
    
    2005
    
    
    2004(In millions)In-process
    
    $
    650
    
    
    $
    276
    
    
    $
    56Submitted
    
    $
    474
    
    
    $
    1,121
    
    
    $
    425Total
    
    $
    1,124
    
    
    $
    1,397
    
    
    $
    481
 Corporate Culture, Employees and Recruiting
    Our Customers
  2006
    
    2005
    
    2004(In millions)U.S. Department of Defense (DoD)
    
    $
    451.8
    
    
    
    89
    %
    
    $
    324.1
    
    
    
    88
    %
    
    $
    244.9
    
    
    
    91
    %Other Federal Civilian Agencies
    
    $
    30.1
    
    
    
    6
    %
    
    $
    30.3
    
    
    
    8
    %
    
    $
    19.0
    
    
    
    7
    %Commercial and International
    
    $
    26.7
    
    
    
    5
    %
    
    $
    14.8
    
    
    
    4
    %
    
    $
    6.0
    
    
    
    2
    %Total
    
    $
    508.6
    
    
    
    100
    %
    
    $
    369.2
    
    
    
    100
    %
    
    $
    269.9
    
    
    
    100
    %
 Competition
  15




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
    
    technical capabilities and approach;
    
    quality of personnel, including management capabilities;
    
    successful past contract performance; and
    
    price.
  S Corporation Status
  
    
    one class of stock;
    
    up to 100 shareholders; and
    
    certain types of shareholders, such as individuals, trusts and some tax-exempt organizations, including ESOPs.
      16




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Business Development and Promotional Activities
    tm
 Resources
  Patents and Proprietary Information
  17




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Foreign Operations
  Company Information Available on the Internet
  Environmental Matters
    Item 1A. Risk Factors
 Risks Related to Our Business
 We incurred a significant amount of debt in order to complete the IITRI acquisition, and we have
thereafter incurred a significant amount of additional debt mostly to fund subsequent acquisitions,
and our debt load may limit our operational flexibility and negatively affect the value of your
investment in the ESOP component.
   18




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
    
    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.
  Our Term B Senior Credit Facility and Bridge Loan Agreement 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.
 19




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We expect to experience net losses in at least our next five years of operation.
  Our ability to meet our financial and other future obligations is dependent on our future operating
results and we cannot be sure that we will be able to meet these obligations as they come due.
  
    
    funding of our contract backlog;
    
    the time within which our customers pay our accounts receivable;
    
    new contract awards and our performance under those contracts;
    
    continued increase in revenue on an annual basis;
    
    increase in operating income on an annual basis;
    
    the amount of our common stock purchased by our employees via payroll deferrals and rollovers to our ESOP;
    
    the amount of our common stock repurchased from our former employees;
    
    interest rate levels;
    
    our status as an S corporation for U.S. federal income tax purposes;
    
    the current economic condition and conditions in the defense contracting industry;
    
    U.S. government spending levels, both generally and by our particular customers;
    
    the failure by the Congress to approve budgets timely for the U.S. federal agencies we support;
    
    any operating difficulties, operating costs or pricing pressures we may experience;
    
    the passage of legislation or other regulatory developments that affects us adversely; and
    
    any delays in implementing any strategic projects we may have.
 20




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We face intense competition from many competitors that have greater resources than we do, which
could result in price reductions, reduced profitability, and loss of market share.
  Our ability to compete for desirable contracts will depend on:
    
    the effectiveness of our research and development programs;
    
    our ability to offer better performance than our competitors at a lower or comparable cost;
    
    the readiness of our facilities, equipment and personnel to perform the programs for which we compete; and
    
    our ability to attract and retain key personnel.
  Historically, a few contracts have provided us with most of our revenues, and if we do not retain
or replace these contracts our operations will suffer.
  1.
    
    Modeling and Simulation Information Analysis Center for the
DoD for the Defense
Modeling and Simulation Office (13%);2.
    
    Engineering, Financial and Program Management Services to the
Virtual SYSCOM
for the U.S. Navy (9%);3.
    
    Joint Spectrum Center (JSC) Engineering Support Services
for the DoD Joint Spectrum Center (7%);4.
    
    Night Vision HighTech Omnibus Contract for the U.S. Army (4%);
and5.
    
    Information Technology Services for the General Services Administration (4%).
  21




---



##### 



If we are unable to manage our growth, our business could be adversely affected.
  Our acquisitions could increase our costs or liabilities or be disruptive.
  Due to the inherent danger involved in some of the businesses that we conduct, there are risks of
claims by clients and third parties that could have a substantial adverse economic impact upon us.
  We depend on key management and may not be able to retain those employees due to competition for
their services.
  Our business could suffer if we fail to attract, train and retain skilled employees.
  22




---



##### 



If
we do not, or the ESOP Trust does not, continue to be exempt from U.S. federal income tax and
any unrelated business income tax, our cash flow available to meet our financial obligations and to
reinvest in our operations will decrease.
   The passage of legislation requiring earlier diversification opportunities in defined contribution
plans may impair our ability to meet our financial obligations and to reinvest in our operations,
because of increased demands on our cash resources due to participants electing to diversify
earlier than anticipated.
  In order to succeed, we will have to keep up with rapid technological changes in a number of
industries and various factors could impact our ability to keep pace with these changes.
 Our success will depend on our ability to keep pace with technology changes in the following research fields:
    
    defense operations support;
    
    wireless communications;
    
    industrial technology solutions;
    
    naval architecture and marine engineering;
    
    modeling and simulation;
    
    chemical, biological, nuclear and environmental sciences; and
    
    information technology.
  23




---



##### 



An economic downturn could harm our business.
  Our employees may engage in misconduct or other improper activities, which could harm our business.
  The interests of the ESOP Trust may not be aligned with the interests of participants in the ESOP
component of the KSOP.
  Environmental laws and regulations and our use of hazardous materials may subject us to significant
liabilities.
  
    
    modifications to current laws and regulations;
    
    new laws and regulations;
    
    violations of environmental laws or the permits required for
our operations;
    
    new guidance or new interpretation of existing laws and regulations; or
    
    the discovery of previously unknown contamination.
 Risks Related to Our Industry
 We are dependent on U.S. government contracts for substantially all of our revenue, and changes in
the contracting policies or fiscal policies of the U.S. government could adversely affect our
business, financial condition or results of operations.
  
    
    budgetary constraints affecting U.S. government spending generally, or specific
departments or agencies in particular, and changes in fiscal policies or available funding;
    
    changes in U.S. government programs or requirements;
    
    curtailment of the U.S. governments use of technology services firms;
    
    the adoption of new laws or regulations;
    
    technological developments;
    
    U.S. government shutdowns (such as that which occurred during the U.S. governments 1996 fiscal year);
    
    competition and consolidation in the information technology industry; and
    
    general economic conditions.
 24




---



##### 



The failure by the Congress to approve budgets timely for the U.S. federal agencies we support
could delay or reduce spending and cause us to lose revenue.
  We may not receive the full amount of our backlog, which could lower future revenue.
  Many of our U.S. government customers spend their procurement budgets through Indefinite
Delivery/Indefinite (ID/IQ) Quantity contracts, GSA Schedule
contracts and Government Wide Acquisition Contracts (GWAC) under which we are
required to compete for post-award orders.
  U.S.
government contracts contain termination provisions that are unfavorable to us.
  25




---



##### 



If we do not accurately estimate the expenses, time and resources necessary to satisfy our
contractual obligations, our profit will be lower than expected.
   Our operating margins and operating results may suffer if cost-reimbursement contracts increase in
proportion to our total contract mix.
  If the volume of services we provide under fixed-price contracts decreases in total or as a
proportion of our total business, or if profit rates on these contracts decline, our operating
margins and operating results may suffer.
  Our subcontractors failure to perform contractual obligations could damage our reputation as a
prime contractor and thereby our ability to obtain future business.
  Because U.S. government contracts are subject to government audits, contract payments are subject
to adjustment and repayment which may result in revenue attributed to a contract being lower than
expected.
  If we fail to recover pre-contract costs, it may result in reduced fees or in losses.
  Actual or perceived conflicts of interest may prevent us from being able to bid on or perform
contracts.
 26




---



##### 



As a U.S. government contractor, we must comply with complex procurement laws and regulations and
our failure to do so could have a negative impact upon our business.
  We derive significant revenue from U.S. government contracts awarded through a competitive bidding
process which is an inherently unpredictable process.
  
    
    the frequent need to bid on programs in advance of the completion of their design, which
may result in unforeseen technological difficulties and/or cost overruns;
    
    the substantial time and effort, including design, development and promotional
activities, required to prepare bids and proposals for contracts that may not be awarded to
us; and
    
    the design complexity and rapid rate of technological advancement of most of our
research offerings.
  Our failure to obtain and maintain necessary security clearances may limit our ability to carry out
confidential work for U.S. government customers, which could cause our revenue to decline.
  Item 1B. Unresolved Staff Comments
 Business Combinations Accounting in a Business
Combination for Deferred Revenue of an Acquiree,
 27




---



##### 



Item 2. Properties
      Item 3. Legal Proceedings
 Estate of Joseph Hudert vs. Alion Science and Technology Corporation; Estate of Frank Stotmeister
vs. Alion Science and Technology Corporation.
  th th
   28




---



##### 



Item 4. Submission of Matters to a Vote of Security Holders
  PART II
 Item 5. Market for Registrants Common Equity, Related Stockholders Matters and Issuer Purchases of
Equity Securities
   Dividend Policy
  Item 6. Selected Financial Data
    29




---



##### 



Selected Financial Data of Alion Science and Technology Corporation
 For Years Ended September 30,
 2006(1)
    
    
    2005(2)
    
    
    2004(3)
    
    
    2003(4)
    
    
    2002(5)(in thousands, except share and per share data)Consolidated Operating Data:Contract revenue
    
    $
    508,628
    
    
    
    369,231
    
    
    $
    269,940
    
    
    $
    165,917
    
    
    $
    201,738Direct contract expenses
    
    
    381,467
    
    
    
    267,241
    
    
    
    196,388
    
    
    
    120,559
    
    
    
    147,377Operating expenses(6)
    
    
    129,466
    
    
    
    104,081
    
    
    
    73,703
    
    
    
    46,273
    
    
    
    48,488Operating income (loss)
    
    
    (2,305
    )
    
    
    (2,091
    )
    
    
    (151
    )
    
    
    (915
    )
    
    
    5,873Other income (expense)(7)
    
    
    (28,784
    )
    
    
    (38,081
    )
    
    
    (14,943
    )
    
    
    (11,701
    )
    
    
    (586
    )Income tax (expense) benefit(8)
    
    
    (26
    )
    
    
    (66
    )
    
    
    (17
    )
    
    
    
    
    
    
    (589
    )Net income (loss)
    
    $
    (31,115
    )
    
    
    (40,238
    )
    
    $
    (15,111
    )
    
    $
    (12,616
    )
    
    $
    4,698Basic and diluted loss per share
    
    $
    (6.19
    )
    
    
    (9.50
    )
    
    $
    (4.91
    )
    
    $
    (6.05
    )
    
    
    Basic and diluted weighted-average
common shares outstanding
    
    
    5,029,670
    
    
    
    4,235,947
    
    
    
    3,074,709
    
    
    
    2,085,274
    
    
    
    Consolidated Balance SheetData at End of Period:Net accounts receivable
    
    $
    150,412
    
    
    
    80,898
    
    
    $
    68,949
    
    
    $
    42,775
    
    
    $
    49,051Total assets
    
    
    650,969
    
    
    
    334,249
    
    
    
    188,461
    
    
    
    144,754
    
    
    
    71,096Current portion of long-term debt
    
    
    2,816
    
    
    
    1,404
    
    
    
    468
    
    
    
    5,000
    
    
    
    3,330Long-term debt, excluding current
portion
    
    
    463,743
    
    
    
    180,833
    
    
    
    99,631
    
    
    
    74,719
    
    
    
    1,654Redeemable common stock warrants
    
    
    35,234
    
    
    
    44,590
    
    
    
    20,777
    
    
    
    14,762
    
    
    
    Long-term deferred gain on sale
of building to Illinois Institute of
Technology, excluding current
portion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,523Other Data:Depreciation and amortization
    
    $
    16,566
    
    
    
    17,771
    
    
    $
    13,447
    
    
    $
    9,553
    
    
    $
    3,447Capital expenditures
    
    
    5,227
    
    
    
    2,233
    
    
    
    3,678
    
    
    
    1,329
    
    
    
    3,643Cash flows provided by (used in):Operating activities
    
    $
    (15,678
    )
    
    
    35,140
    
    
    $
    5,675
    
    
    $
    14,264
    
    
    $
    14,713Investing activities
    
    
    (284,423
    )
    
    
    (78,017
    )
    
    
    (23,625
    )
    
    
    (61,428
    )
    
    
    (4,466
    )Financing activities
    
    
    265,078
    
    
    
    75,938
    
    
    
    22,173
    
    
    
    47,652
    
    
    
    (9,851
    )Funded contract backlog(9)
    
    
    386,000
    
    
    
    193,000
    
    
    
    161,000
    
    
    
    107,000
    
    
    
    72,000Unfunded contract backlog(10)
    
    
    3,861,000
    
    
    
    2,581,000
    
    
    
    1,793,000
    
    
    
    1,435,000
    
    
    
    1,431,000Number of employees
    
    
    3,575
    
    
    
    2,508
    
    
    
    1,880
    
    
    
    1,604
    
    
    
    1,622
 30




---



##### 



1.
    
    During fiscal year 2006, the Company completed four acquisitions as described below.
The results of operations for the companies acquired are included in Alions operations
from the dates of the acquisitions. On February 10,
2006, Alion purchased 100 percent of the outstanding stock of BMH, a provider of advanced
software, systems engineering and distributed interactive simulations for military
training and experimentation, for approximately $20.0 million (less a $1.5 million hold
back) plus additional contingent earn-out obligations over a two year period which can
not exceed $6.0 million. As of September 30, 2006, the Company has recorded approximately
$16.2 million in goodwill relating to this acquisition.On February 24, 2006, the Company acquired 100% of the issued and outstanding stock of
WCI, a provider of enterprise IT and management consulting solutions and services to
commercial and government customers, for $18.0 million (less a $1.5 million hold back)
plus additional contingent earn-out obligations over a two year period which can not
exceed $2.5 million. As of September 30, 2006, the Company has recorded approximately
$17.4 million in goodwill relating to this acquisition.On May 19, 2006, the Company acquired 100% of the issued and outstanding stock of MA&D, a
provider of human factors engineering, modeling and simulation and software development
for approximately $16.9 million (less a $2.0 million hold back) plus additional contingent earn-out
obligations over a two year period which can not exceed approximately
$4.1 million. As of September 30,
2006, the Company has recorded approximately $15.7 million in goodwill relating to this
acquisition.On June 30, 2006, the Company acquired from Anteon a group of assets consisting primarily
of customer contracts for approximately $221.4 million. As of September 30, 2006, the
Company has recorded approximately $50.0 million for purchased contracts and
approximately $174.0 million in goodwill relating to this acquisition.2.
    
    During fiscal year 2005, the Company completed four acquisitions and made one
strategic investment as described below. The results of operations for the companies
acquired are included in Alions operations from the dates of the acquisitions. On
October 28, 2004, Alion purchased substantially all of the assets of Countermeasures
for approximately $2.4 million. Countermeasures had two employees and was located in
Hollywood, Maryland. As of September 30, 2006, the Company has recorded approximately
$1.4 million in goodwill relating to this acquisition.On February 11, 2005, Alion acquired 100% of the outstanding stock of METI, an
environmental and life sciences research and development company for approximately $7.0
million in cash. METI had approximately 110 employees and was headquartered in Research
Triangle Park, North Carolina. As of September 30, 2006, the Company has recorded $5.6
million in goodwill related to this acquisition.On February 25, 2005, Alion acquired 100% of the outstanding stock of CATI, a flight
training software and simulator development company, for approximately $7.3 million in
cash. CATI had approximately 55 employees and was headquartered in Seaside, California.
The transaction is subject to an earn-out provision not-to-exceed a cumulative amount of
$8.3 million based on attaining certain cumulative revenue goals for fiscal years 2005,
2006, and 2007, and a second earn-out provision not-to-exceed $1.5 million for attaining
certain revenue goals in the commercial aviation industry. As of September 30, 2006, the
Company has recorded approximately $13.9 million in goodwill related to this acquisition.On April 1, 2005, the Company acquired 100% of the issued and outstanding stock of JJMA.
The Company paid the equity holders of JJMA approximately $52.9 million, issued 1,347,197
shares of Alion common stock to the JJMA Trust valued at approximately $37.3 million, and
agreed to make $8.3 million in future payments. Including
acquisition costs of $1.3
million, the aggregate purchase price was $99.8 million. As of September 30, 2006, the
Company has recorded approximately $57.8 million in goodwill related to the JJMA
acquisition.On March 22, 2005, Alion acquired approximately 12.5 percent of the class A ordinary
shares in VectorCommand Ltd. for $1.5 million, which investment is accounted for at cost.3.
    
    During fiscal year 2004, the Company completed two acquisitions as described
below. Operating results for these businesses are included in our consolidated totals
from the respective dates of acquisitions. On October 31, 2003, Alion acquired 100% of
the outstanding stock of Innovative Technology Solutions Corporation (ITSC), for $4.0
million. The transaction is subject to an earn-out provision not-to-exceed $1.5
million. ITSC is a New Mexico corporation with approximately 53 employees, the majority
of whom are located in New Mexico. As of September 30, 2006, the Company has recorded
approximately $5.0 million of goodwill relating to this acquisition.
 31




---



##### 



On February 13, 2004, Alion acquired 100% of the outstanding stock of Identix Public
Sector, Inc. (IPS, now known as Alion-IPS Corporation) for $8.0 million in cash. IPS,
formerly ANADAC, was a wholly-owned subsidiary of Identix Incorporated. Following the
closing, the Company paid Identix approximately $4.3 million for intercompany payables.
As of September 30, 2006, the Company has recorded approximately $6.1 million of goodwill
relating to this acquisition.4.
    
    For fiscal year 2003 (October 1, 2002 to September 30, 2003), the operations
data presented reflects approximately nine months of Alion operations since the
Transaction occurred on December 20, 2002, which was at the end of IITRIs first
quarter of operations for fiscal 2003. During the period October 1, 2002 to December
20, 2002, Alion was organizationally a business shell, operationally inactive until the
Transaction occurred.5.
    
    Represents consolidated operating and balance sheet data of the Selected
Operations of IITRI which was acquired by Alion on December 20, 2002.6.
    
    Operating expenses include (i) transaction expenses of
approximately $6.7 million and $6.4 million for fiscal years ended September 30, 2003
and 2002, respectively, and (ii) conversion and roll-out expenses of
approximately $1.5 million for the fiscal year ended September 30, 2003.7.
    
    For the years ended September 30, 2006, 2005 and 2004, other income (expense)
includes approximately $29.7 million, $38.7 million and $16.8 million, respectively, in
interest-related expense associated with the debt financing (which includes the related
change in warrant valuation associated with the change in the share price of Alion
stock) resulting from the Transaction and the acquisitions which were completed in
fiscal years 2006 and 2005, as described above. Other income (expense) for the year
ended September 30, 2004 includes a gain of approximately $2.1 million on the sale of
the Companys minority interest in Matrics Incorporated.8.
    
    Income tax (expense) benefit primarily relates to income (loss) of our
for-profit, wholly-owned subsidiary, HFA prior to HFA becoming a Q-sub beginning on
December 21, 2002.9.
    
    Funded backlog represents the total amount of contracts that have been awarded
and whose funding has been authorized minus the amount of revenue booked under the
contracts from their inception to date.10.
    
    Unfunded backlog refers to the estimated total value of contracts which have
been awarded but whose funding has not yet been authorized for expenditure.
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
  About This Managements Discussion and Analysis
  
    
    provide an overview of our business;
    
    explain the year-over-year trends in our results of operations;
    
    describe our liquidity and capital resources;
    
    explain our critical accounting policies;
    
    explain certain of our other obligations; and
    
    disclose market and other risks.
 32




---



##### 



Overview
  For the Years Ended September 30,2006
    
    
    2005
    
    
    2004(in millions)Revenue
    
    $
    508.6
    
    
    $
    369.2
    
    
    $
    269.9Net loss
    
    $
    (31.1
    )
    
    $
    (40.2
    )
    
    $
    (15.1
    )Contract Backlog:Funded
    
    
    386.0
    
    
    
    193.0
    
    
    
    161.0Unfunded
    
    
    3,861.0
    
    
    
    2,581.0
    
    
    
    1,793.0Total
    
    $
    4,247.0
    
    
    $
    2,774.0
    
    
    $
    1,954.0
  2006
    
    
    2005
    
    
    2004(In millions)U.S. Department of Defense (DoD)
    
    $
    451.8
    
    
    
    89
    %
    
    $
    324.1
    
    
    
    88
    %
    
    $
    244.9
    
    
    
    91
    %Other Federal Civilian Agencies
    
    
    30.1
    
    
    
    6
    %
    
    $
    30.3
    
    
    
    8
    %
    
    $
    19.0
    
    
    
    7
    %Commercial and International
    
    
    26.7
    
    
    
    5
    %
    
    $
    14.8
    
    
    
    4
    %
    
    $
    6.0
    
    
    
    2
    %Total
    
    $
    508.6
    
    
    
    100
    %
    
    $
    369.2
    
    
    
    100
    %
    
    $
    269.9
    
    
    
    100
    %
   33




---



##### 



FY06
    
    
    
    
    
    
    FY05
    
    
    
    
    
    
    FY04Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent ofFY06
    
    
    Total
    
    
    FY05
    
    
    Total
    
    
    FY04
    
    
    TotalSponsor/
    
    
    
    
    
    Annual
    
    
    Annual
    
    
    Annual
    
    
    Annual
    
    
    Annual
    
    
    AnnualGovernment
    
    
    
    Primary Core
    
    Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    RevenueAgency
    
    Title
    
    Business Area*
    
    Amount
    
    
    Amount
    
    
    Amount
    
    
    Amount
    
    
    Amount
    
    
    Amount(In Millions)
    
    
    
    
    
    
    (In Millions)
    
    
    
    
    
    
    (In Millions)Department of
Defense  Defense
Modeling and
Simulation Office
    
    Information Analysis Center
    
    Modeling and Simulation
    
    $
    63.4
    
    
    
    13
    %
    
    $
    69.4
    
    
    
    19
    %
    
    $
    35.1
    
    
    
    13
    %Department of Defense  Navy
    
    Engineering, Financial and Program Management Services to the Virtual SYSCOM program
    
    Naval Architecture and Marine Engineering
    
    $
    46.6
    
    
    
    9
    %
    
    $
    18.5
    
    
    
    5
    %
    
    
    
    
    
    
    Department of Defense  Joint
Spectrum Center
    
    Joint Spectrum Center Engineering Support Services
    
    Wireless Communications
    
    $
    35.3
    
    
    
    7
    %
    
    $
    45.7
    
    
    
    12
    %
    
    $
    49.4
    
    
    
    18
    %Department of
Defense  Army
    
    U.S. Army Night Vision Lab HighTech Omnibus contract
    
    Defense Operations
    
    $
    21.1
    
    
    
    4
    %
    
    $
    18.9
    
    
    
    5
    %
    
    
    
    
    
    
    General Services
Administration
    
    Information Technology Services  U.S. Department
    
    Information Technology
    
    $
    20.6
    
    
    
    4
    %
    
    $
    24.7
    
    
    
    7
    %
    
    $
    47.5
    
    
    
    18
    %Subtotal
    
    
    
    
    
    $
    187.0
    
    
    
    37
    %
    
    $
    177.2
    
    
    
    48
    %
    
    $
    132.0
    
    
    
    49
    %Other Sponsors/Agencies
    
    
    
    
    
    $
    321.6
    
    
    
    63
    %
    
    $
    192.0
    
    
    
    52
    %
    
    $
    137.9
    
    
    
    51
    %Total Revenues
    
    
    
    
    
    $
    508.6
    
    
    
    100
    %
    
    $
    369.2
    
    
    
    100
    %
    
    $
    269.9
    
    
    
    100
    %
 
 *
    
    The total annual revenue identified with a sponsor/government agency may include revenue
within multiple business areas. The primary core business area is the single largest business area
with the sponsor/government agency.   34




---



##### 



For the Year Ended September 30,Contract Type
    
    2006
    
    
    2005
    
    
    2004Cost-reimbursement
    
    $
    326.3
    
    
    
    64
    %
    
    $
    216.2
    
    
    
    58
    %
    
    $
    159.5
    
    
    
    59
    %Fixed-price
    
    
    91.6
    
    
    
    18
    %
    
    $
    76.6
    
    
    
    21
    %
    
    $
    44.3
    
    
    
    16
    %Time-and-material
    
    
    90.7
    
    
    
    18
    %
    
    $
    76.4
    
    
    
    21
    %
    
    $
    66.1
    
    
    
    25
    %Total
    
    $
    508.6
    
    
    
    100
    %
    
    $
    369.2
    
    
    
    100
    %
    
    $
    269.9
    
    
    
    100
    %
  BMH Associates, Inc. (BMH)
 Washington Consulting, Inc. (WCI)
 Micro Analysis and Design, Inc. (MA&D)
 Certain assets of Anteon Corporation (Anteon Contracts)
  
    
    help us expand our research base to include increasingly large and complex programs;
    
    increase our opportunities to exploit the synergies between different research fields in
which we work to broaden our offerings to our existing customers;
    
    bring new strengths to our technical capabilities through cross-utilization of research
technology and engineering skills; and
    
    increase the overall depth and experience of our management.
 Results of Operations
  35




---



##### 



Year ended September 30, 2006 Compared to Year ended September 30, 2005
  Year ended September 30, 2006
    
    Year ended September 30, 2005(in millions)Consolidated
    
    
    
    
    
    
    
    
    
    ConsolidatedOperations of
    
    
    
    
    
    
    
    
    
    Operations ofConsolidated
    
    
    
    
    
    Alion Less
    
    Consolidated
    
    
    
    
    
    Alion LessOperations of
    
    Acquired
    
    the Acquired
    
    Operations of
    
    Acquired
    
    the AcquiredFinancial information
    
    
    
    
    
    Alion
    
    Operations
    
    Operations
    
    Alion
    
    Operations
    
    OperationsTotal revenue
    
    
    
    
    
    $
    508.6
    
    
    $
    222.2
    
    
    $
    286.4
    
    
    $
    369.2
    
    
    $
    65.3
    
    
    $
    303.9Material and subcontract revenue
    
    
    
    
    
    
    172.2
    
    
    
    83.1
    
    
    
    89.1
    
    
    
    102.7
    
    
    
    16.9
    
    
    
    85.8Total direct contract expenses
    
    
    
    
    
    
    381.5
    
    
    
    166.5
    
    
    
    214.9
    
    
    
    267.2
    
    
    
    46.1
    
    
    
    221.1Major components of direct contract
expense:Direct labor cost
    
    
    
    
    
    
    202.6
    
    
    
    83.6
    
    
    
    119.0
    
    
    
    152.5
    
    
    
    26.6
    
    
    
    125.9Other direct cost (ODC)
    
    
    
    
    
    
    16.5
    
    
    
    3.9
    
    
    
    12.6
    
    
    
    13.7
    
    
    
    2.9
    
    
    
    10.8Material and subcontract (M&S) cost
    
    
    
    
    
    
    162.3
    
    
    
    79.0
    
    
    
    83.3
    
    
    
    101.0
    
    
    
    16.6
    
    
    
    84.4Gross profit
    
    
    
    
    
    
    127.2
    
    
    
    55.7
    
    
    
    71.5
    
    
    
    102.0
    
    
    
    19.2
    
    
    
    82.8Total operating expense
    
    
    
    
    
    
    129.5
    
    
    
    53.1
    
    
    
    76.4
    
    
    
    104.1
    
    
    
    13.1
    
    
    
    91.0Major components of operating
expense:Indirect personnel and facilities
    
    
    
    
    
    
    52.1
    
    
    
    24.7
    
    
    
    27.4
    
    
    
    41.6
    
    
    
    6.9
    
    
    
    34.7Other general and administrative
    
    
    
    
    
    
    47.4
    
    
    
    20.6
    
    
    
    26.8
    
    
    
    33.0
    
    
    
    2.9
    
    
    
    30.1Depreciation and amortization
    
    
    
    
    
    
    16.6
    
    
    
    7.8
    
    
    
    8.8
    
    
    
    17.8
    
    
    
    3.2
    
    
    
    14.6Stock-based compensation
    
    
    
    
    
    
    10.7
    
    
    
    
    
    
    
    10.7
    
    
    
    10.6
    
    
    
    0.0
    
    
    
    10.6Operating
(loss) income
    
    
    
    
    
    $
    (2.3
    )
    
    $
    2.6
    
    
    $
    (4.9
    )
    
    $
    (2.1
    )
    
    $
    6.1
    
    
    $
    (8.2
    )
 
 *
    
    For the years ended September 30, 2006 and 2005, the
operations of the acquired entities and the operating results generated in support
of the Anteon contracts have been fully integrated within Alion on a consolidated basis. The
selected financial information provided in the table is managements approximations of actual
results for the acquired and non-acquired operations. Contract Revenues.
 36




---



##### 



Direct Contract Expenses.
 
    
    Direct labor expense for the fiscal year ended September 30, 2006 increased by $50.1
million, or 32.9%, to $202.6 million from $152.5 million for the fiscal year ended
September 30, 2005. Direct labor expense decreased to 39.9% of revenue for the fiscal
year ended September 30, 2006, from 41.3% of revenue in the fiscal year ended September
30, 2005, due to a shift from direct labor to M&S expense. The percentage decrease in
direct labor expense is primarily due to the lower content of direct labor expense to
total direct contract expense of the acquired operations. The content of direct labor expense generated by the JSC
and Guam Ordnance Services contracts was higher in the fiscal year ended September 30,
2006 than in the fiscal year ended September 30, 2005.
    
    M&S expense increased approximately $61.3 million, or 60.7%, to $162.3 million for
the fiscal year ended September 30, 2006, compared to $101.0 million for the fiscal
year ended September 30, 2005. M&S expense was 31.9% and 27.4% of revenue for the
fiscal years ended September 30, 2006 and 2005, respectively. The percentage increase
in M&S expense was primarily due to the higher content of M&S expense to total direct
contract expense of the acquired operations. M&S expense, as a percentage of M&S revenue, was approximately 94.3%
and 98.3% for the fiscal years ended September 30, 2006 and 2005, respectively,
primarily as a result of 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 $10.5 million, or 25.2%, to $52.1 million for the fiscal year
ended September 30, 2006, from $41.6 million for the fiscal year ended September 30,
2005. The increase is partially attributable to expense associated with integrating the
BMH and WCI acquisitions in the second quarter of fiscal year 2006, the MA&D
acquisition in the third quarter of fiscal year 2006 and the Anteon Contracts
acquisition in the fourth quarter of fiscal year 2006. Additionally, due to the delays
in approving the 2006 Federal budget, contract funding was delayed, which results in
increased indirect labor expense required in order to sustain our engineers and
technical labor base. Operating expenses for indirect personnel and facilities were
10.2% and 11.3% of revenue for the fiscal years ended September 30, 2006 and 2005,
respectively.
 37




---



##### 




    
    Stock-based compensation and deferred compensation, included
in General and Administrative (G&A) expense, relate primarily to the expense
associated with the stock appreciation rights and phantom stock
plans. Stock-based compensation was approximately 2.1% and 2.9%of revenue for the fiscal
years ended September 30, 2006 and 2005, respectively. Stock-based compensation and
deferred compensation relate primarily to the expense associated with the stock
appreciation rights and phantom stock plans. This expense increased approximately $0.1
million, or 1.0%, to $10.7 million for the fiscal year ended September 30, 2006,
compared to approximately $10.6 million for the fiscal year ended September 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 fiscal year ended September 30, 2006 and,
to a lesser extent, the increase in awards granted.
    
    Other G&A expense increased approximately $14.4 million, or
43.6%, to $47.4 million for the year ended September 30, 2006, compared to $33.0
million for the year ended September 30, 2005. G&A expenses were 9.3% and 8.9% of
revenue for the years ended September 30, 2006 and 2005, respectively. The increase
consists of $8.4 million of additional third-party legal and accounting fees and
approximately $4.9 million of additional employee fringe benefit expense, which is an
element of G&A expense. These additional expenses represent approximately 2.6% of
revenue.
    
    Depreciation and amortization expense decreased approximately $1.2 million, or 6.7%,
to $16.6 million for the year ended September 30, 2006, compared to $17.8 million for
the year ended September 30, 2005. Depreciation expense primarily arises from fixed
assets while amortization expense derives primarily from purchased contracts.
Depreciation and amortization expense was 3.3% and 4.8% of revenue for the years ended
September 30, 2006 and 2005, respectively.
 Operating
Loss.
 Other Income and Expense.
 Year Ended September 30,2006
    
    
    2005(In millions)Revolving facility
    
    $
    1.0
    
    
    $
    0.2Senior term loan
    
    
    15.2
    
    
    
    6.9Bridge loan
    
    
    4.8
    
    
    
    Mezzanine Note  cash-pay interest
    
    
    
    
    
    
    1.8- accretion of debt discount
    
    
    
    
    
    
    2.2Subordinated note  PIK interest
    
    
    2.4
    
    
    
    2.3- accretion of long-term deferred interest
    
    
    0.8
    
    
    
    0.6- accretion of debt discount
    
    
    0.9
    
    
    
    0.9Accretion of warrants (a)
    
    
    4.3
    
    
    
    23.5Other
    
    
    0.4
    
    
    
    0.3Total
    
    $
    29.7
    
    
    $
    38.7
 
 (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.  38




---



##### 



Income Tax Expense.
 Net Loss.
 Year ended September 30, 2005 Compared to Year ended September 30, 2004
  Acquisitions Completed in the Year ended September 30, 2005
 
    
    We completed the acquisition of substantially all of the assets Countermeasures on
October 28, 2004. Alion acquired technology and software (e.g. Buddy
System
tm,
now known as
Countermeasurestm,
used in vulnerability assessment) for
identifying, quantifying and managing physical, infrastructure, program and electronic
risks.
    
    On February 11, 2005, we completed the acquisition of METI, an environmental and
life sciences research and development company. METI had approximately 110 employees
and was headquartered in Research Triangle Park, North Carolina.
    
    On February 25, 2005, we completed the acquisition of CATI, a provider of flight
training software and simulator development systems. CATI had approximately 55
employees and was headquartered in Seaside, California.
    
    On April 1, 2005, we completed the acquisition of JJMA, a provider of ship and
systems design from mission analysis and feasibility trade-off studies through contract
and detail design, production supervision, testing and logistics support for the
commercial and naval markets. JJMA had approximately 600 employees and was
headquartered in Iselin, New Jersey.
 Year ended September 30, 2005
    
    Year ended September 30, 2004(in millions)Acquired
    
    Consolidated
    
    
    
    
    
    
    
    
    
    ConsolidatedOperations
    
    Operations of
    
    
    
    
    
    Acquired
    
    Operations ofConsolidated
    
    (METI,
    
    Alion Less
    
    Consolidated
    
    Operations
    
    Alion LessOperations of
    
    CATI, and
    
    the Acquired
    
    Operations of
    
    (ITSC and
    
    the AcquiredFinancial information
    
    Alion
    
    JJMA)*
    
    Operations
    
    Alion
    
    IPS)*
    
    OperationsTotal revenue
    
    $
    369.2
    
    
    $
    65.3
    
    
    $
    303.9
    
    
    $
    269.9
    
    
    $
    28.4
    
    
    $
    241.6Material and subcontract revenue
    
    
    102.7
    
    
    
    16.9
    
    
    
    85.8
    
    
    
    70.3
    
    
    
    11.5
    
    
    
    58.9Total direct contract expenses
    
    
    267.2
    
    
    
    46.1
    
    
    
    221.1
    
    
    
    196.4
    
    
    
    19.5
    
    
    
    176.9Major components of direct contract
expense:Direct labor cost
    
    
    152.5
    
    
    
    26.6
    
    
    
    125.9
    
    
    
    120.0
    
    
    
    8.1
    
    
    
    111.9Other direct cost (ODC)
    
    
    13.7
    
    
    
    2.9
    
    
    
    10.8
    
    
    
    8.1
    
    
    
    0.3
    
    
    
    7.9Material and subcontract (M&S) cost
    
    
    101.0
    
    
    
    16.6
    
    
    
    84.4
    
    
    
    68.3
    
    
    
    11.1
    
    
    
    57.1Gross profit
    
    
    102.0
    
    
    
    19.2
    
    
    
    82.8
    
    
    
    73.6
    
    
    
    5.3
    
    
    
    68.3Total operating expense
    
    
    104.1
    
    
    
    13.1
    
    
    
    91.0
    
    
    
    73.7
    
    
    
    4.4
    
    
    
    69.3Major components of operating
expense:Indirect personnel and facilities
    
    
    41.6
    
    
    
    6.9
    
    
    
    34.7
    
    
    
    28.6
    
    
    
    2.2
    
    
    
    26.4Other general and administrative
    
    
    33.0
    
    
    
    2.9
    
    
    
    30.1
    
    
    
    28.1
    
    
    
    1.8
    
    
    
    26.3Depreciation and amortization
    
    
    17.8
    
    
    
    3.2
    
    
    
    14.6
    
    
    
    13.4
    
    
    
    0.3
    
    
    
    13.1Stock-based compensation
    
    
    10.6
    
    
    
    0.0
    
    
    
    10.6
    
    
    
    2.5
    
    
    
    0.0
    
    
    
    2.5Operating
(loss) income
    
    $
    (2.1
    )
    
    $
    6.1
    
    
    $
    (8.2
    )
    
    $
    (0.2
    )
    
    $
    0.9
    
    
    $
    (1.1
    )
 39




---



##### 



*
    
    For the years ended September 30, 2005 and 2004, the operations of the acquired entities have been fully integrated
within Alion on a consolidated basis. The financial information attributed to these entities are
the estimates of management. Contract Revenues.
 Revenue generated by the activities of acquired operations
    
    $65.3 millionRevenue generated by the activities of the non-acquired operations
    
    $34.0 millionTotal:
    
    $99.3 million
   Direct Contract Expenses.
 
    
    Direct labor costs for the year ended September 30, 2005 increased by $32.5 million,
or 27.1%, to $152.5 million from $120.0 million for the year ended September 30, 2004.
As a percentage of revenue, direct labor cost was 41.3% for the year ended September
30, 2005 as compared to 44.5% for the year ended September 30, 2004. The percentage
decrease in direct labor cost is directly associated with the relative percentage
increase in M&S cost associated with the increase in the percentage of M&S revenue, as
described above.
    
    M&S cost increased approximately $32.7 million, or 47.9%, to $101.0 million for the
year ended September 30, 2005, compared to $68.3 million for the year ended September
30, 2004. As a percentage of revenue, M&S cost was 27.5% for the year ended September
30, 2005 as compared to 25.3% for the year ended September 30, 2004. The percentage
increase in M&S cost is directly associated with the relative percentage increase in
M&S cost associated with the contracts, as described above. As a percentage of M&S
revenue, M&S cost was approximately 98.3% and 97.2% for the years ended September 30,
2005 and 2004, respectively.
 40




---



##### 



Gross Profit.
 Gross profit generated by the activities of the acquired operations
    
    $19.2 millionGross profit generated by the activities of the non-acquired operations
    
    $  9.2 millionTotal:
    
    $28.4 million
  Operating Expenses.
  Operating expense incurred by the activities of the acquired operations
    
    $13.1 million Operating expense incurred by activities of the non-acquired operations
    
    $17.3 millionTotal:
    
    $30.4 million
  
    
    Stock-based compensation, included in G&A expense, was approximately 2.9% and 0.9% of revenue for the years
ended September 30, 2005 and 2004, respectively. Stock-based compensation and deferred
compensation relate primarily to the expense associated with the stock appreciation
rights and phantom stock plans. Stock-based compensation increased approximately $8.1
million, or 324% to $10.6 million for the year ended September 30, 2005, from
approximately $2.5 million for the year ended September 30, 2004. The increase in
stock-based compensation and deferred compensation is a result of the increase in the
value of Alions common stock and the increase in awards granted.
    
    Operating expenses for indirect personnel and facilities costs related to rental and
occupancy expenses increased approximately $13.0 million, or 45.4%, to $41.6 million
for the year ended September 30, 2005, from $28.6 million for the year ended September
30, 2004. As a percentage of revenue, operating expenses relating to indirect personnel
and facilities expense was 11.3% for the year ended September 30, 2005 as compared to
10.6% for the year ended September 30, 2004. The increase, as a percentage of revenue,
is partially attributable to the increase in indirect labor costs associated with the
integration activities of the CATI, METI and JJMA acquisitions. Management intends to
reduce facility lease costs through efforts to sublet excess space which resulted from
additional space acquired through the acquisition process.
    
    Other G&A expense increased approximately $4.9 million, or 17.4%, to $33.0 million for the
year ended September 30, 2005, compared to $28.1 million for the year ended September
30, 2004. As a percentage of revenues, G&A expenses were 9.0% for the year ended
September 30, 2005, compared to 10.4% for the year ended September 30, 2004. As a
result of integrating the activities of CATI, METI and JJMA, the costs associated with
providing G&A activities for the acquired operations have been partially absorbed by
the existing G&A infrastructure, resulting in a decrease in expense expressed as a
percentage of revenue.
    
    Depreciation and amortization expense increased approximately $4.4 million, or
32.8%, to $17.8 million for the year ended September 30, 2005, as compared to $13.4
million for the year ended September 30, 2004. Depreciation is associated primarily
with the value assigned to fixed assets while amortization expense is associated
primarily with the intangible asset value assigned to the purchased contracts of the
acquired entities. The $4.4 million increase is primarily attributable to the
following:
 Year Ended September 30,2005
    
    
    2004(In millions)Depreciation expense
    
    $
    4.4
    
    
    $
    2.8Amortization expense for purchased contracts of:- IITRI
    
    $
    10.2
    
    
    $
    10.2- ITSC
    
    $
    0.1
    
    
    
    - IPS
    
    $
    0.5
    
    
    $
    0.4- METI
    
    $
    0.3
    
    
    
    - JJMA
    
    $
    2.2
    
    
    
    Amortization expense for non-compete agreements
    
    $
    0.1
    
    
    
    Total
    
    $
    17.8
    
    
    $
    13.4
 41




---



##### 



Operating Loss.
  Operating income generated from the acquired operations
    
    $ 6.1  million Operating loss generated from the non-acquired operations*
    
    $(8.0) millionTotal:
    
    $(1.9) million
 
 *
    
    For the year ended September 30, 2005, stock-based compensation expense of approximately
$10.6 million was not attributed to the activities of acquired operations. Other Income and Expense.
 Year Ended September 30,2005
    
    
    2004(In millions)Revolving facility
    
    $
    0.2
    
    
    $
    0.8Senior term loan
    
    
    6.9
    
    
    
    3.1Mezzanine Note  cash-pay interest
    
    
    1.8
    
    
    
    2.4- accretion of debt discount
    
    
    2.2
    
    
    
    0.7Subordinated note  PIK interest
    
    
    2.3
    
    
    
    2.4- accretion of long-term deferred interest
    
    
    0.6
    
    
    
    0.4- accretion of debt discount
    
    
    0.9
    
    
    
    0.8Agreements with officers
    
    
    0.0
    
    
    
    0.2Accretion of warrants (a)
    
    
    23.5
    
    
    
    5.9Other
    
    
    0.3
    
    
    
    0.1Total
    
    $
    38.7
    
    
    $
    16.8
 
 (a)
    
    Reflects change in value assigned to the detachable warrants associated with Mezzanine and
Subordinated notes based on the change in the value of Alion common stock.  Income Tax Expense.
 Net Loss.
 Liquidity and Capital Resources
  42




---



##### 



Discussion of Debt Structure
   Term B Senior Credit Facility
  
    
    senior term loan in the current approximate amount of $259.0 million, which includes
$189.2 million in incremental term loans drawn down as of September 30, 2006;
    
    a $50.0 million senior revolving credit facility, approximately $12.3 million of
which was actually borrowed as of September 30, 2006 and approximately $3.8 million of
which was deemed borrowed as of September 30, 2006, for letters of credit; and
    
    a $150.0 million uncommitted incremental term loan accordion facility.
 43




---



##### 



Use of Proceeds.
  44




---



##### 



Security.
 Interest and Fees.
 Federal Funds ABR
    
    Prime Rate ABREurodollar Spread
    
    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.
   45




---



##### 



Other Fees and Expenses.
  Financial Covenants.
    46




---



##### 




    
    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 September 30, 2006 and 2005
 2006
    
    
    2005Calculation of EBITDA
    
    (Dollars in thousands)Net loss
    
    $
    (31,115
    )
    
    $
    (40,238
    )Plus: Interest expense
    
    
    29,691
    
    
    
    38,696Plus: Income tax expense
    
    
    26
    
    
    
    66Plus: Depreciation and amortization expense
    
    
    16,566
    
    
    
    17,771EBITDA
    
    
    15,168
    
    
    
    16,295
 Calculation of Consolidated EBITDA
    
    2006
    
    
    2005EBITDA
    
    
    15,168
    
    
    
    16,295Plus: 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)*
    
    
    10,738
    
    
    
    10,628Plus: Non-cash contributions to the ESOP (including Company 401-k
match)*
    
    
    7,871
    
    
    
    5,707Plus: Nonrecurring charges and adjustments by third-party valuation
firm that prepares valuation reports in connection with the ESOP
    
    
    17,012
    
    
    
    3,759Consolidated EBITDA
    
    $
    50,789
    
    
    $
    36,389
 
 *
    
    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.
 47




---



##### 



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 September 30, 2006 and 2005
 2006
    
    
    2005Numerator:Revolving credit facility
    
    $
    16,096
    
    
    $
    2,954Term B Senior Credit facility debt
outstanding, at face value
    
    
    259,015
    
    
    
    142,920Bridge Loan
Agreement
    
    
    170,000
    
    
    
    Total debt outstanding
    
    $
    445,111
    
    
    $
    145,874Denominator:Consolidated EBITDA
    
    $
    50,789
    
    
    $
    36,389Plus: Acquisition-related pro forma adjustment
    
    
    21,612
    
    
    
    7,345Consolidated
EBITDA with pro forma effect of acquisitions
    
    
    72,401
    
    
    
    43,734Leverage ratio:
    
    
    6.15
    
    
    
    3.34
 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 September 30, 2006 and 2005
 2006
    
    
    2005(Dollars in thousands)Numerator:Consolidated EBITDA
    
    $
    50,789
    
    
    $
    36,389Plus: Acquisition-related pro forma adjustment
    
    
    21,612
    
    
    
    7,345Consolidated
EBITDA with pro forma effect of acquisitions
    
    
    72,401
    
    
    
    43,734Less: Capital expenditures
    
    
    5,227
    
    
    
    2,233Consolidated
EBITDA with pro forma effect of acquisitions less capital expenditures
    
    $
    67,174
    
    
    $
    41,501
 48




---



##### 



2006
    
    
    2005(Dollars in thousands)(Unaudited)Denominator:Consolidated
interest expense
    
    $
    19,349
    
    
    $
    9,328Interest coverage ratio
    
    
    3.47
    
    
    
    4.45
  
    
    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 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;
    
    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).
  49




---



##### 



Bridge Loan Agreement
   Use of Proceeds.
 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.
 50




---



##### 



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
 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 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;
    
    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;
    
    imposition on the ESOP Trust of certain taxes in excess of an agreed amount; or
    
    final determination that the ESOP is not a qualified plan.
 51




---



##### 



Subordinated Note
    7-FiscalYear Period($ Inthousands)2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    TotalBank revolving credit facility- Interest(1)
    
    $
    1,250
    
    
    $
    250
    
    
    $
    250
    
    
    $
    250
    
    
    $
    250
    
    
    $
    250
    
    
    $
    2,500Senior Term
Loan(2)-
Interest(3)
    
    
    19,752
    
    
    
    19,312
    
    
    
    9,729
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,793-
Principal(4)
    
    
    2,620
    
    
    
    2,620
    
    
    
    253,775
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    259,015Bridge Loan(5)-
Interest(6)
    
    
    19,047
    
    
    
    22,646
    
    
    
    23,659
    
    
    
    23,803
    
    
    
    23,936
    
    
    
    1,541
    
    
    
    114,632-
Principal(6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    175,100
    
    
    
    175,100Subordinated note-
Interest(7)
    
    
    
    
    
    
    
    
    
    
    6,384
    
    
    
    3,192
    
    
    
    
    
    
    
    
    
    
    
    9,576-
Principal(7)
    
    
    
    
    
    
    
    
    
    
    27,352
    
    
    
    27,352
    
    
    
    
    
    
    
    
    
    
    
    54,704Total cash  Pay interest
    
    
    40,049
    
    
    
    42,208
    
    
    
    40,022
    
    
    
    27,245
    
    
    
    24,186
    
    
    
    1,791
    
    
    
    175,501Total cash  Pay principal
    
    
    2,620
    
    
    
    2,620
    
    
    
    281,127
    
    
    
    27,352
    
    
    
    
    
    
    
    175,100
    
    
    
    488,819Total
    
    $
    42,669
    
    
    $
    44,828
    
    
    $
    321,149
    
    
    $
    54,597
    
    
    $
    24,186
    
    
    $
    176,891
    
    
    $
    664,320
 
 (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 three years; however, the Company expects
to review the revolving credit facility as an on-going requirement to fund working capital.
For fiscal year 2007, the average balance drawn on the revolving credit facility is
projected to be approximately $10.5 million. For the fiscal years 2008 through 2009, the
Company anticipates the balance drawn on
the revolving credit facility will be minimal. As of September 30, 2006, the Company has
actually borrowed $12.3 million under the revolving credit facility and $3.8 million has
been deemed borrowed for letters of credit. Interest expense value includes an estimate for
the unused balance fee on the $50.0 million revolving credit facility.(2)
    
    The Company expects that it will need to refinance the Term B Senior Credit Facility
before the end of fiscal year 2008.(3)
    
    The projected average annual senior term loan balance the Company estimates will be
drawn under the Term B Senior Credit Facility is as follows: $257.7 million, $255.1 million,
and $126.9 million for the 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 52




---



##### 



years. Based on an estimated LIBOR rate plus the CS Eurodollar
spread, the effective annual interest rate for fiscal years 2007, 2008, and 2009 is
estimated to be approximately 7.7%, 7.6%, and 7.7%, 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 senior
term loan matures August 2, 2009. 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 $1.7 million, $2.6 million, and $1.3 million
for fiscal years ending September 30, 2007, 2008, and 2009, respectively. Estimated interest
expense includes an estimate for the commitment fee on the senior term loan.(4)
    
    The Term B Senior Credit Facility requires the Company to repay 1 percent of the
principal balance outstanding under the senior term loan during each of the fiscal years
2005 through 2008 and 96 percent of the principal balance outstanding during fiscal year
2009 of the term. The table reflects the balance drawn of $259.0 million as of September 30,
2006, resulting in expected aggregate annual principal payments of approximately $2.62
million in each of fiscal years 2007, and 2008. During the fifth year, or 2009, the Company
is scheduled to pay principal in the amount of $253.8 million. The Term B Senior Credit
Facility also requires the Company to make mandatory prepayments of principal depending upon
whether the Company generates certain excess cash flow in a given fiscal year, issues or
incurs certain debt or sells certain assets. As of September 30, 2006, no mandatory
prepayments are due.(5)
    
    The Company expects to refinance the Bridge Loan Agreement before the end of calendar
year 2006 through the issuance of up to $200.0 million of unsecured senior subordinated
notes. The Company intends to use the net proceeds to repay the Bridge Loan and a portion
of the senior term loan. The Company also expects that it will need
to refinance The Term B Senior Credit Facility before the end of
fiscal year 2008.(6)
    
    The table reflects the balance drawn under the Bridge Loan of $170.0 million as of
September 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 fiscal
years 2007, 2008, 2009, 2010, 2011 and 2012 is estimated to be approximately 11.2%, 13.3%,
13.9%, 14.0%, 14.0% and 14.5%, respectively. The approximate impact of a 1% increase in the
interest rate, as applied to principal balance drawn under the Bridge Loan, would be $1.7
million for each fiscal year 2007 through 2011, and $0.4 million for the partial period of
fiscal year 2012.(7)
    
    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
     53




---



##### 



Lease Payments
  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 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
    
    
    $
    10,147,043July 2006
    
    
    32,420
    
    
    $
    37.06
    
    
    $
    1,201,485August 2006
    
    
    1,695
    
    
    $
    37.06
    
    
    $
    62,810Total
    
    
    
    
    
    
    
    
    
    $
    28,869,326
    54




---



##### 



Contract performance  Joint Spectrum Center Contract
  Contractual Obligations
  Payments Due by Fiscal Year2013 andTotal
    
    
    2007
    
    
    2008-2010
    
    
    2011-2012
    
    
    After(In thousands)Contractual Obligations:Long-term debt (1)
    
    $
    664,320
    
    
    $
    42,669
    
    
    $
    420,574
    
    
    $
    201,077
    
    
    $
    Lease Obligations
    
    
    109,874
    
    
    
    26,585
    
    
    
    56,158
    
    
    
    11,543
    
    
    
    15,588Total contractual obligations
    
    $
    774,194
    
    
    $
    69,254
    
    
    $
    476,732
    
    
    $
    212,620
    
    
    $
    15,588
 
 1.
    
    Includes interest payments and forecasted debt obligations. Given the structure of the
Bridge Loan and the Term B Senior Credit Facility, the Company expects that it will need to
refinance the Bridge Loan and the Term B Senior Credit Facility before the end of fiscal
year 2007 and 2008, respectively. Off-Balance Sheet Financing Arrangements
  Summary of Critical Accounting Policies
 Revenue Recognition
   55




---



##### 



Accounting
for Performance on Construction-Type and Certain Production-Type Contracts .
 Goodwill and Intangible Assets
  Business Combinations.
  Recently Issued Accounting Pronouncements
 Share-Based Payment, a revision of SFAS No. 12 Accounting for
Stock Issued to Employees.
 56




---



##### 



Accounting for Conditional Asset
Retirement Obligations  an Interpretation of FASB Statement No. 143.
 Accounting Changes and Error Corrections  a
replacement of APB Opinion No. 20 and FASB Statement No. 3
 Accounting for Uncertainty in
Income Taxes. Accounting for Income
Taxes
 Fair Value Measurements
 Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans
 Financial Statements  Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 Interest rate risk
   57




---



##### 



Foreign currency risk
  Risk associated with value of Alion common stock
     58




---



##### 



Item 8. Financial Statements and Supplementary Data
 INDEX TO FINANCIAL STATEMENTS
 Consolidated Financial Statements of Alion Science and Technology Corporation
 Reports of Independent Registered Public Accounting Firms
    
    
    60Consolidated Financial Statements:Consolidated Balance Sheets as of September 30, 2006 and 2005
    
    
    62Consolidated Statements of Operations for the years ended September 30, 2006, 2005, and 2004
    
    
    63Consolidated Statements of Shareholders Equity (Deficit) for the years ended September 30, 2006, 2005, and 2004
    
    
    64Consolidated Statements of Cash Flows for the years ended September 30, 2006, 2005, and 2004
    
    
    65Notes to Consolidated Financial Statements
    
    
    67Consolidated Financial Statement ScheduleSchedule II  Valuation and Qualifying Accounts
    
    
    88
 59




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
        
 60




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 61




---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
 CONSOLIDATED BALANCE SHEETS
 September 30,2006
    
    
    2005(In thousands, except share andper share information)Current assets:Cash and cash equivalents
    
    $
    2,755
    
    
    $
    37,778Accounts receivable, less allowance of $3,961 and $3,539 at
September 30, 2006 and 2005, respectively
    
    
    150,412
    
    
    
    80,898Stock subscriptions receivable
    
    
    8,990
    
    
    
    1,733Prepaid expenses
    
    
    3,422
    
    
    
    1,944Other current assets
    
    
    2,606
    
    
    
    2,802Total current assets
    
    
    168,185
    
    
    
    125,155Property, plant and equipment, net
    
    
    14,644
    
    
    
    11,174Intangible assets, net
    
    
    75,403
    
    
    
    30,198Goodwill
    
    
    387,927
    
    
    
    163,419Other assets
    
    
    2,067
    
    
    
    1,860Deferred compensation assets
    
    
    2,743
    
    
    
    2,443Total assets
    
    
    650,969
    
    
    
    334,249Current liabilities:Current portion, Term B Senior Credit Facility note payable
    
    
    2,816
    
    
    
    1,404Current portion, acquisition obligations
    
    
    11,457
    
    
    
    3,616Trade accounts payable and accrued liabilities
    
    
    61,902
    
    
    
    27,312Accrued payroll and related liabilities
    
    
    34,955
    
    
    
    29,161ESOP liabilities
    
    
    180
    
    
    
    274Current portion of accrued loss on operating leases
    
    
    901
    
    
    
    1,054Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    2,163
    
    
    
    2,559Total current liabilities
    
    
    114,374
    
    
    
    65,380Acquisition obligations, excluding current portion
    
    
    3,568
    
    
    
    7,100Notes payable to bank
    
    
    12,300
    
    
    
    Term B Senior Credit Facility note payable, excluding current portion
    
    
    252,100
    
    
    
    137,945Bridge loan payable
    
    
    164,680
    
    
    
    Subordinated note payable
    
    
    46,963
    
    
    
    42,888Deferred compensation liability
    
    
    17,510
    
    
    
    2,465Accrued compensation, excluding current portion
    
    
    3,516
    
    
    
    6,356Accrued postretirement benefit obligations
    
    
    3,722
    
    
    
    3,357Non-current portion of lease obligations
    
    
    4,292
    
    
    
    3,694Redeemable common stock warrants
    
    
    35,234
    
    
    
    44,590Total liabilities
    
    
    658,259
    
    
    
    313,775Shareholders equity (deficit):Common stock, $0.01 par value, 8,000,000 shares
authorized, 5,210,126 and 5,149,840 shares issued and outstanding
at September 30, 2006 and September 30, 2005
    
    
    52
    
    
    
    51Additional paid-in capital
    
    
    91,829
    
    
    
    88,479Accumulated deficit
    
    
    (99,171
    )
    
    
    (68,056
    )Total shareholders equity (deficit)
    
    
    (7,290
    )
    
    
    20,474Total liabilities and shareholders equity (deficit)
    
    $
    650,969
    
    
    $
    334,249
 See accompanying notes to consolidated financial statements.
 62




---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Year Ended September 30,2006
    
    
    2005
    
    
    2004(In thousands, except share andper share information)Contract revenue
    
    $
    508,628
    
    
    $
    369,231
    
    
    $
    269,940Direct contract expense
    
    
    381,467
    
    
    
    267,241
    
    
    
    196,388Gross profit
    
    
    127,161
    
    
    
    101,990
    
    
    
    73,552Operating expenses:Indirect contract expense
    
    
    29,907
    
    
    
    29,017
    
    
    
    17,647Research and development
    
    
    2,025
    
    
    
    498
    
    
    
    399General and administrative
    
    
    58,093
    
    
    
    43,602
    
    
    
    30,630Rental and occupancy expense
    
    
    22,208
    
    
    
    12,542
    
    
    
    10,990Depreciation and amortization
    
    
    16,566
    
    
    
    17,771
    
    
    
    13,447Bad debt expense
    
    
    667
    
    
    
    651
    
    
    
    590Total operating expenses
    
    
    129,466
    
    
    
    104,081
    
    
    
    73,703Operating loss
    
    
    (2,305
    )
    
    
    (2,091
    )
    
    
    (151
    )Other income (expense):Interest income
    
    
    590
    
    
    
    475
    
    
    
    27Interest expense
    
    
    (29,691
    )
    
    
    (38,696
    )
    
    
    (16,835
    )Other
    
    
    317
    
    
    
    140
    
    
    
    1,865Loss before income taxes
    
    
    (31,089
    )
    
    
    (40,172
    )
    
    
    (15,094
    )Income tax expense
    
    
    (26
    )
    
    
    (66
    )
    
    
    (17
    )Net loss
    
    $
    (31,115
    )
    
    $
    (40,238
    )
    
    $
    (15,111
    )Basic and diluted loss per share
    
    $
    (6.19
    )
    
    $
    (9.50
    )
    
    $
    (4.91
    )Basic and diluted weighted average common
shares outstanding
    
    
    5,029,670
    
    
    
    4,235,947
    
    
    
    3,074,709
 See accompanying notes to consolidated financial statements.
 63




---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)
 AdditionalCommon
    
    
    Common
    
    
    Paid-in-
    
    
    Treasury
    
    
    Treasury
    
    
    AccumulatedShares
    
    
    Stock
    
    
    Capital
    
    
    Shares
    
    
    Stock
    
    
    Deficit
    
    
    TotalBalances at October 1, 2003
    
    
    2,973,813
    
    
    $
    29
    
    
    $
    30,578
    
    
    
    
    
    
    $
    
    
    
    $
    (12,707
    )
    
    $
    17,900Purchase of common stock from ESOP Trust
    
    
    (99,927
    )
    
    
    
    
    
    
    
    
    
    
    99,927
    
    
    
    (1,562
    )
    
    
    
    
    
    
    (1,562
    )Release of treasury shares to ESOP Trust
    
    
    99,927
    
    
    
    
    
    
    
    
    
    
    
    (99,927
    )
    
    
    1,562
    
    
    
    
    
    
    
    1,562Issuance of common stock to ESOP Trust
    
    
    402,384
    
    
    
    5
    
    
    $
    6,954
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,959Net loss for the year ended September 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,111
    )
    
    
    (15,111
    )Balances at September 30, 2004
    
    
    3,376,197
    
    
    $
    34
    
    
    $
    37,532
    
    
    $
    
    
    
    $
    
    
    
    $
    (27,818
    )
    
    $
    9,748Purchase of common stock from ESOP Trust
    
    
    (52,507
    )
    
    
    
    
    
    
    
    
    
    
    52,507
    
    
    
    (1,047
    )
    
    
    
    
    
    
    (1,047
    )Release of treasury shares to ESOP Trust
    
    
    52,507
    
    
    
    
    
    
    
    
    
    
    
    (52,507
    )
    
    
    1,047
    
    
    
    
    
    
    
    1,047Issuance of common stock to ESOP Trust
    
    
    1,944,300
    
    
    
    19
    
    
    
    56,710
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56,729Retirement of common stock from ESOP Trust
    
    
    (170,657
    )
    
    
    (2
    )
    
    
    (5,763
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,765
    )Net loss for year ended September 30, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40,238
    )
    
    
    (40,238
    )Balances at September 30, 2005
    
    
    5,149,840
    
    
    $
    51
    
    
    $
    88,479
    
    
    $
    
    
    
    $
    
    
    
    $
    (68,056
    )
    
    $
    20,474Issuance of common stock to ESOP Trust
    
    
    579,739
    
    
    
    6
    
    
    
    22,348
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,354Retirement of common stock from ESOP Trust
    
    
    (519,453
    )
    
    
    (5
    )
    
    
    (18,998
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,003
    )Net loss for year ended September 30, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31,115
    )
    
    
    (31,115
    )Balances at September 30, 2006
    
    
    5,210,126
    
    
    $
    52
    
    
    $
    91,829
    
    
    $
    
    
    
    $
    
    
    
    $
    (99,171
    )
    
    $
    (7,290
    )
 See accompanying notes to consolidated financial statements.
 64




---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 2006, 2005, and 2004
 Year Ended September 30,2006
    
    
    2005
    
    
    2004(In thousands, except share and pershare information)Cash flows from operating activities:Net loss
    
    $
    (31,115
    )
    
    $
    (40,238
    )
    
    $
    (15,111
    )Adjustments to reconcile net loss to net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    16,566
    
    
    
    17,771
    
    
    
    13,447Accretion of debt to face value
    
    
    922
    
    
    
    3,056
    
    
    
    1,449Amortization of debt issuance costs
    
    
    1,669
    
    
    
    840
    
    
    
    1,462(Increase) decrease in value of interest rate cap agreement
    
    
    (94
    )
    
    
    (118
    )
    
    
    204Change in fair value of redeemable common stock warrants
    
    
    4,287
    
    
    
    23,730
    
    
    
    6,015Stock-based compensation
    
    
    10,738
    
    
    
    10,628
    
    
    
    2,513(Gain) loss on disposal of assets
    
    
    (1
    )
    
    
    27
    
    
    
    Gain on sale of investments, net
    
    
    (32
    )
    
    
    (72
    )
    
    
    (2,223
    )Changes in assets and liabilities, net of effect of acquisitions:Accounts receivable, net
    
    
    (59,687
    )
    
    
    12,078
    
    
    
    (14,160
    )Other assets
    
    
    (1,316
    )
    
    
    1,036
    
    
    
    (3,810
    )Trade accounts payable and accruals
    
    
    39,293
    
    
    
    6,200
    
    
    
    13,808Other liabilities
    
    
    3,093
    
    
    
    202
    
    
    
    2,081Net cash (used in) provided by operating activities
    
    
    (15,678
    )
    
    
    35,140
    
    
    
    5,675Cash flows from investing activities:Cash paid for acquisitions, net of cash acquired
    
    
    (279,196
    )
    
    
    (74,591
    )
    
    
    (21,678
    )Capital expenditures
    
    
    (5,227
    )
    
    
    (2,233
    )
    
    
    (3,678
    )Proceeds from sale of investment securities
    
    
    
    
    
    
    
    
    
    
    3,064Purchase of investment securities
    
    
    
    
    
    
    (1,193
    )
    
    
    (1,333
    )Net cash used in investing activities
    
    
    (284,423
    )
    
    
    (78,017
    )
    
    
    (23,625
    )Cash flows from financing activities:Proceeds from Term B Senior Credit Facility note payable
    
    
    118,000
    
    
    
    94,000
    
    
    
    50,000Proceeds from bridge loan
    
    
    170,000
    
    
    
    
    
    
    
    Payment of debt issuance costs
    
    
    (7,758
    )
    
    
    (1,307
    )
    
    
    (3,280
    )Repayment of Term B Credit Facility note payable
    
    
    (1,905
    )
    
    
    (1,080
    )
    
    
    Repayment of senior note payable
    
    
    
    
    
    
    
    
    
    
    (29,250
    )Repayment of mezzanine note payable
    
    
    
    
    
    
    (20,201
    )
    
    
    (750
    )Repayment of
mezzanine warrants
    
    
    (13,643)
    
    
    
    
    
    
    
    Proceeds from agreement with officer
    
    
    
    
    
    
    
    
    
    
    750Repayment of agreements with officers
    
    
    
    
    
    
    (1,823
    )
    
    
    Borrowings under revolving credit facility
    
    
    12,300
    
    
    
    
    
    
    
    24,000Repayment of LaSalle revolving credit facility
    
    
    
    
    
    
    
    
    
    
    (24,000
    )Repayment of ITSC revolving credit facility
    
    
    
    
    
    
    
    
    
    
    (375
    )Purchase of interest rate cap agreement
    
    
    (44
    )
    
    
    
    
    
    
    (319
    )Purchase of shares of common stock from ESOP Trust
    
    
    (19,003
    )
    
    
    (8,160
    )
    
    
    (1,562
    )Cash received from issuance of common stock to Trust
    
    
    7,131
    
    
    
    14,509
    
    
    
    6,959Net cash provided by financing activities
    
    
    265,078
    
    
    
    75,938
    
    
    
    22,173Net
(decrease) increase in cash and cash equivalents
    
    
    (35,023
    )
    
    
    33,061
    
    
    
    4,223Cash and
cash equivalents at beginning of year
    
    
    37,778
    
    
    
    4,717
    
    
    
    494Cash and cash equivalents at end of year
    
    $
    2,755
    
    
    $
    37,778
    
    
    $
    4,717
 65




---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 2006, 2005, and 2004 (CONTINUED)
 Year Ended September 30,2006
    
    
    2005
    
    
    2004(In thousands, except share and pershare information)Supplemental disclosure of cash flow information:Cash paid for interest
    
    
    19,349
    
    
    
    9,328
    
    
    
    7,563Cash paid (received) for taxes
    
    
    806
    
    
    
    367
    
    
    
    (29
    )Non-cash financing activities:Common stock issued to ESOP Trust
in satisfaction of employer
contribution liability
    
    
    7,871
    
    
    
    5,707
    
    
    
    4,330Common stock issued for acquisitions
    
    
    
    
    
    
    37,250
    
    
    
    
 See accompanying notes to consolidated financial statements.
 66




---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (1) Description and Formation of the Business
     Cash and restricted cash
    
    $
    1,187Accounts receivable
    
    
    47,485Other current assets
    
    
    3,784Acquired contracts
    
    
    30,645Goodwill
    
    
    63,610Fixed assets
    
    
    9,094Liabilities assumed
    
    
    (28,500
    )$
    127,305
 (2) Summary of Significant Accounting Policies
 Basis of Presentation and Principles of Consolidation
  
    
    Human Factors Application, Inc. (HFA)
    
    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 (U.S.), Inc.  established February 2005
    
    Alion Science and Technology (Canada) Corporation  established February 2005
    
    Alion  JJMA Corporation (JJMA)  acquired April 2005
    
    Alion Technical Services Corporation (ATSC) 
incorporated in Virginia
    
    Alion Technical Services Corporation (ATSC) 
incorporated in Delaware
    
    Alion  BMH Corporation (BMH)  acquired February 2006
    
    Washington Consulting, Inc. (WCI)  acquired February 2006
    
    Alion  MA&D Corporation (MA&D)  acquired May 2006.
 67




---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Fiscal, Quarter and Interim Periods
  Use of Estimates
  Reclassifications
  Revenue Recognition
      Accounting
for Performance on Construction-Type and Certain Production-Type Contracts .
 68




---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Income Taxes
  Cash and Cash Equivalents
  Accounts Receivable and Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts
  Property, Plant and Equipment
  Goodwill and Other Intangibles
 Goodwill and Other Intangible Assets
 Postretirement Benefits
 Employers Accounting for Postretirement Benefits Other Than Pension
 69




---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 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.
 Alion Stock.
 Recently Issued Accounting Pronouncements
 Share-Based Payment, a revision of SFAS No. 12 Accounting for
Stock Issued to Employees.
 Accounting for Conditional Asset
Retirement Obligations  an Interpretation of FASB Statement No. 143.
 Accounting Changes and Error Corrections  a
replacement of APB Opinion No. 20 and FASB Statement No. 3
 70




---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Accounting for Uncertainty in
Income Taxes. Accounting for Income
Taxes
 Fair Value Measurements
 Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans
 Financial Statements  Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements.
 (3) Business Combinations
 Fiscal Year 2006 Acquisitions
 Acquisition of BMH Associates, Inc.
 Acquisition of Washington Consulting, Inc.
 Acquisition of Micro Analysis and Design, Inc.
 71




---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Acquisition of certain assets of Anteon Corporation.
  Twelve Months Ended September 30, 2006
    
    
    Twelve Months Ended September 30, 2005Anteon Pro
    
    
    Alion Pro
    
    
    
    
    
    
    Anteon Pro
    
    
    Alion ProAlion
    
    
    Forma
    
    
    Forma
    
    
    Alion
    
    
    Forma
    
    
    FormaPro Forma Revenue
    
    $
    508,628
    
    
    $
    191,362
    
    
    $
    699,990
    
    
    $
    369,231
    
    
    $
    206,786
    
    
    $
    576,017Pro Forma Loss
    
    $
    (31,115
    )
    
    $
    (8,861
    )
    
    $
    (39,976
    )
    
    $
    (40,238
    )
    
    $
    (15,952
    )
    
    $
    (56,190
    )Weighted Average
Shares Outstanding
    
    
    5,029,670
    
    
    
    
    
    
    
    5,029,670
    
    
    
    4,235,947
    
    
    
    
    
    
    
    4,235,947Loss Per Share
    
    $
    (6.19
    )
    
    $
    
    
    
    $
    (7.95
    )
    
    $
    (9.50
    )
    
    $
    
    
    
    $
    (13.27
    )
  Estimated
    
    Residual
    
    Weighted Average RemainingAmounts in Millions
    
    Fair Value
    
    Value
    
    Amortization PeriodPurchased contracts
    
    $
    54.7
    
    
    $
    
    
    
    5 years
 Fiscal Year 2005 Acquisitions
 Acquisition of Assets of Countermeasures, Inc.
 Acquisition of ManTech Environmental Technology, Inc.
 Acquisition of Carmel Applied Technologies, Inc.
 Investment in VectorCommand Ltd.
 72




---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Acquisition of John J. McMullen Associates, Inc. and Pro Forma Information.
 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
    
    
    25.6Goodwill
    
    
    61.8Accounts payable and other accrued liabilities
    
    
    (11.5
    )
  Twelve Months Ended September 30, 2005JJMA Pro
    
    
    Alion ProAlion
    
    
    Forma
    
    
    FormaPro Forma Revenue
    
    $
    369,231
    
    
    $
    51,103
    
    
    $
    420,334Pro Forma Loss
    
    $
    (40,238
    )
    
    $
    (17,524
    )
    
    $
    (57,762
    )Weighted Average Shares
Outstanding
    
    
    4,235,947
    
    
    
    671,753
    
    
    
    4,907,700Loss Per Share
    
    $
    (9.50
    )
    
    $
    
    
    
    $
    (11.77
    )
  Estimated
    
    
    Residual
    
    
    Weighted Average 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
 Fiscal Year 2004 Acquisitions
 Acquisition of Innovative Technology Solutions Corporation.
 Acquisition of Identix Public Sector, Inc.
 (4) Employee Stock Ownership Plan (ESOP) and Stock Ownership Trust
  (5) Postretirement Benefits
  73




---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   2006
    
    
    2005(In thousands)Accumulated postretirement benefit obligation as of September 30:Retirees
    
    $
    2,364
    
    
    $
    1,028Fully eligible active plan participants
    
    
    1,833
    
    
    
    814Other active plan participants
    
    
    4,837
    
    
    
    1,741$
    9,034
    
    
    $
    3,583
 2006
    
    
    2005(In thousands)Reconciliation of beginning and ending benefit obligation:Benefit obligation at beginning of period
    
    $
    3,583
    
    
    $
    3,602Service cost
    
    
    246
    
    
    
    188Interest cost
    
    
    239
    
    
    
    227Actuarial loss
    
    
    4,312
    
    
    
    22Plan amendment (acquisitions)
    
    
    1,014
    
    
    
    Benefits paid
    
    
    (360
    )
    
    
    (456
    )Benefit obligation at September 30
    
    $
    9,034
    
    
    $
    3,583
  (In thousands)Funded status of the plan:Obligation at September 30
    
    $
    (9,034
    )
    
    $
    (3,583
    )Unrecognized prior service cost
    
    
    1,014
    
    
    
    Unrecognized net loss
    
    
    4,298
    
    
    
    226Accrued postretirement benefits included in the consolidated balance sheet
    
    $
    (3,722
    )
    
    $
    (3,357
    )
  2006
    
    
    2005(In thousands)Service cost
    
    $
    246
    
    
    $
    188Interest cost
    
    
    239
    
    
    
    227Amortization of net loss
    
    
    40
    
    
    
    Net periodic postretirement benefit cost
    
    $
    525
    
    
    $
    415
  2006
    
    2005Accumulated post retirement benefit obligation at September 30
    
    
    5.75
    %
    
    
    5.25
    %Service and interest cost portions of net periodic postretirement benefit costs
    
    
    5.25
    %
    
    
    6.00
    %
  2006
    
    2005Health care cost trend rate assumed for next year
    
    
    11.0
    %
    
    
    10.0
    %Rate to which the cost trend rate is assumed to decline (ultimate trend rates)
    
    
    5.0
    %
    
    
    5.0
    %Year the rate reaches the ultimate trend rate
    
    
    2018
    
    
    
    2015
 74




---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  One-Percentage-
    
    One-Percentage-Point Increase
    
    Point DecreaseTotal interest and service cost
    
    $
    95
    
    
    $
    (85
    )Accumulated postretirement benefit obligation
    
    
    692
    
    
    
    (627
    )
  (In thousands)2007
    
    $
    5672008
    
    
    6542009
    
    
    6932010
    
    
    7892011
    
    
    8842012-2016
    
    
    5,897
  (6) Loss Per Share
  (7) Shareholders Equity (Deficit)
  (8) Accounts Receivable
  2006
    
    
    2005(In thousands)Billed receivables
    
    $
    106,310
    
    
    $
    65,156Unbilled receivables:Amounts currently billable
    
    
    36,548
    
    
    
    13,376Revenues recorded in excess of
milestone billings on fixed price
contracts
    
    
    5,591
    
    
    
    3,707Revenues recorded in excess of
estimated contract value or funding
    
    
    3,354
    
    
    
    1,323Retainages and other amounts billable
upon contract completion
    
    
    2,570
    
    
    
    875Less: Allowance for doubtful accounts
    
    
    (3,961
    )
    
    
    (3,539
    )Total Accounts Receivable
    
    $
    150,412
    
    
    $
    80,898
 75




---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (9) Property, Plant and Equipment
  2006
    
    
    2005(In thousands)Leasehold improvements
    
    $
    2,709
    
    
    $
    2,302Equipment and software
    
    
    25,188
    
    
    
    17,395Total cost
    
    
    27,897
    
    
    $
    19,697Less-accumulated depreciation and amortization
    
    
    13,253
    
    
    
    8,523Net Property, Plant and Equipment
    
    $
    14,644
    
    
    $
    11,174
  (10) Goodwill and Intangible Assets
   Total(In millions)Balance as of October 1, 2004
    
    $
    83.1Goodwill acquired during the year
    
    
    77.6Adjustment to initial allocation
    
    
    2.7Balance as of September 30, 2005
    
    $
    163.4Goodwill acquired during the year
    
    
    223.3Adjustment to initial allocation
    
    
    1.2Balance as of September 30, 2006
    
    $
    387.9
   76




---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  For the year ended September 30:
    
    (in thousands)2007
    
    $
    16,7602008
    
    
    16,4572009
    
    
    15,2732010
    
    
    14,5032011
    
    
    8,599Thereafter
    
    
    3,813
  (11) Long-Term Debt
  Term B Senior Credit Facility
  2006
    
    
    2005Senior term loan
    
    $
    259.0
    
    
    $
    142.9Less: Unamortized debt issuance costs
    
    
    (4.1
    )
    
    
    (3.6
    )Term B Senior Credit Facility Note Payable
    
    $
    254.9
    
    
    $
    139.3Less current maturities, net of unamortized debt issue costs
    
    
    (2.8
    )
    
    
    (1.4
    )Term B Senior Credit Facility Note Payable, less current maturities
    
    $
    252.1
    
    
    $
    137.9
  
    
    a senior term loan in the current approximate amount of $259.0million;
    
    a $50.0 million senior revolving credit facility under which approximately $12.3
million was outstanding as of September 30, 2006, and approximately $3.8 million of
which was deemed borrowed for letters of credit; and
    
    a $150.0 million uncommitted incremental term loan accordion facility.
  77




---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    Use of Proceeds.
  Security.
 Interest and Fees.
  Interest Rate Cap Agreements.
 Other Fees and Expenses.
 78




---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Financial Covenants.
  Subordinated Note
   Bridge Loan Agreement
   Use of Proceeds.
 Interest and Prepayment.
 79




---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Financial Covenants.
  Other Notes and Agreements
   2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    TotalSenior
Secured Term B Loan
(1)(2)
    
    $
    2.6
    
    
    $
    2.6
    
    
    $
    253.8
    
    
    $
    
    
    
    $
    
    
    
    $
    259.0Bridge Loan
(3)(4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    175.1
    
    
    
    175.1Subordinated
Seller Note (5)
    
    
    
    
    
    
    
    
    
    
    19.9
    
    
    
    19.9
    
    
    $
    
    
    
    
    39.8Subordinated Paid in Kind Note
(6)
    
    
    
    
    
    
    
    
    
    
    7.4
    
    
    
    7.4
    
    
    $
    
    
    
    
    14.8Total principal payments
    
    $
    2.6
    
    
    $
    2.6
    
    
    $
    281.1
    
    
    $
    27.3
    
    
    $
    175.1
    
    
    $
    488.7
 
 (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 $252.1 million on the face of the balance
sheet includes, as of September 30, 2006, approximately $4.1 million of unamortized
debt issue costs which totaled approximately $12.3 million.(2)
    
    The Company expects that it will need to refinance the Term B
Senior Credit Facility before the end of the fiscal year 2008.(3)
    
    The table reflects the balance drawn of $170.0 million as of September 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 September
30, 2006, approximately $5.3 million in unamortized debt issue costs.(4)
    
    The Company expects to refinance the Bridge Loan Agreement
before the end of the calendar year 2006 through the issuance of up
to $200.0 million of unsecured senior subordinated notes. The
Company intends to use the net proceeds to repay the Bridge Loan and
a portion of the senior term loan. The Company also expects that it
will need to refinance the Term B loan. The Company also expects
that it will need to refinance the Term B Senior Credit Facility
before the end of fiscal year 2008.(5)
    
    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 September 30, 2006, approximately $3.9 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.(6)
    
    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
  80




---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (13) Leases
   Lease Payments for Fiscal Years Ending
    
    (In thousands)2007
    
    $
    26,5852008
    
    
    23,1912009
    
    
    19,3592010
    
    
    13,6082011
    
    
    11,543and thereafter
    
    
    15,588Gross lease payments
    
    
    109,874Less: non-cancelable subtenant receipts
    
    
    6,124Net lease payments
    
    $
    103,750
  (14) Stock Appreciation Rights
  81




---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
      
 Shares
    
    
    Shares
    
    
    TotalGranted to
    
    
    Granted to
    
    
    Shares
    
    
    Exercise
    
    
    Outstanding
    
    
    Outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vested
    
    
    ExercisableDate of Grant
    
    Employees
    
    
    Directors
    
    
    Granted
    
    
    Price
    
    
    at 9/30/05
    
    
    at 9/30/06
    
    
    Forfeited
    
    
    Exercised
    
    
    Expired
    
    
    9/30/06
    
    
    at 9/30/06December 2002
    
    
    64,250
    
    
    
    
    
    
    
    64,250
    
    
    $
    10.00
    
    
    
    53,450
    
    
    
    47,785
    
    
    
    1,960
    
    
    
    3,705
    
    
    
    
    
    
    
    28,005
    
    
    
    20,360December 2002
    
    
    
    
    
    
    29,400
    
    
    
    29,400
    
    
    $
    10.00
    
    
    
    8,400
    
    
    
    
    
    
    
    
    
    
    
    8,400
    
    
    
    
    
    
    
    
    
    
    
    May 2003
    
    
    300
    
    
    
    
    
    
    
    300
    
    
    $
    11.13
    
    
    
    300
    
    
    
    240
    
    
    
    
    
    
    
    60
    
    
    
    
    
    
    
    120
    
    
    
    120June 2003
    
    
    300
    
    
    
    
    
    
    
    300
    
    
    $
    11.13
    
    
    
    300
    
    
    
    300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    180
    
    
    
    60November 2003
    
    
    129,550
    
    
    
    
    
    
    
    129,550
    
    
    $
    14.71
    
    
    
    115,320
    
    
    
    100,466
    
    
    
    7,230
    
    
    
    7,624
    
    
    
    
    
    
    
    37,634
    
    
    
    21,090November 2003
    
    
    
    
    
    
    12,600
    
    
    
    12,600
    
    
    $
    14.71
    
    
    
    12,600
    
    
    
    2,800
    
    
    
    1,400
    
    
    
    8,400
    
    
    
    
    
    
    
    
    
    
    
    November 2004
    
    
    
    
    
    
    12,600
    
    
    
    12,600
    
    
    $
    19.94
    
    
    
    12,600
    
    
    
    12,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,200
    
    
    
    4,200February 2005
    
    
    164,750
    
    
    
    
    
    
    
    164,750
    
    
    $
    19.94
    
    
    
    152,400
    
    
    
    135,588
    
    
    
    9,350
    
    
    
    7,463
    
    
    
    
    
    
    
    29,575
    
    
    
    March 2005
    
    
    2,000
    
    
    
    
    
    
    
    2,000
    
    
    $
    19.94
    
    
    
    2,000
    
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500
    
    
    
    April 2005
    
    
    33,000
    
    
    
    
    
    
    
    33,000
    
    
    $
    29.81
    
    
    
    33,000
    
    
    
    27,500
    
    
    
    2,750
    
    
    
    2,750
    
    
    
    
    
    
    
    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
    
    
    
    18,775
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    February 2006
    
    
    13,000
    
    
    
    
    
    
    
    13,000
    
    
    $
    35.89
    
    
    
    
    
    
    
    10,250
    
    
    
    2,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    February 2006
    
    
    7,500
    
    
    
    
    
    
    
    7,500
    
    
    $
    35.89
    
    
    
    
    
    
    
    7,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    May 2006
    
    
    7,000
    
    
    
    
    
    
    
    7,000
    
    
    $
    37.06
    
    
    
    
    
    
    
    7,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    July 2006
    
    
    15,000
    
    
    
    
    
    
    
    15,000
    
    
    $
    37.06
    
    
    
    
    
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    August 2006
    
    
    1,250
    
    
    
    
    
    
    
    1,250
    
    
    $
    37.06
    
    
    
    
    
    
    
    1,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    716,575
    
    
    
    54,600
    
    
    
    771,175
    
    
    
    
    
    
    
    392,370
    
    
    
    630,179
    
    
    
    44,215
    
    
    
    38,402
    
    
    
    
    
    
    
    105,714
    
    
    
    45,830Wtd AvgExercise Price
    
    $
    25.75
    
    
    $
    13.38
    
    
    $
    24.87
    
    
    
    
    
    
    $
    17.54
    
    
    $
    26.39
    
    
    $
    26.86
    
    
    $
    15.32
    
    
    $
    
    
    
    $
    15.93
    
    
    $
    13.08
 82




---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 RemainingRisk Free
    
    
    
    
    
    
    Expected
    
    
    LifeDate of Grant
    
    Interest Rate
    
    
    Volatility
    
    
    Life
    
    
    (months)December 2002
    
    
    4.06% - 4.49
    %
    
    
    60
    %
    
    5 yrs
    
    
    13.4December 2002
    
    
    4.06% - 4.49
    %
    
    
    60
    %
    
    3 yrs
    
    
    0.0May 2003
    
    
    2.70% - 3.30
    %
    
    
    55
    %
    
    5 yrs
    
    
    18.8June 2003
    
    
    2.70% - 3.30
    %
    
    
    55
    %
    
    5 yrs
    
    
    19.6November 2003
    
    
    4.06% - 4.49
    %
    
    
    60
    %
    
    5 yrs
    
    
    25.2November 2003
    
    
    4.06% - 4.49
    %
    
    
    60
    %
    
    3 yrs
    
    
    1.2November 2004
    
    
    3.10% - 3.60
    %
    
    
    45
    %
    
    3 yrs
    
    
    13.4February 2005
    
    
    3.10% - 3.60
    %
    
    
    45
    %
    
    4 yrs
    
    
    27.8March 2005
    
    
    3.10% - 3.60
    %
    
    
    45
    %
    
    4 yrs
    
    
    28.9April 2005
    
    
    4.10% - 4.20
    %
    
    
    45
    %
    
    4 yrs
    
    
    29.8June 2005
    
    
    4.10% - 4.20
    %
    
    
    45
    %
    
    4 yrs
    
    
    32.0December 2005
    
    
    4.20% - 4.20
    %
    
    
    40
    %
    
    4 yrs
    
    
    38.6February 2006
    
    
    4.20% - 4.20
    %
    
    
    40
    %
    
    4 yrs
    
    
    40.3February 2006
    
    
    4.20% - 4.20
    %
    
    
    40
    %
    
    4 yrs
    
    
    40.8May 2006
    
    
    4.82% - 4.83
    %
    
    
    35
    %
    
    4 yrs
    
    
    43.6July 2006
    
    
    4.82% - 4.83
    %
    
    
    35
    %
    
    4 yrs
    
    
    45.0August 2006
    
    
    4.82% - 4.83
    %
    
    
    35
    %
    
    4 yrs
    
    
    46.9TotalWtd AvgExercise Price
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    31.4
 (15) Phantom Stock Plans
  Initial Phantom Stock Plan
  The Vested Amount forGrant inAnniversary from Grant Date
    
    February 2003
    
    November 20031st
    
    
    
    
    
    
    20
    %2nd
    
    
    
    
    
    
    20
    %3rd
    
    
    50
    %
    
    
    20
    %4th
    
    
    25
    %
    
    
    20
    %5th
    
    
    25
    %
    
    
    20
    %
 83




---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Second Phantom Stock Plan
   Director Phantom Stock Plan
     84




---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Shares
    
    
    SharesGranted to
    
    
    Granted to
    
    
    Total Shares
    
    
    Exercise
    
    
    Outstanding
    
    
    Outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vested
    
    
    ExercisableDate of Grant
    
    Employees
    
    
    Directors
    
    
    Granted
    
    
    Price
    
    
    at 9/30/05
    
    
    at 9/30/06
    
    
    Forfeited
    
    
    Exercised
    
    
    Expired
    
    
    9/30/06
    
    
    at 9/30/06February 2003
    
    
    171,000
    
    
    
    
    
    
    
    171,000
    
    
    $
    10.00
    
    
    
    171,000
    
    
    
    85,000
    
    
    
    6,232
    
    
    
    79,768
    
    
    
    
    
    
    
    16,500
    
    
    
    16,500November 2003
    
    
    52,685
    
    
    
    
    
    
    
    52,685
    
    
    $
    14.71
    
    
    
    52,685
    
    
    
    32,971
    
    
    
    2,107
    
    
    
    17,607
    
    
    
    
    
    
    
    5,438
    
    
    
    5,438February 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    November 2005
    
    
    
    
    
    
    7,808
    
    
    
    7,808
    
    
    $
    35.89
    
    
    
    
    
    
    
    6,832
    
    
    
    976
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    November 2005
    
    
    55,726
    
    
    
    
    
    
    
    55,726
    
    
    $
    35.89
    
    
    
    
    
    
    
    55,726
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    660,156
    
    
    
    7,808
    
    
    
    667,964
    
    
    
    
    
    
    
    537,838
    
    
    
    561,274
    
    
    
    9,315
    
    
    
    97,375
    
    
    
    
    
    
    
    24,179
    
    
    
    21,938Wtd Avg Fair Value
Price per Share
    
    $
    19.97
    
    
    $
    35.89
    
    
    $
    20.15
    
    
    
    
    
    
    $
    16.34
    
    
    $
    21.87
    
    
    $
    13.78
    
    
    $
    10.85
    
    
    $
    
    
    
    $
    12.55
    
    
    $
    11.17
 
 RemainingRisk Free
    
    
    
    
    
    Expected
    
    LifeDate of Grant
    
    Interest Rate
    
    Volatility
    
    Life
    
    (months)February 2003
    
    
    4.06% - 4.49
    %
    
    
    60
    %
    
    5 yrs
    
    
    15.8November 2003
    
    
    4.06% - 4.49
    %
    
    
    60
    %
    
    5 yrs
    
    
    24.9February 2005
    
    
    3.10% - 3.60
    %
    
    
    45
    %
    
    3 yrs
    
    
    15.8February 2005
    
    
    3.10% - 3.60
    %
    
    
    45
    %
    
    3 yrs
    
    
    15.8February 2005
    
    
    3.10% - 3.60
    %
    
    
    45
    %
    
    4 yrs
    
    
    27.8August 2005
    
    
    3.72% - 3.77
    %
    
    
    45
    %
    
    3 yrs
    
    
    22.0November 2005
    
    
    4.20% - 4.20
    %
    
    
    40
    %
    
    3 yrs
    
    
    25.2November 2005
    
    
    4.20% - 4.20
    %
    
    
    40
    %
    
    3 yrs
    
    
    25.2November 2005
    
    
    4.20% - 4.20
    %
    
    
    40
    %
    
    5 yrs
    
    
    49.2Total
Wtd Avg Fair Value
Price per Share
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    21.0
 (16) Segment Information and Customer Concentration
   85




---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (17) Related Party Transactions
   86




---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (18) Commitments and Contingencies
 Earn-Out Commitments
      Legal Proceedings
 Estate of Joseph Hudert vs. Alion Science and Technology Corporation; Estate of Frank
Stotmeister vs. Alion Science and Technology Corporation.
     87




---



##### 



ALION SCIENCE AND TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Government Audits
  (19) Interim Period Information (Unaudited, in thousands)
 2006 Quarters1st
    
    2nd
    
    3rd
    
    4thRevenue
    
    $
    101,289
    
    
    $
    111,189
    
    
    $
    116,830
    
    
    $
    179,320Gross Profit
    
    $
    24,984
    
    
    $
    30,142
    
    
    $
    29,638
    
    
    $
    42,397Net loss
    
    $
    (7,780
    )
    
    $
    (920
    )
    
    $
    (8,242
    )
    
    $
    (14,173
    )Loss per share
    
    $
    (1.52
    )
    
    $
    (0.19
    )
    
    $
    (1.60
    )
    
    $
    (3.26
    )
 2005 Quarters1st
    
    2nd
    
    3rd
    
    4thRevenue
    
    $
    69,221
    
    
    $
    80,691
    
    
    $
    110,795
    
    
    $
    108,524Gross Profit
    
    $
    19,029
    
    
    $
    21,246
    
    
    $
    30,611
    
    
    $
    31,104Net loss
    
    $
    (5,964
    )
    
    $
    (17,366
    )
    
    $
    (10,763
    )
    
    $
    (6,145
    )Loss per share
    
    $
    (1.77
    )
    
    $
    (5.21
    )
    
    $
    (2.21
    )
    
    $
    (1.18
    )
 88




---



##### 



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  Item 9A. Controls and Procedures
 Disclosure Controls and Procedures.
  Internal Control Over Financial Reporting.
 Item 9B. Other Information
  89




---



##### 



PART III
 Item 10. Directors and Executive Officers of the Registran t
 Information Regarding the Directors of the Registrant
  Term
    
    DirectorName
    
    Age
    
    Position
    
    Expires
    
    SinceBahman Atefi
    
    
    53
    
    
    President, Chief Executive Officer and Chairman
    
    
    2008
    
    
    
    2001Edward C. Pete Aldridge
    
    
    68
    
    
    Director
    
    
    2009
    
    
    
    2003Leslie Armitage
    
    
    38
    
    
    Director
    
    
    2007
    
    
    
    2002Lewis Collens
    
    
    68
    
    
    Director
    
    
    2007
    
    
    
    2002Admiral (Ret.) Harold W. Gehman, Jr.
    
    
    64
    
    
    Director
    
    
    2007
    
    
    
    2002Donald E. Goss
    
    
    75
    
    
    Director
    
    
    2009
    
    
    
    2002General (Ret.) George A. Joulwan
    
    
    67
    
    
    Director
    
    
    2008
    
    
    
    2002General (Ret.) Michael E. Ryan
    
    
    64
    
    
    Director
    
    
    2008
    
    
    
    2002
   Bahman Atefi
 Edward C. Pete Aldridge
 Leslie Armitage
 90




---



##### 



Lewis Collens
 Admiral (Ret.) Harold W. Gehman, Jr.
 Donald E. Goss
 General (Ret.) George A. Joulwan
 General (Ret.) Michael E. Ryan
 Compensation of Directors
   91




---



##### 



Establishment of Committees
  Committee
    
    Chairperson
    
    MembersAudit and Finance Committee
    
    Donald Goss
    
    Leslie Armitage, Harold Gehman, Michael RyanCompensation Committee
    
    Harold Gehman
    
    Pete Aldridge, Leslie Armitage, Lewis
Collens, George Joulwanovernance and Compliance
Committee
    
    Michael Ryan
    
    Bahman Atefi, George Joulwan, Harold Gehman
  Compensation Committee Interlocks and Insider Participation
  Information Regarding the Executive Officers of the Registrant
  Name
    
    Age
    
    Office
    
    Position SinceBahman Atefi
    
    
    53
    
    
    President, Chief Executive
Officer and Chairman of
the Board(1)
    
    December 2001Stacy Mendler
    
    
    43
    
    
    Chief Operating Officer
and Executive Vice
President(1)
    
    September 2006John (Jack) Hughes
    
    
    54
    
    
    Executive Vice President,
Chief Financial Officer
and Treasurer
(1)
    
    September 2005Randy Crawford
    
    
    56
    
    
    Sector Senior Vice
President and Manager -
Engineering and Information Technology Sector
(1)
    
    May 2002Rob Goff
    
    
    60
    
    
    Sector Senior Vice
President and Manager -
Defense Operations Integration Sector
(1)
    
    February 2004Scott Fry
    
    
    57
    
    
    Sector Senior Vice
President and Manager -
Engineering and Integration Solutions Sector
    
    October 2005James Fontana
    
    
    48
    
    
    Senior Vice President,
General Counsel and
Corporate Secretary
    
    January 2004
 
 (1)
    
    Member of the ESOP committee 92




---



##### 



Stacy Mendler
 John
(Jack) Hughes
 Randy Crawford
 Rob Goff
 Scott Fry
 James Fontana
 93




---



##### 



Code of Ethics
   Item 11. Executive Compensation
   Long-TermAnnual Compensation


CompensationOther Annual


LTIP


LTIP


All OtherName and Principal Position

Year


Salary


Bonus


Compensation


Awards(2)


Payouts


CompensationBahman Atefi


2006



480,576



490,000
(1)







(3)


1,443,780
(8)


676,788
(12)Chief Executive Officer


2005



438,609



425,000















1,152,461
(13)2004



406,156



410,000















68,717
(14)Stacy Mendler


2006



293,937



180,000
(1)







(4)


609,026
(9)


61,493
(15)Chief Operating Officer and
    Executive VP


2005



262,450



215,000















289,253
(16)2004



216,243



115,000















48,854
(17)Randy Crawford


2006



278,510



135,000
(1)







(5)






391,482
(18)Engineering and Information
    Technology Sector


2005



286,982



125,000















52,905
(19)Senior VP and Sector Manager


2004



257,752



90,000















44,538
(20)Rob Goff


2006



307,403



160,000
(1)







(6)


39,821
(10)


52,388
(21)Defense Operations


2005



286,169



150,000















47,383
(22)Integration Sector Senior VP


2004



243,271



200,000















39,106
(23)and Sector ManagerJohn (Jack) Hughes


2006



299,370



180,000
(1)







(7)


277,044
(11)


54,292
(24)Executive VP, Chief Financial
    Officer and


2005



280,771



215,000















53,674
(25)Treasurer


2004



245,195



135,000















48,044
(26) 94




---



##### 











|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1)  |  | Approved bonus amounts for fiscal year 2006 will be paid in
    December 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    
|(2)  |  | See the Long Term Incentive Plan  Awards in
    Last Fiscal Year table, set forth below, for details
    related to phantom stock grants. See the Aggregate SAR
    Exercises in Last Fiscal Year and Fiscal Year End SAR
    Values tables, set forth below, for details related to SAR
    grants.                                                                                                                                                                                                                                                                  
|    
|(3)  |  | In November 2005, Dr. Atefi was awarded 50,153 shares
    of retention-based phantom stock under the Second Phantom Stock
    Plan. In February 2005, Dr Atefi was awarded 65,926 shares
    of performance-based phantom stock and 43,951 shares of
    retention-based phantom stock under the Second Phantom Stock
    Plan. In November 2003 and February 2003, Dr. Atefi was
    awarded 18,695 shares and 65,500 shares, respectively,
    of phantom stock under the Initial Phantom Stock Plan. Each
    phantom stock plan is described more fully below.         
|    
|(4)  |  | In November 2005, Ms. Mendler was awarded
    25,076 shares of retention-based phantom stock under the
    Second Phantom Stock Plan. In February 2005, Ms. Mendler
    was awarded 24,151 shares of retention-base phantom stock
    and 36,227 shares of performance-based phantom stock under
    the Second Phantom Stock Plan. In November 2003 and February
    2003, Ms. Mendler was awarded 6,798 shares and
    28,500 shares, respectively, of phantom stock under the
    Initial Phantom Stock Plan. Each phantom stock plan is described
    more fully below.
|    
|(5)  |  | In November 2005, Mr. Crawford was awarded
    4,179 shares of retention-based phantom stock under the
    Second Phantom Stock Plan. In February 2005, Mr. Crawford
    was awarded 25,075 shares of performance-based phantom
    stock under the Second Phantom Stock Plan. In November 2003 and
    February 2003, Mr. Crawford was awarded 6,798 shares
    and 33,000 shares, respectively, of phantom stock under the
    Initial Phantom Stock Plan. Each phantom stock plan is described
    more fully below.                                                    
|(6)  |  | In November 2005, Mr. Goff was awarded 8,080 shares of
    retention-based phantom stock under the Second Phantom Stock
    Plan. In February 2005, Mr. Goff was awarded
    25,075 shares of performance-based phantom stock under the
    Second Phantom Stock Plan. In February 2003, Mr. Goff was
    awarded 3,399 shares of phantom stock under the Initial
    Phantom Stock Plan. Each phantom stock plan is described more
    fully below. In 2003, Mr. Goff received an award of 2,500
    SARs. In 2002, Mr. Goff received an award of 1,200 SARs.             
|    
|(7)  |  | In November 2005, Mr. Hughes was awarded 25,076 shares
    of retention-based phantom stock under the Second Phantom Stock
    Plan. In February 2005, Mr. Hughes was awarded
    30,297 shares of retention-base phantom stock and
    45,445 shares of performance-based phantom stock under the
    Second Phantom Stock Plan. In November 2003 and February 2003,
    Mr. Hughes was awarded 6,798 shares and
    10,000 shares, respectively, of phantom stock under the
    Initial Phantom Stock Plan. Each phantom stock plan is described
    more fully below.   
|    
|(8)  |  | 2006 includes $1,443,780 paid to Dr. Atefi for redemption
    of phantom stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    
|(9)  |  | 2006 includes $609,026 paid to Ms. Mendler for the
    redemption of phantom stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    
|(10) |  | 2006 includes $39,821 paid to Mr. Goff for redemption of
    SARs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    
|(11) |  | 2006 includes 277,044 paid to Mr. Hughes for the redemption
    of phantom stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    
|(12) |  | 2006 includes $571,177 for redemption of warrants, $59,585 in
    health and welfare benefits paid by Alion, $23,936 in leased
    cars paid by Alion, Company matching contributions of $13,650
    under Alions KSOP, $4,300 in club membership dues, $3,610
    in long-term and short-term disability paid by Alion, and $530
    in term life insurance premiums paid by Alion.                                                                                                                                                                                      
|    
|(13) |  | 2005 includes $1,051,005 paid to Dr. Atefi for the
    redemption of the amount due under his Deferred Compensation
    Agreement, $44,249 in health and welfare benefits paid by Alion,
    Company matching contributions of $25,970 under Alions
    KSOP, $23,936 in leased cars paid by Alion, $3,800 in club
    membership dues, $2,828 in long-term and short-term disability
    paid by Alion, and $673 in term life insurance premiums paid by
    Alion.                                                                                                      
|    
|(14) |  | 2004 includes $27,172 in health and welfare benefits paid by
    Alion, $23,936 in leased cars paid by Alion, Company matching
    contributions of $11,817 under Alions KSOP, $1,164 in
    long-term and short-term disability paid by Alion, $648 in term
    life insurance premiums and $3,980 in club membership dues paid
    by Alion.                                                                                                                                                                                                                            

95



---



##### 



(15)
    
    2006 includes $32,152 in health and welfare benefits paid by
    Alion, Company matching contributions of $13,650 under
    Alions KSOP plan, $12,687 in leased cars paid by Alion,
    $2,484 in long-term and short-term disability paid by Alion, and
    $520 in term life insurance premiums paid by Alion.(16)
    
    2005 includes $241,016 paid to Ms. Mendler for the
    redemption of the amount due her under the Executive Deferred
    Compensation Plan, $25,497 in health and welfare benefits paid
    by Alion, $12,687 in leased cars paid by Alion, Company matching
    contributions of $7,415 under Alions KSOP, $2,066 in
    long-term and short-term disability paid by Alion, and $572 in
    term life insurance premiums paid by Alion.(17)
    
    2004 includes $19,938 in health and welfare benefits paid by
    Alion, Company matching contributions of $14,185 under
    Alions KSOP, $13,097 in leased cars paid by Alion, $1,164
    in long-term and short-term disability paid by Alion, and $470
    in term life insurance premiums paid by Alion.(18)
    
    2006 includes $338,338 paid to Mr. Crawford for
    distributions from the IITRI Flexible Option Plan, $26,635 in
    health and welfare benefits paid by Alion, Company matching
    contributions of $13,650 under Alions KSOP, $9,981 in
    leased cars paid by Alion, $2,384 in long-term and short-term
    disability paid by Alion, and $494 in term life insurance
    premiums paid by Alion.(19)
    
    2005 includes $20,807 in health and welfare benefits paid by
    Alion, Company matching contributions of $18,198 under
    Alions KSOP, $11,188 in leased cars paid by Alion, $2,111
    in long-term and short-term disability paid by Alion and $601 in
    term life insurance premiums paid by Alion.(20)
    
    2004 includes $19,755 in health and welfare benefits paid by
    Alion, Company matching contributions of $13,291 under
    Alions KSOP, $9,794 in leased cars paid by Alion, $1,164
    in long-term and short-term disability paid by Alion, and $534
    in term life insurance premiums paid by Alion.(21)
    
    2006 includes $10,572 for distributions from the IITRI Flexible
    Option Plan, Company matching contributions of $13,650 under
    Alions KSOP, $12,151 in health and welfare benefits paid
    by Alion, $12,600 in leased cars paid by Alion, $2,493 in
    long-term and short-term disability paid by Alion, $400 in
    health club membership fees, and $522 in term life insurance
    paid by Alion.(22)
    
    2005 includes Company matching contributions of $18,509 under
    Alions KSOP, $13,138 in health and welfare benefits paid
    by Alion, $12,600 in leased cars paid by Alion, $2,112 in
    long-term and short-term disability paid by Alion, $425 in
    health club membership fees, and $599 in term life insurance
    paid by Alion.(23)
    
    2004 includes Company matching contributions of $13,753 under
    Alions KSOP, $11,889 in health and welfare benefits paid
    by Alion, $11,792 in leased cars paid by Alion, $1,164 in
    long-term and short-term disability paid by Alion, and $508 in
    term life insurance paid by Alion.(24)
    
    2006 includes $25,428 in health and welfare benefits paid by
    Alion, Company matching contributions of $13,650 under
    Alions KSOP, $12,196 in leased cars paid by Alion, $2,494
    in long-term and short-term disability paid by Alion, and $524
    in term life insurance premiums paid by Alion.(25)
    
    2005 includes $20,850 in health and welfare benefits paid by
    Alion, Company matching contributions of $17,315 under
    Alions KSOP, $12,196 in leased cars paid by Alion, $2,134
    in long-term and short-term disability paid by Alion, $534 in
    term life insurance premiums, and $645 in club membership dues
    paid by Alion.(26)
    
    2004 includes $19,650 in health and welfare benefits paid by
    Alion, Company matching contributions of $14,423 under
    Alions KSOP, $12,196 in leased cars paid by Alion, $1,164
    in long-term and short-term disability paid by Alion, and $533
    in term life insurance premiums paid by Alion. Stock Appreciation Rights (SAR) Plans
  96




---



##### 



97




---



##### 



Subject
to certain restrictions under the respective SAR plan, our board of directors may amend or terminate either SAR plan at any time.
  Aggregated SAR Exercises in Last Fiscal Year and Fiscal Year End/ SAR Values*
 Number of SecuritiesUnderlying Unexercised
    
    Value of Unexercised In-Options/SARs at Fiscal
    
    The-Money Options/SARsShares
    
    
    
    
    
    Year End (Number)
    
    at Fiscal Year EndAcquired
    
    Value
    
    Exercisable/
    
    (Dollars) Exercisable/Name
    
    on Exercise
    
    Realized
    
    Unexercisable(4)
    
    Unexercisable(5)(In dollars)*Bahman Atefi (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stacy Mendler (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Randy Crawford (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    John (Jack) Hughes (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Rob Goff (1) (2) ,
    
    
    720
    
    
    $
    18,641
    
    
    
    0/480
    
    
    $
    0/$14,890(3)
    
    
    1,000
    
    
    $
    21,180
    
    
    
    0/1,500
    
    
    $
    0/$39,465
  
 (1)
    
    No SAR awards during the fiscal year ended September 30, 2006.(2)
    
    In 2002, Mr. Goff was awarded 1,200 SARs at the exercise price of $10.00 per share. As of
September 30, 2006, the value of Alion common stock is $41.02 per share.(3)
    
    In 2003, Mr. Goff was awarded 2,500 SARs at the exercise price of $14.71 per share. As of
September 30, 2006, the value of Alion common stock is $41.02 per share.(4)
    
    The number of exercisable and unexercisable SARs is dependent on the plan vesting schedule.
For example, as of September 30, 2006, for Mr. Goff, only 60% of the 1,200 SARs awarded in
2002 have vested, resulting in 720 exercisable SARs, of which all had been exercised as of
September 30, 2006. As of September 30, 2006, the remaining SARs are unexercisable.(5)
    
    The value of exercisable and unexercisable SARs is dependent on the difference between the
exercise price per share and the current fair value per share of Alion common stock. For
example, as of September 30, 2006, for Mr. Goff, the exercise price for his SARs awarded in
2002 was $10 per share and the current value per share of Alion common stock is $41.02. Phantom Stock Plans
  98




---



##### 



Initial Phantom Stock Plan
  Vested Amount for Grant inFebruary
    
    NovemberAnniversary from Grant Date
    
    2003
    
    20031st
    
    
    
    
    
    
    20
    %2nd
    
    
    
    
    
    
    20
    %3rd
    
    
    50
    %
    
    
    20
    %4th
    
    
    25
    %
    
    
    20
    %5th
    
    
    25
    %
    
    
    20
    %
  
    
    the numerator of which is the number of months from the date of grant of the phantom
stock through the end of the month of such termination; and
    
    the denominator of which is 60.
     Second Phantom Stock Plan
  99




---



##### 



Director Phantom Stock Plan
      
    
    Date of grant;
    
    Number of shares of the phantom stock awarded; and
    
    Provisions governing vesting of the phantom stock awarded.
 100




---



##### 



Cumulative SharesShares Issued by
    
    Cumulative Shares Issued
    
    Authorized under allDate of Issuance
    
    Plan
    
    by Plan
    
    PlansFebruary 2003
    
    
    171,000
    (1)
    
    
    171,000
    (1)
    
    
    173,000
    (1)November 2003
    
    
    52,685
    (1)
    
    
    223,685
    (1)
    
    
    225,000
    (1),February 2005
    
    
    311,192
    (2)
    
    
    311,192
    (2)
    
    
    2,000,000
    (2),August 2005
    
    
    2,960
    (2)
    
    
    314,152
    (2)
    
    
    2,000,000
    (2),November 2005
    
    
    122,318
    (2)
    
    
    436,781
    (2)
    
    
    2,000,000
    (2),November 2005
    
    
    7,808
    (3)
    
    
    444,589
    (3)
    
    
    2,000,000
    (3)
    101




---



##### 



Number ofshares, units, orName
    
    rights
    
    Full vesting period
    
    Period until payoutBahman Atefi
    
    
    65,500
    (1)
    
    February 2008 (2)
    
    February 2008 (3)18,695
    (1)
    
    November 2008 (2)
    
    November 2008 (3)65,926
    (4)
    
    February 2008 (5)
    
    February 2010 (5)43,951
    (4)
    
    February 2008 (5)
    
    February 2010 (5)27,863
    (4)
    
    November 2010 (5)
    
    November 2010 (5)22,290
    (4)
    
    November 2008 (5)
    
    November 2008 (5)John (Jack) Hughes
    
    
    10,000
    (1)
    
    February 2008 (2)
    
    February 2008 (3)6,798
    (1)
    
    November 2008 (2)
    
    November 2008 (3)30,297
    (8)
    
    February 2008 (5)
    
    February 2010 (5)45,445
    (8)
    
    February 2008 (5)
    
    February 2010 (5)11,145
    (8)
    
    November 2008 (5)
    
    November 2008 (5)13,931
    (8)
    
    November 2010 (5)
    
    November 2010 (5)Stacy Mendler
    
    
    28,500
    (1)
    
    February 2008 (2)
    
    February 2008 (3)6,798
    (1)
    
    November 2008(2)
    
    November 2008 (3)24,151
    (6)
    
    February 2008 (5)
    
    February 2010 (5)36,227
    (6)
    
    February 2008 (5)
    
    February 2010 (5)11,145
    (6)
    
    November 2008 (5)
    
    November 2008 (5)13,931
    (6)
    
    November 2010 (5)
    
    November 2010 (5)Randy Crawford
    
    
    33,000
    (1)
    
    February 2008 (2)
    
    February 2008 (3)6,798
    (1)
    
    November 2008 (2)
    
    November 2008 (3)25,075
    (7)
    
    February 2008 (5)
    
    February 2010 (5)4,179
    (7)
    
    November 2008 (5)
    
    November 2008 (5)Rob Goff
    
    
    3,399
    (1)
    
    November 2008 (2)
    
    November 2008 (3)25,075
    (9)
    
    February 2008 (5)
    
    November 2010 (5)8,080
    (9)
    
    November 2008 (5)
    
    November 2008 (5)
 
 (1)
    
    The initial set of awards made in February 2003 was made solely to Alions executive
management team. The awards made in November 2003 were made to executive and senior management
of Alion.(2)
    
    Pursuant to the Initial Phantom Stock Plan, recipients will become fully vested on the fifth
year from the grant date, or approximately February 2008 and November 2008.(3)
    
    Pursuant to the Initial Phantom Stock Plan, or applicable award agreement, recipients will be
paid commencing on the fifth year from the date of grant.(4)
    
    Pursuant to the Second Phantom Stock Plan, in February 2005, Dr. Atefi was awarded 65,926
shares of performance-based phantom stock and 43,951 shares of retention-based phantom stock.
In November 2005, Dr. Atefi was awarded 27,863 shares and 22,290 shares of retention-based
phantom stock, which vest on November 2008 and 2010, respectively.(5)
    
    Pursuant to the Second Phantom Stock Plan, recipients may be awarded performance-based or
retention-based phantom stock. Under this plan, performance-based phantom stock will become
fully vested three years from the date of grant; retention-based phantom stock will become
fully vested as specified in the individual agreements. Under this plan, recipients of
performance-based and retention-based phantom stock will be paid commencing on the fifth year
from date of grant. 102




---



##### 



(6)
    
    Pursuant to the Second Phantom Stock Plan, in February 2005, Ms. Mendler was awarded 24,151
shares of retention-based phantom stock and 36,227 shares of performance-based phantom stock.
In November 2005, Ms. Mendler was awarded 11,145 shares and 13,931 shares of retention-based
phantom stock, which vest on November 2008 and 2010, respectively.(7)
    
    Pursuant to the Second Phantom Stock Plan, in February 2005, Mr. Crawford was awarded 25,075
shares of performance-based phantom stock. In November 2005, Mr. Crawford was awarded 4,179
shares of retention-based phantom stock, which will vest on November 2008.(8)
    
    Pursuant to the Second Phantom Stock Plan, in February 2005, Mr. Hughes was awarded 30,297
shares of retention-based phantom stock and 45,445 shares of performance-based phantom stock.
In November 2005, Mr. Hughes was awarded 11,145 shares and 13,931 shares of retention-based
phantom stock, which vest on November 2008 and 2010, respectively.(9)
    
    Pursuant to the Second Phantom Stock Plan, in February 2003, Mr. Goff was awarded 25,075
shares of performance-based phantom stock. In November 2005, Mr. Goff was awarded 8,080
shares of retention-based phantom stock, which will vest on November 2008. Employment Agreements
   
    
    Dr. Atefis annual base salary at the time of termination, for the unexpired term of
the employment agreement up to a maximum of three years; or
    
    an amount equal to Dr. Atefis base salary plus $100,000.
  
    
    his authority or responsibility is materially diminished;
    
    he is assigned duties inconsistent with his position, responsibility and status;
    
    there is an adverse change in his title or office;
    
    his base pay or incentive compensation is reduced; and
    
    his principal work location is more than ten miles away from his principal work
location immediately prior to the change of control event.
  103




---



##### 




    
    Ms. Mendlers annual base salary at the time of termination for the unexpired term
of the employment agreement up to a maximum of two years; or
    
    an amount equal to Ms. Mendlers base salary.
  
    
    her authority or responsibility is materially diminished;
    
    she is assigned duties inconsistent with her position, responsibility and status;
    
    there is an adverse change in her title or office;
    
    her base pay or incentive compensation is reduced; and
    
    her principal work location is more than ten miles away from her principal work
location immediately prior to the change of control event.
   
    
    Mr. Crawfords annual base salary at the time of termination for the unexpired term
of the employment agreement up to a maximum of two years; or
    
    an amount equal to Mr. Crawfords base salary.
  
    
    his authority or responsibility is materially diminished;
    
    he is assigned duties inconsistent with his position, responsibility and status;
    
    there is an adverse change in his title or office;
    
    his base pay or incentive compensation is reduced; and
    
    his principal work location is more than ten miles away from his principal work
location immediately prior to the change of control event.
  104




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##### 




    
    his authority or responsibility is materially diminished;
    
    he is assigned duties inconsistent with his position, responsibility and status;
    
    there is an adverse change in his title or office;
    
    his base pay or incentive compensation is reduced; and
    
    his principal work location is more than ten miles away from his principal work
location immediately prior to the change of control event.
    
    
    his authority or responsibility is materially diminished;
    
    he is assigned duties inconsistent with his position, responsibility and status;
    
    there is an adverse change in his title or office;
    
    his base pay or incentive compensation is reduced; and his principal work location
is more than ten miles away from his principal work location immediately prior to the
change of control event.
 Deferred Compensation Plans
   105




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##### 



Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders
Matters
  Amount and Natureof Beneficial
    
    PercentageName of Beneficial Owner
    
    Title of Class
    
    Ownership
    
    of Class(1)Five Percent Security Holders:Illinois Institute of Technology (2)
    
    Common stock
    
    
    1,080,437
    (3)
    
    
    20.7Directors(4)and Executive Officers:Bahman Atefi
    
    Common stock
    
    
    67,004
    (5)
    
    
    1.3John (Jack) Hughes
    
    Common stock
    
    
    7,105
    (5)
    
    
    *Stacy Mendler
    
    Common stock
    
    
    72,109
    (5)
    
    
    1.4Randy Crawford
    
    Common stock
    
    
    48,468
    (5)
    
    
    *Rob Goff
    
    Common stock
    
    
    10,028
    (5)
    
    
    *All Directors and Executive Officers as a Group
(5 Persons )
    
    Common stock
    
    
    1,285,151
    (5)
    
    
    24.7
 
 *
    
    less than 1%.(1)
    
    Applicable percentages based on 5,210,126 shares outstanding on September 30, 2006, and
also includes shares of common stock subject to warrants that may be exercised within 60
days of September 30, 2006. Such shares are deemed to be outstanding for the purposes of
computing the percentage ownership of the individual or entity holding the shares, but are
not deemed outstanding for purposes of computing the percentage of any other person shown
in the table. This table is based upon information in the Companys possession and believed
to be accurate. Unless indicated in the footnotes to this table and subject to community
property laws where applicable, the Company believes that each of the shareholders named in
this table has sole voting and investment power with respect to the shares indicated as
beneficially owned.(2)
    
    Illinois Institute of Technologys address is 3300 South Federal Street, Chicago, IL
60616.(3)
    
    The number of shares deemed to be beneficially held by IIT represents currently
exercisable warrants held by IIT under the Subordinated Warrant for an aggregate of
1,080,437 shares of common stock.(4)
    
    No directors (other than Dr. Atefi) are believed by the Company to be beneficial owners
of its common stock.(5)
    
    Includes beneficial ownership of shares of Alions common stock pursuant to the Alion
Science and Technology Corporation Employee Ownership, Savings and Investment Plan, which
the Company refers to as the KSOP. Changes in Control
  Item 13. Certain Relationships and Related Transactions
  106




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##### 



Item 14. Principal Accountant Fees and Services
   Fee Category
    
    2006
    
    
    2005Audit Fees (1)
    
    $
    1,235,970
    
    
    $
    728,334Audit-Related Fees (2)
    
    
    292,646
    
    
    
    65,988Tax Fees and All Other Fees
    
    
    58,866
    
    
    
    Total Fees
    
    $
    1,587,482
    
    
    $
    794,322
 
 (1)
    
    Audit fees consist of fees for the audit of the Companys financial statements, the
review of the interim financial statements included in the Companys quarterly reports on
Form 10-Q, and other professional services provided in connection with statutory and
regulatory filings or engagements.(2)
    
    Audit-related fees consist of fees for assurance and related services that are
reasonably related to the performance of the audit and the review of the Companys
financial statements and which are not reported under Audit Fees. In fiscal years 2005
and 2006, these services related to audit services provided in conjunction with
acquisitions, accounting consultations, and audits of employee benefit plans. In fiscal
years 2006 and 2005, these services related to audit of employee benefit plan and
Sarbanes-Oxley Section 404 assistance. These services were approved by the Audit and
Finance Committee. 107




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##### 



PART IV
 Item 15. Exhibits and Financial Statement Schedules
 The following documents are filed as part of the Annual Report on Form 10-K :
 Consolidated Financial Statements of Alion Science and Technology CorporationReports of Independent Registered Public Accounting FirmConsolidated Financial Statements:Consolidated Balance Sheets as of September 30, 2006 and 2005Consolidated Statements of Operations for the years
ended September 30, 2006, 2005 and 2004Consolidated Statements of Shareholders Equity (Deficit),
for the years ended September 30, 2006, 2005 and 2004Consolidated Statements of Cash Flows for the years
ended September 30, 2006, 2005 and 2004Notes to Consolidated Financial Statements
 Consolidated Financial Statement Schedule
  Allowance forDoubtful
    
    Balance at
    
    Charged to
    
    
    
    
    
    
    
    
    
    BalanceAccounts
    
    Beginning
    
    Costs and
    
    
    
    
    
    
    
    
    
    at End ofReceivable
    
    of Year
    
    Expenses
    
    Deductions(1)
    
    Acquisitions
    
    YearFiscal year ended
2004
    
    $
    2,484
    
    
    $
    659
    
    
    $
    (791
    )
    
    $
    544
    (2)
    
    $
    2,896Fiscal year ended
2005
    
    $
    2,896
    
    
    $
    700
    
    
    $
    (970
    )
    
    $
    913
    (3)
    
    $
    3,539Fiscal year ended
2006
    
    $
    3,539
    
    
    $
    667
    
    
    $
    (462
    )
    
    $
    217
    (4)
    
    $
    3,961
 
 1.
    
    Accounts receivable written off against the allowance for doubtful accounts.2.
    
    Adjustments pursuant to the allocation of purchase price to assets acquired
and liabilities assumed in Alions acquisitions of ITSC and IPS.3.
    
    Adjustments pursuant to the allocation of purchase price to assets acquired
and liabilities assumed in Alions acquisitions of CATI, METI, and JJMA.4.
    
    Adjustments pursuant to the allocation of purchase price to assets acquired
and liabilities assumed in Alions acquisitions of BMH, WCI, and MA&D and the Anteon
Contracts. (b) The following exhibits required by Item 601 of Regulation S-K
 ExhibitNo.
    
    Description3.2
    
    Amended and Restated By-laws of Alion Science and Technology Corporation.3.3
    
    Third Amended and Restated Certificate of Incorporation of Alion Science and Technology
Corporation. (15)4.1
    
    Amended and Restated Alion Science and Technology Corporation Employee Ownership, Savings and
Investment Plan. (1)4.2
    
    First Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings
and Investment Plan. (2)4.3
    
    Second Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings
and Investment Plan. (4)4.4
    
    Third Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings
and Investment Plan. (4)4.5
    
    Fourth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings
and Investment Plan. (4)4.6
    
    Fifth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings
and Investment Plan. (5)4.7
    
    Sixth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings
and Investment Plan. (5)4.8
    
    Seventh Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings
and Investment Plan. (5)4.9
    
    Eighth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings
and Investment Plan. (5)4.10
    
    Ninth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings
and Investment Plan. (8)4.11
    
    Tenth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings
and Investment Plan. (17)4.12
    
    Eleventh Amendment to The Alion Science and Technology Corporation Employee Ownership,
Savings and Investment Plan. (17)4.13
    
    Twelfth Amendment to The Alion Science and Technology Corporation Employee Ownership, Savings
and Investment Plan. (25)4.14
    
    Thirteenth Amendment to The Alion Science and Technology Corporation Employee Ownership,
Savings and Investment Plan. (25)4.15
    
    Fourteenth Amendment to The Alion Science and Technology Corporation Employee Ownership,
Savings and Investment Plan.
 108




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##### 



ExhibitNo.
    
    Description10.5
    
    Seller Note Securities Purchase Agreement by and between IIT Research Institute and Alion
Science and Technology Corporation. (2)10.7
    
    Seller Warrant Agreement by and among Alion Science and Technology Corporation, IIT Research
Institute and Alion Science and Technology Employee Ownership, Savings and Investment Trust.
(3)10.8
    
    Rights Agreement by and among Alion Science and Technology Corporation, IIT Research
Institute and Alion Science and Technology Employee Ownership, Savings and Investment Trust.
(2)10.14
    
    Employment Agreement between Alion Science and Technology Corporation and Bahman Atefi. (2)*10.15
    
    Employment Agreement between Alion Science and Technology Corporation and Stacy Mendler. (2)*10.16
    
    Employment Agreement between Alion Science and Technology Corporation and Randy Crawford. (2)*10.18
    
    Employment Agreement between Alion Science and Technology Corporation and John Hughes. (2)*10.31
    
    Agreement between Alion Science and Technology Corporation and James Fontana. (6)*10.32
    
    Employment Agreement between Alion Science and Technology Corporation and Leroy R. Goff III. (6)*10.34
    
    Addendum to Employment Agreement between Alion Science and Technology Corporation and James
Fontana. (7)*10.36
    
    Senior Secured Credit facility that includes a revolving credit facility and Term B note, by
and among Credit Suisse First Boston as arranger, various lenders, and Alion Science and
Technology Corporation. (8)10.38
    
    First Amendment to the Seller Warrant Agreement. (8)10.46
    
    Second Amendment to the Seller Warrant Agreement. (9)10.49
    
    Commitment letter agreement by and between Alion Science and Technology Corporation and
Credit Suisse First Boston. (10)10.50
    
    Third Amendment to the Seller Warrant Agreement. (11)10.53
    
    Stock Purchase Agreement by and among Alion Science and Technology Corporation, John J.
McMullen Associates, Inc., Marshall and Ilsley Trust Company, N.A. as Trustee to the John J.
McMullen, Inc. Employee Stock Ownership Trust and P. Thomas Diamant, Anthony Serro, and David
Hanafourde. (12)10.54
    
    Incremental Term Loan Assumption Agreement and Amendment Number One to existing Term Loan
Facility with Credit Suisse First. (13)10.55
    
    Employment Agreement between Alion Science and Technology Corporation and Anthony Serro.
(14)*10.56
    
    Employment Agreement between Alion Science and Technology Corporation and P. Thomas Diamant.
(14)*10.57
    
    Alion Science and Technology Corporation Board of Directors Phantom Stock Plan. (16)*10.58
    
    Amended and Restated Alion Science and Technology Corporation Phantom Stock Plan. (16)*10.59
    
    Amended and Restated Alion Science and Technology Corporation Performance Shares and
Retention Phantom Stock Plan. (16)*10.60
    
    Amended and Restated Alion Science and Technology Corporation 2002 Stock Appreciation Rights
Plan. (16)*10.61
    
    Amended and Restated Alion Science and Technology Corporation 2004 Stock Appreciation Rights
Plan. (16)*10.62
    
    Amended and Restated Alion Science and Technology Corporation Executive Deferred
Compensation Plan. (16)*10.63
    
    Amended and Restated Alion Science and Technology Corporation Director Deferred Compensation
Plan. (16)*10.64
    
    Commitment letter by and between Alion Science and Technology Corporation, Credit Suisse and
Credit Suisse Securities (USA) LLC. (18)10.65
    
    Incremental Term Loan Assumption Agreement and Amendment No. 2 dated as of March 24, 2006,
by and among Alion Science and Technology Corporation, Human Factors Applications, Inc.
(HFA), Alion  METI Corporation (METI), Alion  CATI Corporation (CATI), Alion  JJMA
Corporation (JJMA), BMH Associates, Inc. (BMH), Washington Consulting, Inc. (WCI),
Credit Suisse, and the lenders party thereto. (19)10.66
    
    Fourth Amendment to the Seller Warrant Agreement by and among Alion Science and Technology
Corporation, IIT Research Institute and Alion Science and Technology Employee Ownership,
Savings and Investment Trust. (20)10.67
    
    Mezzanine Warrant Redemption Agreement by and between Alion Science and Technology
Corporation and Illinois Institute of Technology. (20)10.68
    
    Alion Mezzanine Warrant Redemption Agreement. by and among Alion Science and Technology
Corporation, Alion Science and Technology Employee Ownership, Savings and Investment Trust and
Bahman Atefi. (20)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. (21)
 109




---



##### 



ExhibitNo.
    
    Description10.70
    
    Incremental Term Loan Assumption Agreement and Amendment No. 3 dated as of June 30, 2006, by
and among Alion Science and Technology Corporation, HFA, METI, CATI, JJMA, BMH, WCI, MA&D, CS,
and the lenders party thereto. (22)10.71
    
    Bridge Loan Agreement dated as of June 30, 2006, by and among Alion Science and Technology
Corporation, HFA, METI, CATI, JJMA, BMH, WCI, MA&D, CS, and the lenders party thereto. (22)10.72
    
    Closing Letter Agreement dated as of June 30, 2006, by and among Alion Science and
Technology Corporation, Alion Technical Services Corporation and Anteon Corporation. (23)10.73
    
    First Amendment to Seller Note Securities Purchase Agreement dated as June 30, 2006, by and
between Alion Science and Technology Corporation and the Illinois Institute of Technology.
(24)10.74
    
    Separation Agreement between Alion Science and Technology Corporation and Barry Watson.
(26)*10.75
    
    Second Addendum to Employment Agreement between Alion Science and Technology Corporation and
James Fontana. (27)*10.76
    
    Commitment letter by and between Alion Science and Technology Corporation, Credit Suisse and
Credit Suisse Securities (USA) LLC. (28)10.77
    
    Amendment to Offer of Promotion between Alion Science and Technology Corporation and Leroy
R. Goff III. (29)*10.78
    
    Offer Letter between Alion Science and Technology Corporation and Scott A. Fry. (30)*10.79
    
    Addendum to Offer Letter between Alion Science and Technology Corporation and Scott A. Fry. (31)*14
    
    Code of Ethics16
    
    Letter from KPMG LLP dated May 31, 2006. (32)21
    
    Subsidiaries of Alion Science and Technology Corporation are wholly-owned (either directly or
indirectly) by Alion Science and Technology Corporation.:(i) Human Factors Applications, Inc., incorporated in the Commonwealth of
Pennsylvania,(ii) Innovative Technology Solutions Corporation, incorporated in the State of New Mexico,(iii)Alion-IPS Corporation, incorporated in the Commonwealth of Virginia,(iv) Alion-METI Corporation, incorporated in the Commonwealth of Virginia,(v) Alion-CATI Corporation, incorporated in the State of California,(vi) Alion-JJMA Corporation, incorporated in the State of New York,(vii) Alion Technical Services Corporation, incorporated in the Commonwealth of Virginia,(viii) Alion Technical Services Corporation, incorporated in the State of Delaware,(ix) Alion Canada (U.S.), Inc., incorporated in the State of Delaware,(x) Alion Science and Technology (Canada) Corporation, incorporated in the Province
of Nova Scotia,(xi)Alion-BMH Corporation, incorporated in the Commonwealth of Virginia,(xii)Washington Consulting, Inc., incorporated in the Commonwealth of Virginia,(xiii)Alion-MA&D Corporation, incorporated in the State of Colorado.23.1
    
    Independent Auditors Consent.23.2
    
    Consent of Independent Registered Public Accounting Firm.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 Pre-Effective Amendment No. 3 to the Registration Statement on Form S-1 filed with
the Securities and Exchange Commission on October 7, 2002.(2)
    
    Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the
Companys Post-Effective Amendment No. 3 to the Registration Statement on Form S-1 filed with
the Securities and Exchange Commission on March 24, 2003.(3)
    
    Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the
Companys quarterly report on Form 10-Q for the quarterly period ended December 12, 2002,
filed with the Securities and Exchange Commission on February 3, 2003.(4)
    
    Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the
Companys quarterly report
on Form 10-Q for the quarterly period ended July 4, 2003, filed with the Securities and
Exchange Commission on August 15, 2003. 110




---



##### 



(5)
    
    Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the
Companys Registration Statement on Form S-8 filed with the Securities and Exchange Commission
on April 28, 2004.(6)
    
    Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the
Companys quarterly report on Form 10-Q for the quarterly period ended March 31, 2004, filed
with the Securities and Exchange Commission on May 17, 2004.(7)
    
    Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the
Companys quarterly report on Form 10-Q for the quarterly period ended June 30, 2004, filed
with the Securities and Exchange Commission on August 13, 2004.(8)
    
    Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the
Companys annual report on Form 10-K for the fiscal year ended September 30, 2004, filed with
the Securities and Exchange Commission on December 28, 2004.(9)
    
    Companys Post-effective Amendment No. 5 to the Registration Statement on Form S-1 filed with
the Securities and Exchange Commission on January 24, 2005.(10)
    
    Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the
Companys Form 8-K filed with the Securities and Exchange Commission on March 9, 2005.(11)
    
    Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the
Companys Form 8-K filed with the Securities and Exchange Commission on March 14, 2005.(12)
    
    Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the
Companys Form 8-K/A filed with the Securities and Exchange Commission on April 6, 2005.(13)
    
    Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the
Companys Form 8-K filed with the Securities and Exchange Commission on April 6, 2005.(14)
    
    Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the
Companys Form 8-K filed with the Securities and Exchange Commission on April 7, 2005.(15)
    
    Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the
Companys quarterly report on Form 10-Q for the quarterly period ended March 31, 2005, filed
with the Securities and Exchange Commission on May 13, 2005.(16)
    
    Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the
Companys Form 8-K filed with the Securities and Exchange Commission on December 2, 2005.(17)
    
    Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the
Companys annual report on Form 10-K for the fiscal year ended September 30, 2004, filed with
the Securities and Exchange Commission on January 31, 2006.(18)
    
    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 23, 2006.(19)
    
    Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the
Companys Form 8-K filed with the Securities and Exchange Commission on March 29, 2006.(20)
    
    Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the
Companys Form 8-K filed with the Securities and Exchange Commission on March 31, 2006.(21)
    
    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. 111




---



##### 



(22)
    
    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 July 7, 2006.(23)
    
    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 July 7, 2006.(24)
    
    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 July 7, 2006.(25)
    
    Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the
Companys quarterly report on Form 10-Q for the quarterly period ended June 30, 2006, filed
with the Securities and Exchange Commission on August 14, 2006.(26)
    
    Incorporated by reference to exhibit 10.73 previously filed as an exhibit to the Companys
quarterly report on Form 10-Q for the quarterly period ended June 30, 2006, filed with the
Securities and Exchange Commission on August 14, 2006.(27)
    
    Incorporated by reference to exhibit 10.74 previously filed as an exhibit to the Companys
quarterly report on Form 10-Q for the quarterly period ended June 30, 2006, filed with the
Securities and Exchange Commission on August 14, 2006.(28)
    
    Incorporated by reference to exhibit 10.75 previously filed as an exhibit to the Companys
quarterly report on Form 10-Q for the quarterly period ended June 30, 2006, filed with the
Securities and Exchange Commission on August 14, 2006.(29)
    
    Incorporated by reference to exhibit 10.76 previously filed as an exhibit to the Companys
quarterly report on Form 10-Q for the quarterly period ended June 30, 2006, filed with the
Securities and Exchange Commission on August 14, 2006.(30)
    
    Incorporated by reference to exhibit 10.77 previously filed as an exhibit to the Companys
quarterly report on Form 10-Q for the quarterly period ended June 30, 2006, filed with the
Securities and Exchange Commission on August 14, 2006.(31)
    
    Incorporated by reference to exhibit 10.78 previously filed as an exhibit to the Companys
quarterly report on Form 10-Q for the quarterly period ended June 30, 2006, filed with the
Securities and Exchange Commission on August 14, 2006.(32)
    
    Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the
Companys Form 8-K/A filed with the Securities and Exchange Commission on June 1, 2006.*
    
    Denotes management contract and/or compensatory plan/arrangement. 112




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##### 



SIGNATURES
  Date: December 1, 2006
    ALION SCIENCE AND TECHNOLOGY CORPORATION
(Registrant)By:
    /s/ BAHMAN ATEFIBahman AtefiChairman, Chief Executive Officer and Director  Signature
    
    Title
    
    Date/s/ Bahman Atefi
Bahman Atefi
    
    Chairman, Chief
Executive Officer and
Director
    
    December 1, 2006/s/ John M. Hughes
John M. (Jack) Hughes
    
    Chief Financial Officer
(Principal Financial
Officer)
    
    December 1, 2006/s/ Gary N. Amstutz
Gary N. Amstutz
    
    Senior Vice President
and Executive Director
of Finance
    
    December 1, 2006/s/ Leslie Armitage
Leslie Armitage
    
    Director
    
    December 1, 2006/s/
Lewis Collens
Lewis Collens
    
    Director
    
    December 1, 2006/s/ Harold Gehman
Harold Gehman
    
    Director
    
    December 1, 2006/s/ Donald E. Goss
Donald E. Goss
    
    Director
    
    December 1, 2006/s/ George A. Joulwan
    
    Director
    
    December 1, 2006George A. Joulwan/s/ Michael E. Ryan
Michael E. Ryan
    
    Director
    
    December 1, 2006/s/ Edward C. Aldridge, Jr.
Edward C. Aldridge, Jr.
    
    Director
    
    December 1, 2006
 Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the
Act by Registrants which Have Not Registered Securities Pursuant to Section 12 of the Act
  113