e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended June 30, 2007.

Commission File Number 333 - 89756

Alion Science and Technology Corporation

(Exact Name of Registrant as Specified in Its Charter)



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


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

(Address, including Zip Code and Telephone Number with

Area Code, of Principal Executive Offices)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, and accelerated filer, or a non-accelerated filer (as defined in Rule 12b — 2 of the Exchange Act).

Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer þ

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

The number of shares outstanding of Alion Science and Technology Corporation Common Stock as of August 14, 2007, was: Common Stock 5,256,770

ALION SCIENCE AND TECHNOLOGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
As of June 30, 2007 and September 30, 2006


	June 30,			September 30,
	2007			2006
	(In thousands, except share and per share information)
	(Unaudited)

Current assets:
Cash and cash equivalents	$	78		$	2,755
Accounts receivable, net		201,485			150,412
Stock subscriptions receivable		—			8,990
Prepaid expenses and other current assets		6,015			6,028

Total current assets		207,578			168,185
Property, plant and equipment, net		16,869			14,644
Intangible assets, net		60,099			75,403
Goodwill		394,428			387,927
Other assets		6,056			4,810

Total assets		685,030			650,969

Current liabilities:
Book cash overdraft		4,186			—
Interest payable		13,852			240
Current portion, Term B senior term loan payable		2,180			2,576
Current portion, acquisition obligations		5,807			11,457
Trade accounts payable and accrued liabilities		61,262			62,803
Accrued payroll and related liabilities		35,504			35,135
Billings in excess of costs and estimated earnings on uncompleted contracts		2,387			2,163

Total current liabilities		125,178			114,374
Acquisition obligations, excluding current portion		—			3,568
Notes payable to bank		25,300			12,300
Term B senior term loan payable, excluding current portion		214,518			252,100
Senior Unsecured Notes		243,473			—
Bridge loan payable		—			164,680
Subordinated note payable		50,216			46,963
Accrued compensation, excluding current portion		27,208			21,026
Accrued postretirement benefit obligations		4,814			3,722
Non-current portion of lease obligations		4,397			4,292
Redeemable common stock warrants		38,649			35,234

Total liabilities		733,753			658,259
Shareholder’s deficit:
Common stock, $0.01 par value, 8,000,000 shares authorized, 5,256,770 and 5,210,126 shares issued and outstanding at June 30, 2007 and September 30, 2006		52			52
Additional paid-in capital		94,029			91,829
Accumulated deficit		(142,804	)		(99,171	)

Total shareholder’s deficit		(48,723	)		(7,290	)

Total liabilities and shareholder’s deficit	$	685,030		$	650,969

See accompanying notes to condensed consolidated financial statements.

ALION SCIENCE AND TECHNOLOGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
	(In thousands, except share and per share information)
	(Unaudited)

Contract revenue	$	184,933		$	116,830		$	553,971		$	329,308
Direct contract expense		142,172			87,192			423,785			244,544

Gross profit		42,761			29,638			130,186			84,764

Operating expenses:
Indirect contract expense		11,689			7,212			32,861			19,370
Research and development		577			531			1,878			1,301
General and administrative		16,982			15,053			48,425			41,233
Rental and occupancy expense		7,876			5,390			24,352			15,443
Depreciation and amortization		4,955			2,543			16,294			9,734
Bad debt expense		333			292			888			507

Total operating expenses		42,412			31,021			124,698			87,588

Operating income (loss)		349			(1,383	)		5,488			(2,824	)
Other income (expense):
Interest income		54			108			196			569
Interest expense		(14,290	)		(6,998	)		(43,339	)		(14,915	)
Loss on extinguishment of debt		—			—			(6,170	)		—
Other		61			38			181			254

Loss before income taxes		(13,826	)		(8,235	)		(43,644	)		(16,916	)
Income tax benefit (expense)		(1	)		(7	)		11			(26	)

Net loss	$	(13,827	)	$	(8,242	)	$	(43,633	)	$	(16,942	)

Basic and diluted loss per share	$	(2.63	)	$	(1.60	)	$	(8.40	)	$	(3.34	)

Basic and diluted weighted average common shares outstanding		5,252,863			5,157,009			5,194,412			5,076,060

See accompanying notes to condensed consolidated financial statements.

ALION SCIENCE AND TECHNOLOGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended
	June 30,
	2007			2006
	(In thousands)
	(Unaudited)

Cash flows from operating activities:
Net loss	$	(43,633	)	$	(16,942	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		16,294			9,734
Accretion of debt to face value		724			689
Amortization of debt issuance costs		2,325			1,260
Loss on extinguishment of debt		6,170			—
Decrease/(Increase) in value of interest rate cap agreement		238			(364	)
Change in fair value of redeemable common stock warrants		3,415			1,450
Stock-based compensation		9,859			8,282
Gain on disposal of assets		(18	)		(1	)
Gain on sale of investments, net		(10	)		(21	)
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable, net		(50,724	)		(21,365	)
Other assets		(1,536	)		5,430
Trade accounts payable and accruals		480			2,256
Interest payable		13,612			413
Other liabilities		3,951			2,223

Net cash used in operating activities		(38,853	)		(6,956	)
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired		(12,551	)		(278,805	)
Capital expenditures		(6,497	)		(4,497	)

Net cash used in investing activities		(19,048	)		(283,302	)
Cash flows from financing activities:
Change in book overdraft		4,186			—
Proceeds from Term B Senior Credit Facility note payable		15,000			118,000
Proceeds from Senior Unsecured Notes		250,000			—
Repayment of Term B Credit Facility note payable		(52,894	)		(1,250	)
Repayment of mezzanine note warrants		—			(13,643	)
Proceeds from Bridge Loan		—			170,000
Repayment of Bridge Loan		(170,000	)		—
Payment of debt issuance costs		(10,069	)		(7,758	)
Net borrowings under revolving credit facility		13,000			5,975
Purchase interest rate cap agreement		—			(44	)
Purchase of common stock from ESOP Trust		(6,656	)		(17,739	)
Cash received from sale of common stock to ESOP Trust		12,657			1,693

Net cash provided by financing activities		55,224			255,234
Net decrease in cash and cash equivalents		(2,677	)		(35,024	)
Cash and cash equivalents at beginning of period		2,755			37,778

Cash and cash equivalents at end of period	$	78		$	2,754

Supplemental disclosure of cash flow information:
Cash paid for interest		20,045			8,869
Cash paid for taxes		697			610
Non-cash financing activities:
Common stock issued to ESOP Trust in satisfaction of employer contribution liability		5,100			3,587

See accompanying notes to condensed consolidated financial statements.

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(1)	Description and Formation of the Business

Alion Science and Technology Corporation and its subsidiaries (collectively, the Company or Alion) provides scientific, engineering and information technology expertise to research and develop technological solutions for problems relating to national defense, homeland security and energy and environmental analysis. The Company provides these research services primarily to agencies of the federal government and, to a lesser extent, to commercial and international customers.

Alion, a for-profit S Corporation, was formed in October 2001 for the purpose of purchasing substantially all of the assets and certain of the liabilities of IIT Research Institute (IITRI), a not-for-profit corporation controlled by Illinois Institute of Technology (IIT). On December 20, 2002, Alion acquired substantially all of the assets and liabilities of IITRI, excluding the assets and liabilities of IITRI’s Life Sciences Operation, for aggregate total proceeds of $127.3 million (the Transaction). Prior to that time, the Company’s activities were organizational in nature.


(2)	Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2006, filed with the SEC on December 1, 2006.

The statements are prepared on the accrual basis of accounting and include the accounts of Alion and its wholly-owned subsidiaries from the date of acquisition or formation. All inter-company accounts have been eliminated in consolidation. The wholly-owned subsidiaries are as follows:


	•	Human Factors Application, Inc. (HFA) — acquired November 1998

	•	Innovative Technology Solution Corporation (ITSC) — acquired October 2003

	•	Alion — IPS Corporation (IPS) — acquired February 2004

	•	Alion — METI Corporation (METI) — acquired February 2005

	•	Alion — CATI Corporation (CATI) — acquired February 2005

	•	Alion Canada (US) Corporation — established February 2005

	•	Alion Science and Technology (Canada) Corporation — established February 2005

	•	Alion — JJMA Corporation (JJMA) — acquired April 2005

	•	Alion Technical Services Corporation (Virginia) — established July 2005

	•	Alion — BMH Corporation (BMH) — acquired February 2006

	•	Washington Consulting, Inc. (WCI) — acquired February 2006

	•	Alion — MA&D Corporation (MA&D) — acquired May 2006

	•	Alion Technical Services Corporation (Delaware) — established May 2006

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

Fiscal and Quarter Periods

The Company’s fiscal year ends on September 30. The Company operates based on a three-month quarter, four-quarter fiscal year. Quarter end dates: December 31, March 31, June 30, and September 30.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of financial statements and operating results reported for a given period. Actual results are likely to differ from those estimates, but the Company’s management does not believe such differences will materially affect the Company’s financial position, results of operations, or cash flows.

Reclassifications

Certain items in the condensed consolidated financial statements have been reclassified to conform to the current presentation.

Revenue Recognition

The Company’s revenue results primarily from technology services under a variety of contracts, some of which provide for reimbursement of costs plus fees and others of which are fixed-price or time-and-material type contracts. The Company generally recognizes revenue when a contract has been executed, the contract price is fixed or determinable, delivery of the services or products has occurred and collectibility of the contract price is considered reasonably assured.

The Company recognizes revenue on cost-reimbursement contracts as it incurs costs and includes estimated fees earned. The Company recognizes time-and-material contract revenue at negotiated, fixed, contractually billable rates as it delivers labor hours and incurs other direct expenses. The Company uses various performance measures under the percentage of completion method to recognize revenue for fixed-price contracts. The process of estimating contract costs at completion and recognizing revenue appropriately involves significant management estimates. Actual costs may differ from estimated costs and affect estimated profitability and the timing of revenue recognition. From time to time, facts develop that require the Company to revise its estimated total costs or revenues expected. The Company records the cumulative effect of revised estimates in the period in which the facts requiring revised estimates become known. The Company recognizes the full amount of anticipated losses on any type of contract in the period in which they become known. For each of the periods presented, the cumulative effects of revised estimates were immaterial to the financial performance of the Company. Revised estimates did not generate any anticipated losses for any period presented. Further, the Company had no cost overruns on fixed price contracts that materially affected financial performance in any of the periods presented.

Contracts with agencies of the federal government are subject to periodic funding by the contracting agency concerned. A contract may be fully funded at its inception or ratably funded throughout its period of performance as services are provided. If the Company determines contract funding is not probable, it defers revenue recognition until realization is probable.

Contract costs on federal government contracts are subject to audit by the federal government and to adjustment through negotiations between the Company and government representatives. The government considers Alion to be a major contractor and maintains an office on site to perform various audits. The government has audited all of the Company’s federal government contract indirect costs through fiscal year 2004. Indirect rates have been negotiated and settled through fiscal year 2003. The Company submitted its fiscal year 2006 indirect expense rates to the government in March 2007. The Company has recorded revenue on federal government contracts in amounts it expects to realize.

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

The Company recognizes revenue on unpriced change orders as it incurs expenses and only to the extent it is probable that the Company will recover such costs. The Company recognizes revenue in excess of costs on unpriced change orders only when management can also estimate beyond a reasonable doubt the amount of excess and experience provides a sufficient basis for recognition. The Company recognizes revenue on claims as expenses are incurred only to the extent it is probable that the Company will recover such costs and it can reliably estimate the amount it will recover.

The Company generates software revenue from licensing software and providing services. In general, professional services are essential to the functionality of the solution sold and the Company applies the percentage of completion method, as prescribed by AICPA SOP 81-1, Accounting for Performance on Construction-Type and Certain Production-Type Contracts, to recognize revenue.

Income Taxes

The Company is an S corporation under the provisions of the Internal Revenue Code of 1986, as amended. For federal and certain state income tax purposes, the Company is not subject to tax on its income. The Company’s income is allocated to its sole shareholder, Alion Science and Technology Corporation Employee Stock Ownership, Savings and Investment Trust (the Trust). The Company may be subject to state income taxes in those states that do not recognize S corporations and to additional types of taxes including franchise and business taxes. All of the Company’s wholly-owned operating subsidiaries are qualified subchapter S or disregarded entities which, for federal income tax purposes, are not treated as separate corporations.

Cash and Cash Equivalents

The Company considers cash in banks, and deposits with financial institutions with maturities of three months or less at time of purchase and that can be liquidated without prior notice or penalty, to be cash and cash equivalents.

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

Accounts receivable include billed accounts receivable, amounts currently billable and costs and estimated earnings in excess of billings on uncompleted contracts that represent accumulated project expenses and fees which have not been billed or are not currently billable as of the date of the consolidated balance sheet. The costs and estimated earnings in excess of billings on uncompleted contracts are stated at estimated realizable value. Unbilled accounts receivable include revenue recognized for customer-requested work performed by the Company on new and existing contracts for which the Company had not received contracts or contract modifications. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable losses in the Company’s existing billed and unbilled accounts receivable. The Company determines the allowance using specific identification and historical write-off experience based on the age of the receivables. Billings in excess of costs and estimated earnings and advance collections from customers represent amounts received from or billed to customers in excess of project revenue recognized to date.

Property, Plant and Equipment

Leasehold improvements, software and equipment are recorded at cost. Maintenance and repairs that do not add significant value or significantly lengthen an asset’s useful life are charged to current operations. Software and equipment are depreciated on the straight-line method over their estimated useful lives (typically 3 years for software and 5 years for equipment). Leasehold improvements are amortized on the straight-line method over the shorter of each such asset’s estimated useful life or the life of the lease. Upon sale or retirement of an asset, costs and related accumulated depreciation are deducted from the accounts, and the gain or loss is recognized in the consolidated statements of operations.

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

Goodwill and Other Intangibles

As required by SFAS 142, Goodwill and Other Intangible Assets, the Company reviews goodwill annually for impairment at the end of each fiscal year or if events or circumstances indicate potential impairment. The Company must recognize an impairment loss if, and to the extent that, goodwill exceeds fair value. The Company completed the fiscal year 2006 annual goodwill impairment analysis in the fourth quarter of fiscal year 2006. Based on this analysis, the Company concluded that no goodwill impairment existed as of September 30, 2006. For the nine months ended June 30, 2007, there were no significant events that indicated the existence of goodwill impairment as of June 30, 2007. Intangible assets are amortized over their estimated useful lives of generally one to thirteen years primarily using the straight-line method.

Postretirement Benefits

The Company accounts for postretirement benefits other than pension in accordance with SFAS No. 106 Employers’ Accounting for Postretirement Benefits Other Than Pension which requires the cost to provide the benefits to be accrued over the employees’ period of active service. These costs are determined on an actuarial basis. The Company is amortizing its transition obligation for past service costs relating to these benefits over twenty years. Unrecognized actuarial gains and losses are amortized over the estimated average remaining service period for active employee plans and over the estimated average remaining life for retiree plans. The Company is currently analyzing the impact of adopting SFAS No. 158 Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, which requires an employer to recognize the over- or under-funded status of its defined benefit plan as an asset or liability, and to recognize in income any change in funded status in the year it occurs.

Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate fair value. It is impracticable for the Company to estimate the fair value of its subordinated debt because the only market for this financial instrument consists of principal to principal transactions. For all of the following items, the fair value is not materially different than the carrying value.

Cash, cash equivalents, accounts payable and accounts receivable

The carrying amount approximates fair value because of the short maturity of those instruments.

Marketable securities

The fair values of these investments are estimated based on quoted or market prices for these or similar instruments.

Senior long-term debt

The carrying amount of the Company’s senior debt approximates fair value which is estimated based on current rates offered to the Company for debt of the same remaining maturities.

Interest rate caps

The fair value of these financial instruments is estimated based on current rates offered to the Company for contracts with similar terms and maturities.

Redeemable common stock warrants

The Company uses an option pricing model to estimate the fair value of its redeemable common stock warrants.

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

Alion Stock

The estimated fair value price per share is determined based upon a valuation performed by an independent, third-party firm.

Recently Issued Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Where applicable, this Statement simplifies and codifies related guidance within generally accepted accounting principles (GAAP). This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently analyzing the expected impact from adopting this statement on its financial statements, but currently does not believe its adoption will have a significant impact on the financial position or results of operations of the Company.

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, which requires employers to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity. This statement is effective for the Company in fiscal year 2007. The Company is currently analyzing the expected impact of adoption of this Statement on its financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is currently analyzing the impact of adopting this statement.


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

On December 19, 2001, the Company adopted the Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan (the Plan) and the Trust. The Plan, a tax qualified retirement plan, includes an ESOP component and a non-ESOP component. On August 9, 2005, the Internal Revenue Service (IRS) issued a determination letter that the Trust and the Plan, as amended through the Ninth Amendment to the Plan, qualify under Sections 401(a) and 501(a) of the Internal Revenue Code of 1986 (the IRC), as amended. On January 29, 2007, the Company amended and restated the Plan effective as of October 1, 2006 and the Company filed a request with the IRS for a determination letter with respect to the amended and restated Plan on January 30, 2007. The Company believes that the Plan and the Trust have been designed and are currently being operated in compliance with the applicable requirements of the IRC.


(4)	Postretirement Benefits

The Company sponsors a medical benefits plan providing certain medical, dental, and vision insurance benefits to eligible employees and former employees. The Company is self-insured and has a stop-loss limit under an insurance agreement. The Company also provides postretirement medical benefits for employees who meet certain age and service requirements. Retiring employees may become eligible for those benefits at age 55 if they have 20 years of service, or at age 60 with 10 years of service. The plan provides benefits until age 65 and requires employees to pay one-quarter of their health care premiums. A small, closed group of employees is eligible for coverage after age 65. These retirees contribute a fixed portion of their health care premium. The estimated annual contribution to premiums from retirees is approximately $125,000.

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

There were no plan assets as of June 30, 2007 and September 30, 2006. The Company uses an October 1 measurement date.


(5)	Loss Per Share

Basic and diluted loss per share is computed by dividing net loss by the weighted average number of common shares outstanding excluding the impact of warrants, phantom stock and stock appreciation rights described herein as this impact would be anti-dilutive for all periods presented.


(6)	Shareholder’s Deficit

The Company’s outstanding common stock is held by the Trust for the benefit of participants in the Plan. The Company provides a put option to any participant or beneficiary who receives a distribution of common stock which permits the participant or beneficiary to sell such common stock to the Company during certain periods, at the then estimated fair value per share, which was $43.37 per share as of June 30, 2007. The estimated fair value per share is determined based upon a valuation performed by an independent, third-party firm. The Company may allow the Trust to purchase shares of common stock tendered to the Company under the put option.

Participants have the right to sell the shares distributed from their accounts that were acquired on the closing date of the Transaction at a value per share equal to the greater of the original purchase price or the estimated fair value price per share of the common stock.


(7)	Accounts Receivable


	June 30,			September 30,
	2007			2006
	(In thousands)

Billed receivables	$	127,991		$	106,310
Unbilled receivables:
Amounts currently billable		49,301			36,548
Revenues recorded in excess of milestone billings on fixed price contracts		7,852			5,591
Revenues recorded in excess of estimated contract value or funding		16,510			3,354
Retainages and other amounts billable upon contract completion		4,374			2,570
Allowance for doubtful accounts		(4,543	)		(3,961	)

Total Accounts Receivable	$	201,485		$	150,412

Revenues recorded in excess of milestone billings on fixed price contracts are not yet contractually billable. Amounts currently billable consist principally of amounts to be billed within the next year. Indirect cost rates in excess of provisional billing rates on U.S. government contracts are generally billable at actual rates shortly after the end of each fiscal year. Any remaining unbilled balance including retainage is billable upon contract completion or completion of Defense Contract Audit Agency audits. Revenues recorded in excess of contract value or funding are billable upon receipt of contractual amendments or other modifications. Costs and estimated earnings in excess of billings on uncompleted contracts totaled approximately $78.0 million as of June 30, 2007 and included approximately $16.5 million for customer-requested work for which the Company had not received contracts or contract modifications.

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

(8) Property, Plant and Equipment


	June 30,			September 30,
	2007			2006
	(In thousands)

Leasehold improvements	$	3,755		$	2,709
Equipment and software		30,694			25,188

Total cost		34,449			27,897
Less: accumulated depreciation and amortization		(17,580	)		(13,253	)

Net fixed assets	$	16,869		$	14,644

Depreciation and amortization expense for property, plant and equipment was approximately $1.4 million and $1.2 million for the three months ended June 30, 2007 and 2006, respectively. Depreciation and amortization expense for property, plant and equipment was approximately $4.2 million and $3.6 million for the nine months ended June 30, 2007 and 2006, respectively.


(9)	Goodwill and Intangible Assets

As of June 30, 2007, the Company has recorded goodwill of approximately $394.4 million. Changes in the carrying amount of goodwill during the nine months ended June 30, 2007, in the aggregate, are summarized in the following table:


	Total
	(In thousands)

Balance as of October 1, 2006	$	387,927
Adjustment to initial allocation made during the nine months ended June 30, 2007 (includes earn out obligations)		6,501

Balance as of June 30, 2007	$	394,428

On June 30, 2006, the Company acquired a group of contracts from Anteon Corporation for approximately $221.4 million. The Company finalized its purchase accounting for the Anteon contracts in the current quarter and adjusted goodwill and intangible assets by approximately $3.2 million. There were no acquisitions during the nine months ended June 30, 2007.

As of June 30, 2007, the Company recorded gross intangible assets of approximately $114.8 million, accumulated amortization of $54.7 million and net intangible assets of approximately $60.1 million. Intangible assets consist primarily of contracts purchased in connection with the acquisitions of JJMA, IPS, METI, BMH, WCI and MA&D and the contracts the Company acquired from Anteon Corporation (Anteon Contracts).


			Accumulated
	Gross		Amortization		Net
	(In thousands)

Purchased contracts	$	112,032	$	53,468	$	58,564
Internal use software and engineering designs		2,155		692		1,463
Non-compete agreements		650		578		72

Total	$	114,837	$	54,738	$	60,099

The intangible assets generally have estimated useful lives of one to thirteen years and are being amortized primarily using the straight-line method. The weighted-average remaining amortization period of intangible assets was approximately seven years at June 30, 2007. Amortization expense was approximately $4.1 million and $1.3 million for the three months ended June 30, 2007 and 2006, respectively. Amortization expense was

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

approximately $12.6 million and $6.1 million for the nine months ended June 30, 2007 and 2006, respectively. Estimated aggregate amortization expense for the remainder of fiscal year 2007 and for each of the next five years and thereafter is as follows:


		(In thousands)

For the remaining three months:	2007	$	3,725
For the year ending September 30:	2008		14,631
	2009		12,541
	2010		10,965
	2011		6,843
	2012		6,150
	and thereafter		5,244

Total:		$	60,099


(10)	Long-Term Debt

Term B Senior Credit Facility

The Company entered into various debt agreements (Senior Credit Agreement, Mezzanine Note, and Subordinated Note) on December 20, 2002 to fund its acquisition of substantially all the assets of IITRI. In August 2004, the Company entered into a new Term B senior secured credit facility (the Term B Senior Credit Facility) with a syndicate of financial institutions for which Credit Suisse serves as arranger, administrative agent and collateral agent, and for which LaSalle Bank National Association serves as syndication agent. The Company has entered into the following instruments in connection with the Term B Senior Credit Facility since August 2004:


	•	In April 2005, the first amendment to the Term B Senior Credit Facility (Amendment One) made certain changes to the Term B Senior Credit Facility and added $72.0 million in term loans to the Company’s total Term B Senior Credit Facility debt.

	•	In March 2006, the second amendment to the Term B Senior Credit Facility (Amendment Two) made certain changes to the Term B Senior Credit Facility and increased the term loan commitment by $68.0 million, of which the full $68.0 million had been drawn down by the Company as of June 30, 2007, and increased the revolving credit commitment from $30.0 million to $50.0 million.

	•	On June 30, 2006, the third amendment to the Term B Senior Credit Facility (Amendment Three) made certain changes to the Term B Senior Credit Facility and added $50.0 million in term loans to the Company’s total Term B Senior Credit Facility debt.

	•	On January 4, 2007, the fourth increment to the Term B Senior Credit Facility (Increment Four) added $15.0 million in term loans to the Company’s total Term B Senior Credit Facility debt.

	•	On February 6, 2007, the fourth amendment to the Term B Senior Credit Facility (Amendment Four) made certain changes to the Term B Senior Credit Facility, including (i) extending the maturity date of the senior term loans to February 6, 2013, (ii) adjusting the principal repayment schedule to require one balloon principal repayment at maturity, and (iii) adding an incurrence test as an additional condition to the Company’s ability to incur permitted indebtedness.

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

The Term B Senior Credit Facility consists of:


	•	a senior term loan, which is comprised of the following balances:


	June 30,			September 30,
	2007			2006
	(In thousands)

Senior term loan	$	221,121		$	259,015
Less: Unamortized debt issuance costs		(4,423	)		(4,339	)

Senior term loan payable	$	216,698		$	254,676
Less: current maturities, net of unamortized debt issue costs		(2,180	)		(2,576	)

Senior term loan payable, less current maturities	$	214,518		$	252,100


	•	a $50.0 million senior revolving credit facility under which approximately $25.3 million was outstanding as of June 30, 2007, and approximately $3.7 million of which was allocated for letters of credit and as such is not available to be borrowed; and

	•	a $135.0 million uncommitted incremental term loan “accordion” facility.

Interest and Fees. Under the Term B Senior Credit Facility, the senior term loan and the senior revolving credit facility can each bear interest at either of two floating rates. The Company was entitled to elect that the senior term loan bear interest at an annual rate equal to: 1) the applicable alternate base interest rate charged by Credit Suisse plus a 150 basis point spread or, 2) the Eurodollar rate plus a 250 basis point spread. The Company was also entitled to elect that the senior revolving credit facility bear interest at an annual rate dependent on the Company’s leverage ratio and whether the Company made a Eurodollar or an alternate base borrowing. The alternate base rate is the greater of Credit Suisse’s prime rate or the federal funds effective rate, plus additional basis points corresponding to the Company’s leverage ratio at the time.

On April 1, 2005, the Company chose to have the senior term loan bear interest at the Eurodollar rate and the senior revolving credit facility bear interest at the ABR rate based on Credit Suisse’s prime rate. On February 6, 2007, the fixed component of the Term B Senior Credit Facility interest rate was reduced by 25 basis points in the fourth amendment. As of June 30, 2007, the Eurodollar rate on the senior term loan was 7.86 percent (5.36 percent plus 2.50 percent Eurodollar spread) and the ABR rate was 9.75 percent (8.25 percent plus 1.50 percent spread).

Other Fees and Expenses. Each quarter the Company is required to pay a commitment fee of 50 basis points per year on the prior quarter’s daily, unused balance of the revolving credit facility and senior term loan commitment. As of June 30, 2007, the Company had approximately $25.3 million outstanding on the revolving credit facility and approximately $3.7 million was allocated for letters of credit; and the senior term loan was fully utilized. For the nine months ended June 30, 2007, the Company paid approximately $59,000 in commitment fees for the revolving credit facility and no commitment fee for the senior term loan.

Financial Covenants. The Term B Senior Credit Facility requires the Company to meet certain financial performance measures typical of commercial loans of this type including senior secured leverage and interest coverage ratios. The Term B Senior Credit Facility includes other covenants that restrict the Company’s ability to take certain actions without the prior consent of senior lenders who extended a majority of the outstanding term loans. As of June 30, 2007, the Company was in compliance with the Term B Senior Credit Facility covenants.

Senior Unsecured Notes

On February 8, 2007, the Company issued and sold $250.0 million of its 10.25% senior unsecured notes due February 1, 2015 (the Private Senior Unsecured Notes) to Credit Suisse, which informed the Company that it resold most of the Senior Unsecured Notes to qualified institutional buyers.

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

Use of Proceeds. The proceeds of the Private Senior Unsecured Notes were used to pay off all outstanding amounts under the Bridge Loan Agreement and approximately $72.0 million of the amounts outstanding under the Term B Senior Credit Facility.

Exchange Offer; Registration Rights. In connection with the Private Senior Unsecured Notes, the Company filed a registration statement with the SEC with respect to a registered offer to exchange the Private Senior Unsecured Notes for publicly registered notes (the Senior Unsecured Notes). The registration statement was declared effective on May 10, 2007 and the exchange offer closed on June 20, 2007.

Security. The Senior Unsecured Notes are currently guaranteed by HFA, CATI, METI, JJMA, BMH, WCI and MA&D and will be guaranteed by certain of the Company’s future subsidiaries (see Note 16).

Ranking. The Senior Unsecured Notes are senior unsecured obligations of the Company and rank the same in right of payment with all existing and future senior indebtedness of the Company including future indebtedness under the Term B Senior Credit Facility. However, all of the Company’s secured debt and other obligations in effect from time to time, including the amounts outstanding under the Term B Senior Credit Facility, are effectively senior to the Senior Unsecured Notes to the extent of the value of the assets securing such debt or other obligations. The Senior Unsecured Notes rank senior in right of payment to all existing and future subordinated indebtedness, including the subordinated notes.

Interest and Fees. The Senior Unsecured Notes bear interest at 10.25% per year, payable semi-annually in arrears on February 1 and August 1, commencing on August 1, 2007. The Company will make each interest payment to the holders of record on the immediately preceding January 15 and July 15. The Company will pay interest on overdue principal at 11.25% per annum and will pay interest on overdue installments of interest at 11.25% per annum to the extent lawful.

Optional Redemption. Prior to February 1, 2011, the Company may redeem all, but not less than all, of the Senior Unsecured Notes at a redemption price equal to 100% of the principal amount of the Senior Unsecured Notes plus accrued and unpaid interest to the redemption date plus an applicable make-whole premium as of the redemption date.

In addition, any time prior to February 1, 2010, subject to certain conditions, the Company may use the proceeds of a qualified equity offering to redeem Senior Unsecured Notes in an aggregate principal amount not to exceed $87.5 million at a redemption price equal to the sum of 110.25% of the aggregate principal amount of the notes actually redeemed, plus accrued and unpaid interest to the redemption date.

On or after February 1, 2011, the Company may redeem all or a portion of the Senior Unsecured Notes at the redemption prices set forth below (expressed in percentages of principal amount on the redemption date), plus accrued and unpaid interest to the redemption date, if redeemed during the 12-month period commencing on February 1 of the years set forth below:


Period	Redemption Price

2011		105.125	%
2012		102.563	%
2013 and thereafter		100.000	%

Covenants. The Indenture governing the Senior Unsecured Notes contains covenants that, among other things, limit the Company’s ability and the ability of certain of its subsidiaries to incur additional indebtedness and make certain types of payments.

Bridge Loan

On June 30, 2006, the Company entered into a Bridge Loan agreement with Credit Suisse and borrowed $170.0 million, which was used to pay part of the cost of acquiring the Anteon Contracts. In February 2007, the

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

Company repaid the $170.0 million balance under the Bridge Loan Agreement. The net carrying value of the Bridge Loan prior to pay-off was $163.8 million. The Company determined that the pay-off of the Bridge Loan was a debt extinguishment and recognized as a loss on extinguishment of debt of $6.2 million for the nine months ended June 30, 2007.

Interest Payable

Interest Payable consisted of the following balances:


	June 30,		September 30,
	2007		2006
	(In thousands)

Senior Unsecured Notes	$	10,179	$	—
Term B Senior Term Loan		3,673		137
Bridge loan payable		—		103

Total	$	13,852	$	240

Subordinated Note

On December 20, 2002, the Company issued a $39.9 million note to IITRI (Subordinated Note) as part of the consideration for Alion’s acquisition of substantially all of IITRI’s assets. On July 1, 2004, IIT acquired all of IITRI’s rights and interests in the Subordinated Note and the related warrant agreement. On June 30, 2006, the Company and IIT entered into an agreement that increased the interest rate on the Subordinated Note for two years from December 21, 2006 through December 20, 2008.

The Subordinated Note bears interest at (i) 6% 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 PIK notes have the effect of deferring the underlying cash interest expense on the Subordinated Note. Beginning in December 2008, the Subordinated Note will bear interest at 16% per year payable quarterly in cash until the note has been repaid in full. Principal on the Subordinated Note is payable in equal installments of $19.95 million in December 2009 and December 2010. The PIK notes are due in equal installments of approximately $7.4 million on these same dates.

As of June 30, 2007, the remaining fiscal year principal repayments (at face amount before debt discount) for outstanding indebtedness are as follows:


	2007		2008		2009		2010		2011		2012		Thereafter		Total
	(In thousands)

Senior Term Loan(1)	$	556	$	2,224	$	2,224	$	2,224	$	2,224	$	2,224	$	209,445	$	221,121
Senior Unsecured Notes(2)		—		—		—		—		—		—		250,000		250,000
Subordinated Note(3)		—		—		19,950		19,950		—		—		—		39,900
Subordinated Paid in
Kind Notes(4)		—		—		7,402		7,402		—		—		—		14,804

Total principal payments	$	556	$	2,224	$	29,576	$	29,576	$	2,224	$	2,224	$	459,445	$	525,825


(1)		The table does not reflect any prepayments of the senior term loan based on excess cash flow or other conditions as the timing and amount of any such payments are uncertain. The approximate $216.7 million on the face of the balance sheet (current and long-term portion) includes, as of June 30, 2007, approximately $4.4 million of unamortized debt issue costs (which initially totaled approximately $12.3 million). The Company expects to refinance the senior term loan before the end of fiscal year 2012.

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)


(2)		The table reflects the $250.0 million of Senior Unsecured Notes currently issued and outstanding. The principal amount of $250.0 million is due and payable on February 1, 2015.

(3)		Repayment of $39.9 million for the face value of the Subordinated Note in two equal payments of $19.95 million in years 2009 and 2010. The $39.9 million includes, as of June 30, 2007, approximately $3.1 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. The Company expects to refinance the Subordinated Note before the end of fiscal year 2008.

(4)		During the eight-year term of the Subordinated Note, approximately $14.8 million of principal accretes to the note in the form of Paid in Kind (PIK) notes 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 due and payable in equal amounts at the end of fiscal years 2009 and 2010. The Company expects to refinance the PIK notes before the end of fiscal year 2008.


(11)	Redeemable Common Stock Warrants

In connection with the issuance of the Subordinated Note described in Note 10, the Company issued 1,080,437 detachable redeemable common stock warrants (the Warrants) to IITRI. IITRI subsequently transferred all of its rights, title and interest in the warrants to IIT. The Warrants have an exercise price of $10 per share and are exercisable until December 2010. The Warrants permit the holders to sell warrants to the Company, at predetermined times, at the then current fair value of the common stock less the exercise price. The Warrants are classified as debt instruments 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. The Company recorded the initial $10.3 million estimated fair value of the Warrants as a discount to the face value of the notes issued and as a liability. The outstanding Warrants had an estimated fair value of $38.6 million as of June 30, 2007. The Company recognizes interest expense for changes in the estimated fair value of the Warrants.

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

(12) Leases

Future minimum lease payments under non-cancelable operating leases for buildings, equipment and automobiles at June 30, 2007 are set out below. Under these operating leases, the Company subleased some excess capacity to subtenants under non-cancelable operating leases. In connection with the IPS, METI, and JJMA acquisitions, the Company assumed operating leases at above-market rates and recorded a loss accrual of approximately $4.9 million based on the estimated fair value of the lease liabilities assumed. The loss is being amortized over the lease terms; the remaining unamortized balance was $1.7 million at June 30, 2007. In connection with the IPS acquisition, the Company also acquired a related sub-lease pursuant to which it receives above-market rates. Based on the estimated fair value of the sublease, the Company recognized an asset of $0.6 million which is being amortized over the lease term. The remaining asset value was $0.2 million at June 30, 2007.


Fiscal Years Ending	(In thousands)

2007 (for the remainder of fiscal year)	$	6,957
2008		25,648
2009		22,400
2010		16,661
2011		14,522
2012		9,961
and thereafter		22,941

Gross lease payments	$	119,090
Less: non-cancelable subtenant receipts		(4,306	)

Net lease payments	$	114,784

Rent expense under operating leases was $6.5 million and $4.6 million for the three months ended June 30, 2007 and 2006, respectively. Rent expense under operating leases was $20.9 million and $18.3 million for the nine months ended June 30, 2007 and 2006, respectively. Sublease rental income under operating leases was $0.5 million for the three months ended June 30, 2007 and 2006, respectively. Sublease rental income under operating leases was $1.5 million and $2.1 million for the nine months ended June 30, 2007 and 2006, respectively.


(13)	Stock Appreciation Rights

As of June 30, 2007, under the 2002 SAR Plan, the Company had granted 236,400 SARs to directors and employees. Under the 2004 SAR Plan, the Company had granted 807,515 SARs to directors and employees. For the three months ended June 30, 2007 and 2006, the Company recognized approximately $1.0 million and $1.0 million, respectively, in compensation expense associated with the two SAR plans. For the nine months ended June 30, 2007 and 2006, the Company recognized approximately $3.0 million and $2.4 million, respectively, in compensation expense associated with the two SAR plans.

The table below sets out the disclosures and the assumptions used to value a share of Alion common stock and the Company’s grants of stock appreciation rights as of June 30, 2007. For grants issued prior to October 1, 2006, the Company uses the intrinsic value method to recognize compensation expense pursuant to SFAS No. 123 Accounting for Stock-Based Compensation. For grants issued on or after October 1, 2006, the Company uses a Black-Scholes-Merton option pricing model to recognize compensation expense pursuant to SFAS No. 123(R) Share-Based Payment. The Company uses the fair market value of a share of its common stock to recognize expense for all grants; therefore no additional disclosures are required for these grants. There is no established public trading market for Alion’s common stock. The Trust is the only holder of our common stock. The Company uses an independent third party valuation firm to determine the fair market value of a share of Alion common stock. Alion does not expect to pay any dividends on its common stock. The terms of the Term B Senior Credit Facility, the Indenture and the Subordinated Note impose certain limitations on the payment of dividends. The Company currently intends to retain future earnings, if any, for use in the operation of its business.

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

Alion Science and Technology Corporation
Stock-based Compensation Disclosures per FAS 123 and FAS 123R
Stock Appreciation Rights
As of June 30, 2007


	Shares		Shares		Total
	Granted to		Granted to		Shares		Exercise		Outstanding		Outstanding								Vested		Exercisable
Date of Grant	Employees		Directors		Granted		Price		at 9/30/06		at 6/30/07		Forfeited		Exercised		Expired		at 6/30/07		at 6/30/07

December 2002		64,250		—		64,250	$	10.00		47,785		40,660		1,840		5,285		—		32,050		17,300
December 2002		—		29,400		29,400	$	10.00		—		—		—		—		—		—		—
May 2003		300		—		300	$	11.13		240		150		—		90		—		90		90
June 2003		300		—		300	$	11.13		300		—		120		180		—		—		—
November 2003		129,550		—		129,550	$	14.71		100,466		85,666		4,628		10,172		—		48,256		16,188
November 2003		—		12,600		12,600	$	14.71		2,800		2,800		—		—		—		2,800		2,800
November 2004		—		12,600		12,600	$	19.94		12,600		12,600		—		—		—		8,400		8,400
February 2005		164,750		—		164,750	$	19.94		135,588		122,363		9,875		3,350				59,963		—
March 2005		2,000		—		2,000	$	19.94		2,000		2,000		—		—		—		1,000		—
April 2005		33,000		—		33,000	$	29.81		27,500		27,500		—		—		—		12,500		—
June 2005		2,000		—		2,000	$	29.81		2,000		2,000		—		—		—		1,000		—
December 2005		276,675		—		276,675	$	35.89		257,900		237,625		18,762		1,513		—		63,225		—
February 2006		13,000		—		13,000	$	35.89		10,250		10,250		—		—		—		2,563		—
February 2006		7,500		—		7,500	$	35.89		7,500		5,625		1,875		—		—		1,875		—
May 2006		7,000		—		7,000	$	37.06		7,000		7,000		—		—		—		1,750		—
July 2006		15,000		—		15,000	$	37.06		15,000		15,000		—		—		—		—		—
August 2006		1,250		—		1,250	$	37.06		1,250		1,250		—		—		—		—		—
December 2006		239,290		—		239,290	$	41.02		—		232,250		7,040		—		—		500		500
February 2007		33,450		—		33,450	$	41.02		—		32,200		1,250		—		—		—		—
Total		989,315		54,600		1,043,915				630,179		836,939		45,390		20,590		—		235,972		45,278
Wtd Avg Exercise Price	$	29.96	$	13.38	$	29.09			$	26.39	$	31.22	$	30.08	$	15.86	$	—	$	22.76	$	14.16

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

Alion Science and Technology Corporation
Stock-based Compensation Disclosures per FAS 123 and 123R
Stock Appreciation Rights
As of June 30, 2007


	Risk Free				Remaining Life
Date of Grant	Interest Rate	Volatility		Expected Life	(months)

December 2002	4.06% - 4.49%		60%	5 yrs		4.3
December 2002	4.06% - 4.49%		60%	3 yrs		0.0
May 2003	2.70% - 3.30%		55%	5 yrs		9.7
June 2003	2.70% - 3.30%		55%	5 yrs		10.5
November 2003	4.06% - 4.49%		60%	5 yrs		16.1
November 2003	4.06% - 4.49%		60%	3 yrs		0.0
November 2004	3.10% - 3.60%		45%	3 yrs		4.3
February 2005	3.10% - 3.60%		45%	4 yrs		18.7
March 2005	3.10% - 3.60%		45%	4 yrs		19.8
April 2005	4.10% - 4.20%		45%	4 yrs		20.7
June 2005	4.10% - 4.20%		45%	4 yrs		22.9
December 2005	4.20% - 4.20%		40%	4 yrs		29.5
February 2006	4.20% - 4.20%		40%	4 yrs		31.2
February 2006	4.20% - 4.20%		40%	4 yrs		31.7
May 2006	4.82% - 4.83%		35%	4 yrs		34.5
July 2006	4.82% - 4.83%		35%	4 yrs		35.9
August 2006	4.82% - 4.83%		35%	4 yrs		37.8
December 2006	4.54% - 4.58%		35%	4 yrs		41.7
February 2007	4.54% - 4.58%		35%	4 yrs		43.8
Wtd Avg Remaining Life (months)						28.7

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

(14) Phantom Stock Plans

As of June 30, 2007, under the Initial Phantom Stock Plan, the Company had granted 223,685 shares of phantom stock. Under the Second Phantom Stock Plan, the Company had granted 294,149 shares of retention phantom stock and 207,778 shares of performance phantom stock. Under the Director Phantom Stock Plan, the Company had granted 13,786 shares of phantom stock. For the three months ended June 30, 2007 and 2006, the Company recognized approximately $2.4 million and $2.3 million, respectively, in compensation expense associated with all three phantom stock plans. For the nine months ended June 30, 2007 and 2006, the Company recognized approximately $6.9 million and $5.9 million, respectively, in compensation expense associated with all three phantom stock plans.

The table below sets out the disclosures and the assumptions used to value a share of Alion common stock and the Company’s grants of phantom stock as of June 30, 2007. For grants issued prior to October 1, 2006, the Company uses the intrinsic value method to recognize compensation expense pursuant to SFAS No. 123 Accounting for Stock-Based Compensation and SFAS No. 123(R) Share-Based Payment. The Company uses the fair market value of a share of its common stock to recognize expense for all grants; therefore no additional disclosures are required for these grants. There is no established public trading market for Alion’s common stock. The Trust is the only holder of the Company’s common stock. The Company uses an independent third party valuation firm to determine the fair market value of a share of Alion common stock. Alion does not expect to pay any dividends on its common stock. The terms of the Term B Senior Credit Facility, the Indenture, and the Subordinated Note impose certain limitations on the payment of dividends. The Company intends to retain future earnings, if any, for use in the business.

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

Alion Science and Technology Corporation
Stock-based Compensation Disclosures per FAS 123 and FAS 123R
Phantom Stock
as of June 30, 2007


							Grant
	Shares		Shares		Total		Date				Outstanding
	Granted to		Granted to		Shares		Price per		Outstanding		at								Vested at		Exercisable at
Date of Grant	Employees		Directors		Granted		Share		at 9/30/06		6/30/07		Forfeited		Exercised		Expired		6/30/07		6/30/07

February 2003		171,000		—		171,000	$	10.00		85,000		59,000		—		26,000		—		24,750		24,750
November 2003		52,685		—		52,685	$	14.71		32,971		26,513		—		6,458		—		8,158		8,158
February 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		—		—		—		2,508		—
August 2005		2,960		—		2,960	$	33.78		2,960		2,960		—		—		—		987		—
November 2005		66,592		—		66,592	$	35.89		66,592		66,592		—		—		—		—		—
November 2005		—		7,808		7,808	$	35.89		6,832		6,181		—		651		—		1,626		1,626
November 2005		55,726		—		55,726	$	35.89		55,726		55,726		—		—		—		—		—
November 2006		—		5,978		5,978	$	41.02		—		5,978		—		—		—		—		—
November 2006		65,456		—		65,456	$	41.02		—		65,456		—		—		—		—		—
Total		725,612		13,786		739,398				561,274		599,599		—		33,109		—		38,029		34,534
Wtd Avg Grant Date Fair Value Price per Share	$	21.86	$	38.11	$	22.17			$	21.87	$	24.73	$	—	$	11.43	$	—	$	13.39	$	12.33

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

Alion Science and Technology Corporation
Stock-based Compensation Disclosures per FAS 123 and FAS 123R
Phantom Stock
as of June 30, 2007


	Risk Free							Remaining Life
Date of Grant	Interest Rate		Volatility			Expected Life		(months)

February 2003		4.06% - 4.49%		60	%		5 yrs		6.7
November 2003		4.06% - 4.49%		60	%		5 yrs		15.8
February 2005		3.10% - 3.60%		45	%		3 yrs		6.7
February 2005		3.10% - 3.60%		45	%		3 yrs		6.7
February 2005		3.10% - 3.60%		45	%		4 yrs		18.7
August 2005		3.72% - 3.77%		45	%		3 yrs		12.9
November 2005		4.20% - 4.20%		40	%		3 yrs		16.1
November 2005		4.20% - 4.20%		40	%		3 yrs		16.1
November 2005		4.20% - 4.20%		40	%		5 yrs		40.1
November 2006		4.54% - 4.58%		35	%		3 yrs		28.4
November 2006		4.54% - 4.58%		35	%		3 yrs		28.4
Total
Wtd Avg Remaining Life (months)									14.1


(15)	Segment Information and Customer Concentration

The Company operates in one segment, delivering a broad array of scientific and engineering expertise to research and develop technological solutions for problems relating to national defense, homeland security, and energy and environmental analysis under contracts with the federal government, state and local governments, and commercial customers. The Company’s federal government customers typically exercise independent contracting authority, and even offices or divisions within an agency or department may directly, or through a prime contractor, use the Company’s services as a separate customer so long as that customer has independent decision-making and contracting authority within its organization.

Contract receivables from agencies of the federal government represented approximately $188.6 million, or 91.8%, of accounts receivable at June 30, 2007 and $143.8 million, or 93.7%, of accounts receivable at September 30, 2006. Contract revenues from agencies of the federal government represented approximately 94.5% of total contract revenues during the nine months ended June 30, 2007 and 94.7% of total contract revenues during the nine months ended June 30, 2006. Two prime contracts with the Department of Defense represented approximately 17.5% and 8.6% of revenue for the nine months ended June 30, 2007. Two prime contracts with the Department of Defense represented approximately 14.6% and 10.6% of revenue for the nine months ended June 30, 2006.


(16)	Guarantor/Non-guarantor Condensed Consolidated Financial Information

The Company’s Senior Unsecured Notes are unsecured general obligations of the Company. Certain of the Company’s wholly-owned, domestic subsidiaries have jointly, severally, fully and unconditionally guaranteed the Senior Unsecured Notes. The following information presents condensed consolidating balance sheet as of June 30, 2007 and September 30, 2006, condensed consolidating statement of operations for the three months ended June 30, 2007 and June 30, 2006; condensed consolidating statement of operations for the nine months ended June 30, 2007 and June 30, 2006; and condensed consolidating statement of cash flows for the nine months ended June 30, 2007 and June 30, 2006 of the parent company issuer, the guarantor subsidiaries and the non-guarantor subsidiaries. Investments include investments in subsidiaries held by the parent company issuer and have been presented using the equity method of accounting.

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

Condensed Consolidating Balance Sheet Information at June 30, 2007


							Non-
				Guarantor			Guarantor
	Parent			Companies			Companies			Eliminations			Consolidated
	(In thousands)

Current assets:
Cash and cash equivalents	$	77		$	—		$	1		$	—		$	78
Accounts receivable		196,347			5,134			4			—			201,485
Other current assets		5,903			110			2			—			6,015

Total current assets		202,327			5,244			7			—			207,578
Property, plant and equipment, net		16,672			197			—			—			16,869
Intangible assets, net		60,099			—			—			—			60,099
Goodwill		394,428			—			—			—			394,428
Investment in subsidiaries		7,836			—			—			(7,836	)		—
Intercompany receivables		—			7,355			—			(7,355	)		—
Other assets		6,042			14			—			—			6,056

Total assets		687,404			12,810			7			(15,191	)		685,030

Current liabilities:
Book cash overdraft		3,478			706			2			—			4,186
Interest payable		13,852			—			—			—			13,852
Current portion, Term B Senior Credit Facility note payable		2,180			—			—			—			2,180
Current portion, acquisition obligations		5,807			—			—			—			5,807
Trade accounts payable and accrued liabilities		59,431			1,826			5			—			61,262
Accrued payroll and related liabilities		34,166			1,215			123			—			35,504
Billings in excess of costs and estimated earnings on uncompleted contracts		2,387			—			—			—			2,387

Total current liabilities		121,301			3,747			130			—			125,178
Intercompany payables		7,083			—			272			(7,355	)		—
Notes payable to bank		25,300			—			—			—			25,300
Term B Senior Credit Facility note payable, excluding current portion		214,518			—			—			—			214,518
Senior Unsecured Notes		243,473			—			—			—			243,473
Subordinated note payable		50,216			—			—			—			50,216
Accrued compensation, excluding current portion		26,458			750			—			—			27,208
Accrued postretirement benefit obligations		4,814			—			—			—			4,814
Non-current portion of lease obligations		4,315			82			—			—			4,397
Redeemable common stock warrants		38,649			—			—			—			38,649

Total liabilities		736,127			4,579			402			(7,355	)		733,753
Shareholder’s equity (deficit):
Common stock		52			1			—			(1	)		52
Additional paid-in capital		94,029			2,800			—			(2,800	)		94,029
Treasury stock		—			(2	)		—			2			—
Accumulated surplus (deficit)		(142,804	)		5,432			(395	)		(5,037	)		(142,804	)

Total shareholder’s equity (deficit)		(48,723	)		8,231			(395	)		(7,836	)		(48,723	)

Total liabilities and shareholder’s equity (deficit)	$	687,404		$	12,810		$	7		$	(15,191	)	$	685,030

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

Condensed Consolidating Balance Sheet Information at September 30, 2006


							Non-
				Guarantor			Guarantor
	Parent			Companies			Companies			Eliminations			Consolidated
	(In thousands)

Current assets:
Cash and cash equivalents	$	2,728		$	(32	)	$	59		$	—		$	2,755
Accounts receivable		144,751			5,657			4			—			150,412
Stock subscriptions receivable		8,990			—			—			—			8,990
Other current assets		5,885			134			9			—			6,028

Total current assets		162,354			5,759			72			—			168,185
Property, plant and equipment, net		14,029			299			316			—			14,644
Intangible assets, net		75,403			—			—			—			75,403
Goodwill		387,927			—			—			—			387,927
Investment in subsidiaries		7,979			—			—			(7,979	)		—
Intercompany receivables		—			8,310			—			(8,310	)		—
Other assets		4,797			13			—			—			4,810

Total assets		652,489			14,381			388			(16,2889	)		650,969

Current liabilities:
Interest payable		240			—			—			—			240
Current portion, Term B Senior Credit Facility note payable		2,576			—			—			—			2,576
Current portion, acquisition obligations		11,457			—			—			—			11,457
Trade accounts payable and accrued liabilities		59,174			3,625			4			—			62,803
Accrued payroll and related liabilities		33,288			1,694			153			—			35,135
Billings in excess of costs and estimated earnings on uncompleted contracts		2,163			—			—			—			2,163

Total current liabilities		108,898			5,319			157			—			114,374
Acquisition obligations, excluding current portion		3,568			—			—			—			3,568
Intercompany payables		7,784			—			526			(8,310	)		—
Notes payable to bank		12,300			—			—			—			12,300
Term B Senior Credit Facility note payable, excluding current portion		252,100			—			—			—			252,100
Bridge loan payable		164,680			—			—			—			164,680
Subordinated note payable		46,963			—			—			—			46,963
Accrued compensation, excluding current portion		20,254			772			—			—			21,026
Accrued postretirement benefit obligations		3,722			—			—			—			3,722
Non-current portion of lease obligations		4,276			16			—			—			4,292
Redeemable common stock warrants		35,234			—			—			—			35,234

Total liabilities		659,779			6,107			683			(8,310	)		658,259
Shareholder’s equity (deficit):
Common stock		52			1			—			(1	)		52
Additional paid-in capital		91,829			2,800			—			(2,800	)		91,829
Treasury stock					(2	)		—			2			—
Accumulated surplus (deficit)		(99,171	)		5,475			(295	)		(5,180	)		(99,171	)

Total shareholder’s equity (deficit)		(7,290	)		8,274			(295	)		(7,979	)		(7,290	)

Total liabilities and shareholder’s equity (deficit)	$	652,489		$	14,381		$	388		$	(16,289	)	$	650,969

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

Condensed Consolidating Statement of Operations
for the Three Months Ended June 30, 2007


							Non-
				Guarantor			Guarantor
	Parent			Companies			Companies			Eliminations		Consolidated
	(In thousands)

Contract revenue	$	177,937		$	6,946		$	50		$	—	$	184,933
Direct contract expense		136,973			5,165			34			—		142,172

Gross profit		40,964			1,781			16			—		42,761

Operating expenses:
Indirect contract expense		10,425			1,254			10			—		11,689
Research and development		492			6			79			—		577
General and administrative		16,735			285			(38	)		—		16,982
Rental and occupancy expense		7,840			22			14			—		7,876
Depreciation and amortization		4,920			35			—			—		4,955
Bad debt expense		317			16			—			—		333

Total operating expenses		40,729			1,618			65			—		42,412

Operating income (loss)		235			163			(49	)		—		349
Other income (expense):
Interest income		54			—			—			—		54
Interest expense		(14,290	)		—			—			—		(14,290	)
Other		291			(304	)		74			—		61
Equity in net income (loss) of subsidiaries		(117	)		—			—			117		—

Income (loss) before income taxes		(13,827	)		(141	)		25			117		(13,826	)
Income tax expense		—			(1	)		—			—		(1	)

Net income (loss)	$	(13,827	)	$	(142	)	$	25		$	117	$	(13,827	)

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

Condensed Consolidating Statement of Operations
for the Three Months Ended June 30, 2006


							Non-
				Guarantor			Guarantor
	Parent			Companies			Companies			Eliminations			Consolidated
	(In thousands)

Contract revenue	$	109,695		$	7,085		$	50		$	—		$	116,830
Direct contract expense		82,105			5,056			31			—			87,192

Gross profit		27,590			2,029			19			—			29,638

Operating expenses:
Indirect contract expense		6,309			893			10			—			7,212
Research and development		341			—			190			—			531
General and administrative		14,792			259			2			—			15,053
Rental and occupancy expense		5,381			1			8			—			5,390
Depreciation and amortization		2,512			31			—			—			2,543
Bad debt expense		292			—			—			—			292

Total operating expenses		29,627			1,184			210			—			31,021

Operating income (loss)		(2,037	)		845			(191	)		—			(1,383	)
Other income (expense):
Interest income		108			—			—			—			108
Interest expense		(6,998	)		—			—			—			(6,998	)
Other		38			(331	)		(13	)		—			38
Equity in net income (loss) of subsidiaries		310			—			—			(310	)		—

Income (loss) before income taxes		(8,235	)		514			(204	)		(310	)		(8,235	)
Income tax expense		(7	)		—			—			—			(7	)

Net income (loss)	$	(8,242	)	$	514		$	(204	)	$	(310	)	$	(8,242	)

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

Condensed Consolidating Statement of Operations
for the Nine Months Ended June 30, 2007


							Non-
				Guarantor			Guarantor
	Parent			Companies			Companies			Eliminations		Consolidated
	(In thousands)

Contract revenue	$	533,102		$	20,684		$	185		$	—	$	553,971
Direct contract expense		408,505			15,156			124			—		423,785

Gross profit		124,597			5,528			61			—		130,186

Operating expenses:
Indirect contract expense		29,121			3,602			138			—		32,861
Research and development		1,732			8			138			—		1,878
General and administrative		47,534			966			(75	)		—		48,425
Rental and occupancy expense		24,300			22			30			—		24,352
Depreciation and amortization		16,192			102			—			—		16,294
Bad debt expense		847			41			—			—		888

Total operating expenses		119,726			4,741			231			—		124,698

Operating income (loss)		4,871			787			(170	)		—		5,488
Other income (expense):
Interest income		196			—			—			—		196
Interest expense		(43,339	)		—			—			—		(43,339	)
Loss on extinguishment of debt		(6,170	)		—			—			—		(6,170	)
Other		952			(841	)		70			—		181
Equity in net income (loss) of subsidiaries		(143	)		—			—			143		—

Income (loss) before income taxes		(43,633	)		(54	)		(100	)		143		(43,644	)
Income tax benefit		—			11			—			—		11

Net income (loss)	$	(43,633	)	$	(43	)	$	(100	)		143	$	(43,633	)

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

Condensed Consolidating Statement of Operations
for the Nine Months Ended June 30, 2006


							Non-
				Guarantor			Guarantor
	Parent			Companies			Companies			Eliminations			Consolidated
	(In thousands)

Contract revenue	$	316,745		$	12,135		$	428		$	—		$	329,308
Direct contract expense		235,602			8,671			271			—			244,544

Gross profit		81,143			3,464			157			—			84,764

Operating expenses:
Indirect contract expense		18,043			1,301			26			—			19,370
Research and development		932			—			369			—			1,301
General and administrative		40,714			465			54			—			41,233
Rental and occupancy expense		15,413			4			26			—			15,443
Depreciation and amortization		9,689			45			—			—			9,734
Bad debt expense		507			—			—			—			507

Total operating expenses		85,298			1,815			475			—			87,588

Operating income (loss)		(4,155	)		1,649			(318	)		—			(2,824	)
Other income (expense):
Interest income		569			—			—			—			569
Interest expense		(14,915	)		—			—			—			(14,915	)
Other		(1,048	)		(714	)		(80	)		—			254
Equity in net income (loss) of subsidiaries		537			—			—			(537	)		—

Income (loss) before income taxes		(16,916	)		935			(398	)		(537	)		(16,916	)
Income tax expense		(26	)		—			—			—			(26	)

Net income (loss)	$	(16,942	)	$	935		$	(398	)	$	(537	)	$	(16,942	)

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

Condensed Consolidating Statement of Cash Flows
Nine Months Ended June 30, 2007


							Non-
				Guarantor			Guarantor
	Parent			Companies			Companies			Consolidated
	(In thousands)

Net cash used in operating activities	$	(38,119	)	$	(674	)	$	(60	)	$	(38,853	)
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired		(12,551	)		—			—			(12,551	)
Capital expenditures		(6,497	)		—			—			(6,497	)

Net cash used in investing activities		(19,048	)		—			—			(19,048	)
Cash flows from financing activities:
Change in book overdraft		3,478			706			2			4,186
Proceeds from Term B Senior Credit Facility note payable		15,000			—			—			15,000
Proceeds from Senior Unsecured Notes		250,000			—			—			250,000
Repayment of Term B Credit Facility note payable		(52,894	)		—			—			(52,894	)
Repayment of Bridge Loan		(170,000	)		—			—			(170,000	)
Payment of debt issuance costs		(10,069	)		—			—			(10,069	)
Net borrowings under revolving credit facility		13,000			—			—			13,000
Purchase of common stock from ESOP Trust		(6,656	)		—			—			(6,656	)
Cash received from sale of common stock to ESOP Trust		12,657			—			—			12,657

Net cash provided by financing activities		54,516			706			2			55,224
Net increase (decrease) in cash and cash equivalents		(2,651	)		32			(58	)		(2,677	)
Cash and cash equivalents at beginning of year		2,728			(32	)		59			2,755

Cash and cash equivalents at end of year	$	77		$	—		$	1		$	78

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

Condensed Consolidating Statement of Cash Flows
Nine Months Ended June 30, 2006


							Non-
				Guarantor			Guarantor
	Parent			Companies			Companies			Consolidated
	(In thousands)

Net cash used in operating activities	$	(7,042	)	$	(221	)	$	(307	)	$	(6,956	)
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired		(278,805	)		—			—			(278,805	)
Capital expenditures		(4,168	)		(17	)		(312	)		(4,497	)

Net cash used in investing activities		(282,973	)		(17	)		(312	)		(283,302	)
Cash flows from financing activities:
Proceeds from Term B Senior Credit Facility note payable		118,000			—			—			118,000
Repayment of Term B Credit Facility note payable		(1,250	)		—			—			(1,250	)
Repayment of mezzanine note warrants		(13,643	)		—			—			(13,643	)
Proceeds from bridge loan		170,000			—			—			170,000
Payment of debt issuance costs		(7,758	)		—			—			(7,758	)
Net borrowings under revolving credit facility		5,975			—			—			5,975
Purchase interest rate cap agreement		(44	)		—			—			(44	)
Purchase of shares of common stock from ESOP Trust		(17,739	)		—			—			(17,739	)
Cash received from issuance of common stock to Trust		1,693			—			—			1,693

Net cash provided by financing activities		255,234			—			—			255,234
Net decrease in cash and cash equivalents		(34,781	)		(238	)		(5	)		(35,024	)
Cash and cash equivalents at beginning of year		37,512			261			5			37,778

Cash and cash equivalents at end of year	$	2,731		$	23		$	—		$	2,754


(17)	Commitments and Contingencies

Earn Out Commitments

The Company has earn out commitments related to the following acquisitions:

CATI — There is an earn out provision not to exceed $8.25 million based on the revenue of the business units that formerly comprised CATI. There is a second earn out provision not to exceed $1.5 million based on attaining certain revenue goals in the commercial aviation industry. The obligations continue until September 2007. In the nine months ended June 30, 2007, the Company recognized no earn out obligations for CATI.

BMH — There is an earn out provision not to exceed a total of $6.0 million based on the revenue of the business units that formerly comprised BMH. The obligation continues until December 2007. In the nine months ended June 30, 2007, the Company recognized and paid $3.0 million in earn out obligation related to BMH.

WCI — There is an earn out provision not to exceed a total of $2.6 million based on the revenue of the business units that formerly comprised WCI. The obligation continues until September 2007. In the nine months ended June 30, 2007, the Company paid approximately $1.3 million in previously recognized earn out obligations related to WCI.

MA&D — There is an earn out provision not to exceed a total of $4.1 million based on the revenue of the business units that formerly comprised MA&D. The obligation continues until September 2007. In the nine months ended June 30, 2007, the Company recognized no earn out obligations related to MA&D.

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

In the opinion of management, the realization of the amounts due under these arrangements will not have a material adverse effect upon the financial position, results of operations, or the liquidity of the Company.

Legal Proceedings

Estate of Joseph Hudert vs. Alion Science and Technology Corporation; Estate of Frank Stotmeister vs. Alion Science and Technology Corporation.

On December 23, 2004, the estate of Joseph Hudert filed an action against Grunley-Walsh Joint Venture, L.L.C. (Grunley-Walsh) and the Company in the District of Columbia Superior Court for damages in excess of $80 million. On January 6, 2005, the estate of Frank Stotmeister filed an action against the Company in the same court on six counts, some of which are duplicate causes of action, claiming $30 million for each count. The Hudert case has been removed to the United States District Court for the District of Columbia. Several other potential defendants may be added to these actions in the future.

The suits arose in connection with a steam pipe explosion that occurred on or about April 23, 2004 on a construction site at 17th Street, N.W. in Washington, D.C. The plaintiffs died, apparently as a result of the explosion. They were employees of the prime contractor on the site, Grunley-Walsh, and the subcontractor, Cherry Hill Construction Company Inc. Grunley-Walsh had a contract with the U.S. General Services Administration (GSA) for construction on 17th Street N.W. near the Old Executive Office Building in Washington, D.C. Sometime after the award of Grunley-Walsh’s construction contract, Alion was awarded a separate contract by GSA. Alion’s responsibilities on this contract were non-supervisory monitoring of Grunley-Walsh’s activities and reporting to GSA of any deviations from contract requirements.

The Company intends to defend these lawsuits vigorously. Based on the facts underlying the lawsuits known to the Company at this time, and the Company’s non-supervisory monitoring role at the project site, the Company’s management believes that the potential for Alion to incur a material loss as a result of the lawsuits is remote. Therefore, the Company’s management does not believe that these lawsuits will have a material adverse effect upon the Company, its operations, its financial condition, or its cash flows.

Alion’s primary provider of general liability insurance, St. Paul Travelers, has assumed defense of these lawsuits. However, since there is some uncertainty as to whether St. Paul Travelers received timely notice of a potential claim by Alion in connection with these lawsuits under its general liability insurance policy, St. Paul Travelers indicated when it assumed defense of the lawsuits, that it was doing so subject to a reservation of rights to deny coverage. Nevertheless, even if St. Paul Travelers is ultimately able to properly deny coverage as a result of late notice of the lawsuits, the Company’s management does not believe that the lawsuits will have a materially adverse effect upon the Company, its operations or its financial condition. American International Group, the Company’s excess insurance carrier, has also been notified regarding these lawsuits.

The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect upon the Company’s business, financial position, operating results or ability to meet its financial obligations.

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

Government Audits

The amount of federal government contract revenue and expense reflected in the consolidated financial statements attributable to cost reimbursement contracts is subject to audit and possible adjustment by the Defense Contract Audit Agency (DCAA). The federal government considers the Company to be a major contractor and DCAA maintains an office on site to perform its various audits throughout the year. All of the Company’s federal government contract indirect costs have been audited through 2004. Indirect rates have been negotiated through fiscal year 2003. Contract revenue on federal government contracts has been recorded in amounts that are expected to be realized upon final settlement.


(18)	Subsequent Events

On July 17, 2007, the Company borrowed a total of $25.0 million in additional term loans under the Term B Senior Credit Facility. Those loan proceeds, less approximately $515,000 in fees associated with the borrowing, were immediately used to pay down the outstanding balance on the senior revolving credit facility.

On July 20, 2007, the Company acquired substantially all the assets of LogConGroup, Inc. for $1.7 million plus additional contingent earn out obligations over a six year period which cannot exceed $0.9 million.


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

The following discussion of Alion’s financial condition and results of operations should be read together with the condensed consolidated financial statements (unaudited) and the notes to those statements. The following is intended to update the information contained in the Company’s Annual Report on Form 10-K for the year ended September 30, 2006, and presumes that readers have access to, and will have read, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in that report.

Overview

We provide scientific, engineering and information technology and expertise to research and develop technological solutions for problems relating to national defense, homeland security and energy and environmental analysis. We provide these services primarily to agencies of the federal government and, to a lesser extent, to commercial and international customers. Our revenues increased $68.1 million for the quarter ended June 30, 2007 and $224.7 million for the nine months ended June 30, 2007 as compared to the quarter ended June 30, 2006 and nine months ended June 30, 2006, through a combination of internal growth and acquisitions. The following table reflects, for each fiscal year indicated, summary results of operations data:


	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
	(In millions)

Revenue	$	184.9		$	116.8		$	554.0		$	329.3
Net loss		(13.8	)		(8.2	)		(43.6	)		(16.9	)

The following table summarizes the percentage of revenues attributable to each contract type for the periods indicated. The increase in absolute revenue dollars and percentage of cost-reimbursement work is attributable primarily to the contracts acquired from Anteon.


	For the Nine Months Ended June 30,
Contract Type	2007				2006
	(In millions)

Cost-reimbursement	$	367.7	66.4	%	$	199.5	60.6	%
Fixed-price		102.5	18.5	%		65.6	19.9	%
Time-and-material		83.8	15.1	%		64.2	19.5	%

Total	$	554.0	100.0	%	$	329.3	100.0	%

We contract primarily with the federal government. We expect most of our revenues to continue to come from government contracts and we expect that most of these contracts will be with the U.S. Department of Defense (DoD). The much smaller balance of our revenue comes from a variety of commercial customers, state and local governments, and foreign governments. The following table sets forth, for each period indicated, the percentage of our revenues from our major types of customers.


	For the Nine Months Ended June 30,
Customer Type	2007				2006
	(In millions)

U.S. Department of Defense (DoD)	$	505.5	91.3	%	$	287.9	87.4	%
Other Federal Civilian Agencies		17.8	3.2	%		24.1	7.3	%
Commercial / State / Local and International		30.7	5.5	%		17.3	5.3	%

Total	$	554.0	100.0	%	$	329.3	100.0	%

Results of Operations

Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006

In the discussion that follows, and for purposes of comparability, the relative financial impact of the BMH, WCI and MA&D acquisitions and for the work performed in support of the contracts acquired from Anteon are referred to as the “acquired operations” of Alion. All operations of Alion, other than those acquired through the above-noted acquisitions are referred to as “non-acquired operations.” The selected financial information provided in the table below relate to the financial performance of Alion for the three months ended June 30, 2007, compared to the financial performance for three months ended June 30, 2006.


	Three Months Ended					Three Months Ended
	June 30, 2007					June 30, 2006
	Consolidated Operations of Alion					Consolidated Operations of Alion
	(Dollars in millions)
			%						%
Financial Information			revenue						revenue

Total Revenue	$	184.9				$	116.8
Material and subcontract revenue		80.2		43.4	%		34.5			29.5	%
Total direct contract expenses		142.2		76.9	%		87.2			74.7	%
Major components of direct contract expenses
Direct labor expense		60.3		32.6	%		47.8			40.9	%
Material and subcontract expense		76.6		41.4	%		33.0			28.3	%
Other direct expense		5.2		2.8	%		6.4			5.5	%
Gross profit		42.8		23.1	%		29.6			25.3	%
Total operating expense		42.4		22.9	%		31.0			26.5	%
Major components of operating expense
Indirect personnel and facilities		19.6		10.6	%		12.6			10.8	%
General and administrative (excluding stock-based compensation)		13.6		7.4	%		11.8			10.1	%
Stock-based compensation		3.4		1.8	%		3.3			2.8	%
Depreciation and amortization		5.0		2.7	%		2.5			2.1	%
Income (loss) from operations	$	0.3		0.2	%	$	(1.4	)		(1.2	)%

Revenues. Revenues for the three months ended June 30, 2007 increased $68.1 million, or 58.3%, over the three months ended June 30, 2006. This increase is attributable to the following:


• Increase in revenue generated by the activities of the acquired operations	$	69.2 million
• Decrease in revenue generated by the activities of the non-acquired operations	$	(1.1) million

Total:	$	68.1 million

As a component of revenue, material and subcontract (M&S) revenue for the three months ended June 30, 2007 increased approximately $45.7 million, or 132.5%, over the three months ended June 30, 2006. The acquired operations and non-acquired operations generated increases of approximately $36.8 million and $8.9 million, respectively. M&S revenue increased to 43.4% of total revenue from 29.5% of total revenue for the three months ended June 30, 2007 and 2006, respectively. This increase was due primarily to the increase in content of M&S revenue to total revenue from acquired operations, primarily related to WCI and for work provided in support of the Anteon contracts.

Direct Contract Expenses. Direct contract expenses for the three months ended June 30, 2007 increased $55.0 million, or 63.1%, over the three months ended June 30, 2006. The acquired operations increased approximately $55.9 million and the non-acquired operations decreased approximately $0.9 million. Direct

contract expenses were 76.9% and 74.7% of total revenue for the three months ended June 30, 2007 and 2006, respectively. The changes in the major components of direct contract expense were:


	•	Direct labor expense for the three months ended June 30, 2007 increased $12.5 million, or 26.2%, over the three months ended June 30, 2006. Direct labor expense declined to 32.6% from 40.9% of total revenue for the three months ended June 30, 2007 and 2006, respectively. This decrease was due to the decrease in content of direct labor expense from acquired operations primarily related to WCI and for work provided in support of the Anteon contracts.

	•	M&S expense for the three months ended June 30, 2007 increased $43.6 million, or 132.1%, over the three months ended June 30, 2006. M&S expense increased to 41.4% from 28.3% of total revenue for the three months ended June 30, 2007 and 2006, respectively. The percent increase in M&S expense was primarily due to the increase in content of M&S expense to total direct contract expense of the acquired operations, primarily related to WCI and for work provided in support of the Anteon contracts. M&S expense was approximately 95.5% and 95.7% of M&S revenue for the three months ended June 30, 2007 and 2006, respectively.

M&S expense has been increasing relative to direct labor, as a result of contracts obtained in connection with our acquired operations as well as higher levels of M&S related work on contracts in the non-acquired operations. This increased level of M&S expense is expected to continue until backlog on these contracts is expended.

Gross Profit. Gross profit was $42.8 million and $29.6 million for the three months ended June 30, 2007 and June 30, 2006, respectively. Gross profit was 23.1% and 25.3% of total revenue for the three months ended June 30, 2007 and 2006, respectively. Gross profit margins decreased due to the relative increase in M&S contract work. M&S contract work typically generates lower profit margins than contract direct labor work.

Operating Expenses. Operating expenses for the three months ended June 30, 2007 increased $11.4 million, or 36.8%, over the three months ended June 30, 2006. Operating expenses were 22.9% and 26.5% of total revenue for the three months ended June 30, 2007 and 2006, respectively. The changes in the major components of operating expenses were:


	•	Operating expenses for indirect personnel and rental and occupancy expenses for the three months ended June 30, 2007 increased approximately $7.0 million, or 55.6%, over the three months ended June 30, 2006. The increase was primarily associated with additional indirect personnel and facilities expenses related to the activities in support of the contracts acquired from Anteon. The contracts from Anteon were acquired on June 30, 2006; therefore, there was no related activity for the three months ended June 30, 2006. Operating expenses for indirect personnel and facilities was 10.6% and 10.8% of total revenue for the three months ended June 30, 2007 and 2006, respectively.

	•	General and administrative (G&A) expense, excluding stock-based compensation, for the three months ended June 30, 2007 increased approximately $1.8 million, or 15.3%, over the three months ended June 30, 2006. G&A expenses were 7.4% and 10.1% of revenue for the three months ended June 30, 2007 and 2006, respectively. For the three months ended June 30, 2007, the Company incurred approximately $1.6 million of third-party legal and accounting fees associated with financing expense and approximately $0.4 million for third party legal expense for contract protests. These additional expenses represent approximately 1.1% of total revenue. For the three months ended June 30, 2006, the Company incurred approximately $2.0 million in third-party external accounting and legal fees related to acquisitions.

	•	Stock-based compensation expense (a separate element of G&A expense) relates to the SAR and phantom stock plans. This expense for the three months ended June 30, 2007 increased approximately $0.1 million, or 3.0%, from the three months ended June 30, 2006. The change in stock-based compensation expense results from the relative change in price of a share in Alion common stock and, to a lesser extent, the change in balance of awards that remain outstanding.

	•	Depreciation and amortization expense for the three months ended June 30, 2007 increased approximately $2.5 million, or 100.0%, over the three months ended June 30, 2006. Depreciation expense primarily arises from fixed assets while amortization expense results primarily from purchased contracts. For the three


		months ended June 30, 2007, approximately $2.0 million of amortization expense was associated with the contracts purchased from Anteon. Depreciation and amortization expense was 2.7% and 2.1% of revenue for the three months ended June 30, 2007 and 2006, respectively.

Income (Loss) from Operations. Operating income was $0.3 million for the three months ended June 30, 2007 compared to an operating loss of $1.4 million for the three months ended June 30, 2006, which was attributed to the factors discussed above.

Other Expense. Other expense for the three months ended June 30, 2007 increased approximately $7.3 million, or 106.9%, over the three months ended June 30, 2006 and related to the following:

Interest Expense. Interest expense for the three months ended June 30, 2007 increased approximately $7.3 million, or 104.2%, from the three months ended June 30, 2006, which was attributable to the following:


	Three Months
	Ended
	June 30,
	2007		2006
	(In millions)

Revolving facility	$	0.6	$	0.4
Senior term loan		4.6		4.1
Bridge loan		—		0.1
Senior unsecured note		6.6		—
Subordinated Note		0.6		1.0
-long-term deferred interest		0.2		—
-amortization of debt issuance costs		0.3		—
Accretion of warrants(a)		1.1		1.2
Other		0.3		0.2

Total	$	14.3	$	7.0


(a)		Reflects change in value assigned to the detachable warrants associated with the Subordinated Note based on the change in the value of Alion common stock and the number of warrants outstanding.

Income Tax Expense. The Company has filed qualified subchapter S elections for all of its wholly-owned domestic subsidiaries to treat them as disregarded entities for federal income tax purposes. Some states do not recognize the effect of these elections or Alion’s S corporation status. For the Company’s Canadian subsidiary, Alion Science and Technology (Canada) Corporation, it accrues a tax liability, as required. The Company recorded $1,000 income tax expense for the three months ended June 30, 2007 and $7,000 income tax expense for the three months ended June 30, 2006.

Net Loss. The net loss for the three months ended June 30, 2007 increased over the three months ended June 30, 2006, because of the factors discussed above.

Nine Months Ended June 30, 2007 Compared to Nine Months Ended June 30, 2006

For purposes of comparability, the selected financial information provided in the table below reflects the relative financial impact of the BMH, WCI and MA&D acquisitions and for the work performed in support of the contracts acquired from Anteon, which we refer to as the “acquired operations” of Alion, as they relate to the financial performance of Alion for the nine months ended June 30, 2007, compared to the financial performance for nine months ended June 30, 2006. All operations of Alion, other than those acquired through the above-noted acquisitions are referred to as “non-acquired operations.” The selected financial information provided in the table represents actual results for the acquired and non-acquired operations rounded to the nearest one hundred thousand dollars.


	Nine Months Ended					Nine Months Ended
	June 30, 2007					June 30, 2006
	Consolidated Operations of					Consolidated Operations of
	Alion					Alion
	(Dollars in millions)
			%						%
Financial Information			revenue						revenue

Total Revenue	$	554.0				$	329.3
Material and subcontract revenue		230.0		41.5	%		100.7			30.6	%
Total direct contract expenses		423.8		76.5	%		244.5			74.2	%
Major components of direct contract expenses
Direct labor expense		187.0		33.8	%		136.4			41.4	%
Material and subcontract expense		221.3		39.9	%		96.5			29.3	%
Other direct expense		15.5		2.8	%		11.6			3.5	%
Gross profit		130.2		23.5	%		84.8			25.8	%
Total operating expense		124.7		22.5	%		87.6			26.6	%
Major components of operating expense
Indirect personnel and facilities		57.2		10.3	%		34.8			10.6	%
General and administrative (excluding stock-based compensation)		38.6		7.0	%		32.9			10.0	%
Stock-based compensation (included in G&A expense)		9.9		1.8	%		8.3			2.5	%
Depreciation and amortization		16.3		2.9	%		9.7			2.9	%
Income (loss) from operations		5.5		1.0	%	$	(2.8	)		(0.9	)%

Revenues. Revenues for the nine months ended June 30, 2007 increased $224.7 million, or 68.2%, over the nine months ended June 30, 2006. This increase is attributable to the following:


• Increase in revenue generated by the activities of the acquired operations	$	222.9 million
• Increase in revenue generated by the activities of the non-acquired operations	$	1.8 million

Total:	$	224.7 million

As a component of revenue, M&S revenue for the nine months ended June 30, 2007 increased approximately $129.3 million, or 128.4%, over the nine months ended June 30, 2006. The acquired operations and non-acquired operations generated increases of approximately $109.7 million and $19.6 million, respectively. M&S revenue increased to 41.5% of total revenue from 30.6% of total revenue for the nine months ended June 30, 2007 and 2006, respectively. This increase was due primarily to the increase in content of M&S revenue to total revenue from acquired operations, primarily related to WCI and for work provided in support of the Anteon contracts.

Direct Contract Expenses. Direct contract expenses for the nine months ended June 30, 2007 increased $179.3 million, or 73.3%, over the nine months ended June 30, 2006. The acquired operations and non-acquired operations generated increases of approximately $176.9 million and $2.4 million, respectively. Direct contract expenses were 76.5% and 74.2% of total revenue for the nine months ended June 30, 2007 and 2006, respectively. The changes in the major components of direct contract expense were:


	•	Direct labor expense for the nine months ended June 30, 2007 increased $50.6 million, or 37.1%, over the nine months ended June 30, 2006. Direct labor expense declined to 33.8% from 41.4% of total revenue for the nine months ended June 30, 2007 and 2006, respectively. This decrease was due to the decrease in content of direct labor expense from acquired operations primarily related to WCI and for work provided in support of the Anteon contracts.

	•	M&S expense for the nine months ended June 30, 2007 increased $124.8 million, or 129.3%, over the nine months ended June 30, 2006. M&S expense increased to 39.9% from 29.3% of total revenue for the nine months ended June 30, 2007 and 2006, respectively. The percent increase in M&S expense was primarily


		due to the increase in content of M&S expense to total direct contract expense of the acquired operations, primarily related to WCI and for work provided in support of the Anteon contracts. M&S expense was approximately 96.2% and 95.8% of M&S revenue for the nine months ended June 30, 2007 and 2006, respectively.

Gross Profit. Gross profit was $130.2 million and $84.8 million for the nine months ended June 30, 2007 and June 30, 2006, respectively. Gross profit was 23.5% and 25.8% of total revenue for the nine months ended June 30, 2007 and 2006, respectively. Gross profit margins decreased due to the relative increase in M&S contract work. M&S contract work typically generates lower profit margins than contract direct labor work.

Operating Expenses. Operating expenses for the nine months ended June 30, 2007 increased $37.1 million, or 42.4%, over the nine months ended June 30, 2006. Operating expenses were 22.5% and 26.6% of total revenue for the nine months ended June 30, 2007 and 2006, respectively. The changes in the major components of operating expenses were:


	•	Operating expenses for indirect personnel and rental and occupancy expenses for the nine months ended June 30, 2007 increased approximately $22.4 million, or 64.4%, over the nine months ended June 30, 2006. The increase was primarily associated with additional indirect personnel and facilities expenses related to the activities in support of the contracts acquired from Anteon. The contracts from Anteon were acquired on June 30, 2006; therefore, there was no related activity for the nine months ended June 30, 2006. Operating expenses for indirect personnel and facilities were 10.3% and 10.6% of total revenue for the nine months ended June 30, 2007 and 2006, respectively.

	•	General and administrative (G&A) expense, excluding stock-based compensation, for the nine months ended June 30, 2007 increased approximately $5.7 million, or 17.3%, over the nine months ended June 30, 2006. G&A expenses were 7.0% and 10.0% of revenue for the nine months ended June 30, 2007 and 2006, respectively. For the nine months ended June 30, 2007, the Company incurred expenses of approximately $5.9 million for third-party legal and accounting fees associated with financing expense and approximately $1.5 million for third party legal expense for contract protests. These additional expenses represent approximately 1.3% of total revenue. For the nine months ended June 30, 2006, the Company incurred expenses of approximately $1.3 million for external accounting and legal fees associated with the completion of an investigation relating to an anonymous letter received by the Company shortly before the deadline for filing the Annual Report. The anonymous letter alleged, among other things, that on one of the Company’s business units had engaged in illegal activities with respect to certain of its business operations. The independent investigators concluded that there was no material basis for the allegations. Approximately $1.0 million was incurred for legal and accounting fees associated with acquisitions. These additional expenses represented approximately 0.7% of total revenue.

	•	Stock-based compensation expense (a separate element in G&A expense) relates to the SAR and phantom stock plans. This expense for the nine months ended June 30, 2007 increased approximately $1.6 million, or 19.3%, over the nine months ended June 30, 2006. The increase in stock-based compensation expense results from the relative change in price of a share in Alion common stock and, to a lesser extent, the increase in the awards granted.

	•	Depreciation and amortization expense for the nine months ended June 30, 2007 increased approximately $6.6 million, or 68.0%, over the nine months ended June 30, 2006. Depreciation expense primarily arises from fixed assets while amortization expense results primarily from purchased contracts. Depreciation and amortization expense was 2.9% of revenue for the nine months ended June 30, 2007 and 2006, respectively.

Income (loss) from Operations. Operating income was $5.5 million for the nine months ended June 30, 2007 compared to operating loss of $2.8 million for the nine months ended June 30, 2006, which resulted from the factors discussed above.

Other Expense. Other expense for the nine months ended June 30, 2007 increased approximately $35.0 million, or 248.7%, over the nine months ended June 30, 2006 and relates to the following:

Interest Expense. Interest expense for the nine months ended June 30, 2007 increased approximately $28.4 million, or 190.6%, over the nine months ended June 30, 2006, which was attributable to the following:


	Nine Months Ended
	June 30,
	2007		2006
	(In millions)

Revolving facility	$	1.9	$	0.7
Senior term loan		16.6		9.4
Bridge loan		6.8		0.1
Senior unsecured note		10.6		—
Subordinated Note		1.9		1.8
-long-term deferred interest		0.7		0.5
-amortization of debt issuance costs		0.7		0.7
Accretion of warrants(a)		3.4		1.5
Other		0.7		0.2

Total	$	43.3	$	14.9


(a)		Reflects change in value assigned to the detachable warrants associated with the Subordinated Note and/or the Mezzanine Note based on the change in the value of Alion common stock and the number of warrants outstanding; the warrants associated with the Mezzanine Note were redeemed in March 28, 2006.

Loss on extinguishment of debt. In February 2007, the Company paid off the $170.0 million balance under the Bridge Loan Agreement. The Company determined that the pay-off of the Bridge Loan was a debt extinguishment and recognized a loss on extinguishment of debt of $6.2 million for the nine months ended June 30, 2007.

Income Tax (Expense) Benefit. The Company has filed qualified subchapter S elections for all of its wholly-owned domestic subsidiaries to treat them as disregarded entities for federal income tax purposes. Some states do not recognize the effect of these elections or Alion’s S corporation status. For the Company’s Canadian subsidiary, Alion Science and Technology (Canada) Corporation, it accrues a tax liability, as required. The Company recorded $11,000 income tax benefit and $26,000 in income tax expense for the nine months ended June 30, 2007 and June 30, 2006, respectively.

Net Loss. The net loss for the nine months ended June 30, 2007 increased over the nine months ended June 30, 2006, because of the factors discussed above.

Liquidity and Capital Resources

The Company’s primary liquidity requirements are for debt service, working capital, capital expenditures, and acquisitions. The Company’s principal working capital need is to fund accounts receivable, which increases with the growth of the Company’s business. The Company is funding present operations, and intends to fund future operations, primarily through cash provided by operating activities and through use of a revolving credit facility.

The following discussion relates to the cash flow of Alion for the nine months ended June 30, 2007 and 2006.

Net cash used in operating activities was approximately $38.9 million and $7.0 million for the nine months ended June 30, 2007 and 2006, respectively. The $31.9 million increase in use of cash was primarily attributable to the approximate $26.7 million increase in net loss and $29.4 million increase in use of cash to fund growth in accounts receivable, which were offset by the approximate $13.2 million decrease in payments of trade accounts payable and other liabilities, $6.2 million loss on extinguishment of debt, and $6.6 million increase in depreciation and amortization.

Net cash used in investing activities was approximately $19.0 million and $283.3 million for the nine months ended June 30, 2007 and 2006, respectively. During the nine months ended June 30, 2007, the Company paid approximately $12.6 million in acquisition related obligations (termination and earn out payments) for JJMA, WCI and BMH. The Company spent approximately $6.5 million for capital expenditures unrelated to acquisitions. During the nine months ended June 30, 2006, the Company used cash of approximately $278.8 million to acquire BMH, WCI, MA&D and the Anteon Contracts. The Company spent approximately $4.5 million for capital expenditures unrelated to acquisitions.

Net cash provided by financing activities was approximately $55.2 million for the nine months ended June 30, 2007, compared to net cash used in financing activities of $255.2 million for the nine months ended June 30, 2006. During the nine months ended June 30, 2007, Alion borrowed $250.0 million in Private Senior Unsecured Notes, of which $170.0 million was used to repay the Bridge Loan, $52.9 million was used primarily to pay outstanding principal of senior term loans under the Term B Senior Credit Facility, and $5.8 million was used to pay debt issuance costs. The remaining $4.3 million debt issue costs were paid from working capital. During the nine months ended June 30, 2007, the Company also borrowed $15.0 million under the revolving credit facility for working capital needs and received $12.7 million from the issuance of common stock under the ESOP. During the nine months ended June 30, 2006, Alion borrowed approximately $118.0 million in proceeds under the Term B Senior Credit Facility and borrowed $170.0 million pursuant to the Bridge Loan Agreement. The borrowed proceeds of approximately $288.0 million were used to fund acquisitions ($278.8 million), to pay certain debt issuance costs of approximately $7.8 million and to repay approximately $1.3 million of principal of senior term loans under the Term B Senior Credit Facility. The Company used cash of approximately $13.6 million to redeem the mezzanine warrants held by IIT and Dr. Atefi, and purchased approximately $17.7 million in common stock from the ESOP Trust.

Discussion of Debt Structure

Term B Senior Credit Facility

As of June 30, 2007, the Term B Senior Credit Facility consisted of:


	•	a senior term loan in the approximate amount of $221.1 million;

	•	a $50.0 million senior revolving credit facility under which approximately $25.3 million was outstanding as of June 30, 2007, and approximately $3.7 million of which was allocated for letters of credit and as such is not available to be borrowed; and

	•	a $135.0 million uncommitted incremental term loan “accordion” facility.

The discussion below describes the Term B Senior Credit Facility, as amended and supplemented by Amendments One, Two, Three, Increment Four, Amendment Four and Increment Five; the Subordinated Note used to finance the Transaction; the previously effective Bridge Loan Agreement and the Senior Unsecured Notes issued and sold by the Company.

On August 2, 2004, the Company entered into the Term B Senior Credit Facility with a syndicate of financial institutions for which Credit Suisse serves as arranger, administrative agent and collateral agent, and for which LaSalle Bank National Association serves as syndication agent.


	•	In April 2005, the first amendment to the Term B Senior Credit Facility (Amendment One) made certain changes to the Term B Senior Credit Facility and added $72.0 million in term loans to the Company’s total Term B Senior Credit Facility debt.

	•	In March 2006, the second amendment to the Term B Senior Credit Facility (Amendment Two) made certain changes to the Term B Senior Credit Facility and increased the term loan commitment by $68.0 million, of which the full $68.0 million had been drawn down by the Company as of June 30, 2007, and increased the revolving credit commitment from $30.0 million to $50.0 million.


	•	On June 30, 2006, the third amendment to the Term B Senior Credit Facility (Amendment Three) made certain changes to the Term B Senior Credit Facility and added $50.0 million in term loans to the Company’s total Term B Senior Credit Facility debt.

	•	On January 4, 2007, the fourth increment to the Term B Senior Credit Facility (Increment Four) added $15.0 million in term loans to the Company’s total Term B Senior Credit Facility debt.

	•	On February 6, 2007, the fourth amendment to the Term B Senior Credit Facility (Amendment four) made certain changes to the Term B Senior Credit Facility, including (i) extending the maturity date of the senior term loans to February 6, 2013, (ii) adjusting the principal repayment schedule to require one balloon principal repayment at maturity, and (iii) adding an incurrence test as an additional condition to the Company’s ability to incur permitted indebtedness.

	•	On July 17, 2007, the Company entered into a fifth incremental term loan facility (Increment Five), which added $25.0 million in term loans to the Term B Senior Credit Facility.

The Term B Senior Credit Facility requires the Company to repay one percent of the principal balance of the senior term loan during each of the first eight years (fiscal years 2005 through 2012) and the first quarter of fiscal year 2013 in equal quarterly principal installments and the remaining principal balance outstanding during the ninth and final year (2013) in one principal installment. As of July 17, 2007, through the quarter ending December 31, 2012, the Company is currently obligated to pay quarterly principal installments of approximately $0.6 million. On February 6, 2013, the senior term loan maturity date, the Company is obligated to pay a principal installment of approximately $232.5 million.

Use of Proceeds. On January 4, 2007, the Company borrowed $15.0 million of incremental term loans under Increment Four less approximately $0.3 million in fees associated with the borrowing, to pay down a portion of the outstanding balance on the senior revolving credit facility. On July 17, 2007, the Company borrowed $25.0 million of incremental term loans under Increment Five less approximately $0.5 million in fees associated with the borrowing to pay down a portion of the outstanding balance on the senior revolving credit facility.

Interest and Fees. Under the Term B Senior Credit Facility, the senior term loan and the senior revolving credit facility can each bear interest at either of two floating rates. As of June 30, 2007, the Company was entitled to elect that interest be payable on the Company’s senior term loan at an annual rate equal to either: 1) the applicable alternate base interest rate charged by Credit Suisse plus a 150 basis point spread or, 2) the Eurodollar rate plus a 250 basis point spread. The Company was also entitled to elect that interest be payable on the senior revolving credit facility at an annual rate dependent on the Company’s leverage ratio and whether the borrowing is a Eurodollar or an alternate base rate (ABR) borrowing. As of June 30, 2007, under the Term B Senior Credit Facility, if the Company were to elect a Eurodollar borrowing under its senior revolving credit facility, interest would be payable at an annual rate equal to the Eurodollar rate plus additional basis points as reflected in the table below under the column “Eurodollar Spread” corresponding to the Company’s leverage ratio at the time. Under the Term B Senior Credit Facility, if the Company were to elect an ABR borrowing under its senior revolving credit facility, the Company would pay interest at an alternate base interest rate based on the greater of Credit Suisse’s prime rate or a federal funds effective rate, plus additional basis points reflected in the table below under the columns “Prime Rate ABR Spread” or “Federal Funds ABR Spread” corresponding to the Company’s leverage ratio at the time.


	Eurodollar		Federal Funds		Prime Rate
	Spread		ABR Spread		ABR Spread
Leverage Ratio	(in basis points)		(in basis points)		(in basis points)

Category 1		275		225		175
Greater than or equal to 3.00 to 1.00
Category 2		250		200		150
Greater than or equal to 2.50 to 1.00 but less than 3.00 to 1.00
Category 3		225		175		125
Greater than or equal to 2.00 to 1.00 but less than 2.50 to 1.00
Category 4		200		150		100
Less than 2.00 to 1.00

On April 1, 2005, the Company elected to have the senior term loan bear interest at the Eurodollar rate and the senior revolving credit facility bear interest at the ABR rate. As of June 30, 2007, the Eurodollar rate on the senior term loan was 7.86 percent (5.36 percent plus 2.50 percent Eurodollar spread) and the ABR rate was 9.75 percent (8.25 percent plus 1.50 percent spread).

Other Fees and Expenses. Each quarter the Company is required to pay a commitment fee equal to 50 basis points per year on the prior quarter’s daily unused balance of the revolving credit facility and the senior term loan. As of June 30, 2007, there was approximately $25.3 million outstanding on the revolving credit facility and approximately $3.7 million was allocated for letters of credit; and the senior term loan was fully utilized. For the nine months ended June 30, 2007, the Company paid a commitment fee of approximately $59,000 for the revolving credit facility and no commitment fee for the senior term loan.

Financial Covenants. The Term B Senior Credit Facility requires the Company to meet certain financial performance measures over the life of the facility. These financial measures are used by the Company’s lenders in evaluating the Company’s leverage capacity, debt service ability and liquidity that result from the calculation of the senior secured leverage ratio and the interest coverage ratio as required by the terms of the Term B Senior Credit Facility. As defined below, both the senior secured leverage ratio and interest coverage ratio refer to the non-GAAP terms “EBITDA” and “Consolidated EBITDA” as defined in the Term B Senior Credit Facility. EBITDA and consolidated EBITDA have been calculated by management in accordance with the financial covenants and have not been audited. The definition, calculation and reconciliation of the differences between these non-GAAP financial measures to the most comparable financial measures calculated and presented in accordance with GAAP in this quarterly report on Form 10-Q are included in the schedules that follow.

a) Consolidated EBITDA — Definition

Consolidated EBITDA is defined in the Term B Senior Credit Facility as: (a) the Company’s consolidated net income (or loss), as defined therein, plus (b) without duplication, to the extent deducted from net income or included in the net loss, the sum of: (i) interest expense; (ii) provision for income taxes; (iii) depreciation and amortization, including amortization of other intangible assets; (iv) cash contributions to the ESOP in respect of the repurchase liability of the Company under the ESOP Plan; (v) any non-cash charges or expenses (other than the write-down of current assets) including (A) non-cash expenses associated with the recognition of the difference between the fair market value of the remaining outstanding Warrants (see Note 12 “Redeemable Common Stock Warrants”) and the exercise price of those Warrants, (B) non-cash expenses with respect to the stock appreciation rights and phantom stock plans, and the remaining outstanding Warrants and accretion of those Warrants and (C) non-cash contributions to the ESOP, (vi) any extraordinary losses and (vii) any nonrecurring charges and adjustments treated as such by the third-party valuation firm that prepares valuation reports in connection with the ESOP, minus (c) without duplication, (i) all cash payments made on account of reserves, restructuring charges and other non-cash charges added to net income (or included in net loss) pursuant to clause (b)(v) above in a previous period and (ii) to the extent included in net income (or net loss), any extraordinary gains and all non-cash items of income, all determined on a consolidated basis in accordance with GAAP.

In addition, the Term B Senior Credit Facility adjusts consolidated EBITDA for purposes of calculating compliance with certain financial covenants in the event that the Company acquires another business pursuant to pre-approved procedures and requirements which the Term B Senior Credit Facility refers to as a “Permitted Acquisition” and in cases where the Company sells certain significant assets. In those cases, consolidated EBITDA will be adjusted for a particular accounting period so that consolidated EBITDA takes into account the pro forma effect of such acquisition or asset sale as if it had taken place at the beginning of that particular accounting period. The Term B Senior Credit Facility also adjusts consolidated EBITDA for purposes of the new incurrence test added pursuant to Amendment Four.

Consolidated EBITDA has limitations as an analytical tool, and is not to be considered in isolation or as a substitute for analysis of the Company’s financial performance or liquidity as reported under GAAP. Some of these limitations are:


	•	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.

The calculation and reconciliation to the most comparable financial measure calculated and presented in accordance with GAAP is included in the table below.

Non-GAAP Measures — EBITDA and Consolidated EBITDA
For the Twelve Months Ended June 30, 2007 and 2006


Calculation of EBITDA	2007			2006
	(Dollars in thousands)

Net loss	$	(57,806	)	$	(23,087	)
Plus: Interest expense		58,115			21,308
Plus: Income tax expense (benefit)		(11	)		41
Plus: Depreciation and amortization expense		23,126			14,787

EBITDA	$	23,424		$	13,049


Calculation of Consolidated EBITDA	2007		2006
	(Dollars in thousands)

EBITDA	$	23,424	$	13,049
Plus: Cash contributions to ESOP in respect of the repurchase liability		—		2,380
Plus: Non-cash expenses with respect to the stock appreciation rights and phantom stock plans (Stock-based compensation less cash settlements)*		12,315		11,307
Plus: Non-cash contributions to the ESOP (including Company 401-k match)*		10,062		7,311
Plus: Loss on extinguishment of debt		6,170		—
Plus: Adjustments permitted by certain covenants in the Term B Senior Credit Facility		20,393		9,462

Consolidated EBITDA	$	72,364	$	43,509


*		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. As of June 30, 2006, the Company’s leverage ratio was calculated by dividing the total outstanding amount of all of the Company’s consolidated indebtedness, but excluding the amount owed under the Company’s Subordinated Note and the aggregate amount of letters of credit issued on the Company’s behalf other than drawings which have not been reimbursed, by the Company’s Consolidated EBITDA for the previous four fiscal quarters on a rolling basis. The maximum total leverage ratio is measured as of the end of each quarter. As of June 30, 2006, for each of the following time periods, the Company was permitted to maintain a maximum leverage ratio not greater than the following:


Period	Ratio

June 30, 2006 through September 30, 2007		6.50 to 1.00
October 1, 2007 through June 30, 2008		6.00 to 1.00
July 1, 2008 through June 30, 2009		5.75 to 1.00
Thereafter		5.25 to 1.00

The calculation of the Company’s leverage ratio for the twelve months ended June 30, 2006 is set forth in the table below.

Computation of Leverage Ratio
Under the Term B Senior Credit Facility
For the Twelve Months Ended June 30, 2006


	2006
	(Dollars in thousands)

Numerator:
Revolving credit facility	$	5,975
Term B Senior Credit facility debt outstanding, at face value		259,670
Bridge loan		170,000

Total debt outstanding	$	435,645

Denominator:
Consolidated EBITDA	$	43,509
Plus: Permitted covenant adjustments		25,074

Consolidated EBITDA with pro forma effect of acquisitions	$	68,583

Leverage ratio:		6.35

The Company’s leverage ratio was converted into a senior secured leverage ratio pursuant to Amendment Four. The Company’s senior secured leverage ratio is calculated by dividing the total outstanding amount of all of the Company’s consolidated indebtedness secured by a lien, but excluding the Senior Unsecured Notes, the amount owed under the Company’s Subordinated Note and the aggregate amount of letters of credit issued on the Company’s behalf other than drawings which have not been reimbursed, by the Company’s Consolidated EBITDA for the previous four quarters on a rolling basis. The maximum total senior secured leverage ratio is measured as of the end of each of quarter. For each of the following time periods, the Company will be permitted to maintain a maximum senior secured leverage ratio not greater than the following:


Period	Ratio

February 6, 2007 through September 30, 2007		4.00 to 1.00
October 1, 2007 through September 30, 2008		3.75 to 1.00
October 1, 2008 through September 30, 2009		3.25 to 1.00
Thereafter		3.00 to 1.00

The calculation of the Company’s senior secured leverage ratio for the twelve months ended June 30, 2007 is set forth in the table below.

Computation of Senior Secured Leverage Ratio
Under the Term B Senior Credit Facility
For the Twelve Months Ended June 30, 2007


	2007
	(Dollars in thousands)

Numerator:
Revolving credit facility	$	25,300
Term B Senior Credit facility debt outstanding, at face value		221,121

Total debt outstanding	$	246,421

Denominator:
Consolidated EBITDA		72,364
Plus: Permitted covenant adjustments		—

Consolidated EBITDA with pro forma effect of acquisitions		72,364

Leverage ratio:		3.41

Interest Coverage Ratio. As of June 30, 2006, the Company’s interest coverage ratio was calculated by dividing the Company’s consolidated EBITDA, less amounts the Company spends attributable to property, plant, equipment and other fixed assets, by the Company’s consolidated interest expense. As of June 30, 2006, for each of the following time periods, the Company was required to maintain a minimum interest coverage ratio not less than the following:


Period	Ratio

June 30, 2006 through September 30, 2007		1.65 to 1.00
October 1, 2007 through September 30, 2008		1.75 to 1.00
Thereafter		2.00 to 1.00

The calculation of the Company’s interest coverage ratio for the twelve months ended June 30, 2006 is set forth in the table below.

Computation of Interest Coverage Ratio
Under the Term B Senior Credit Facility
For the Twelve Months Ended June 30, 2006


	2006
	(Dollars in thousands)

Numerator:
Consolidated EBITDA	$	43,509
Plus: Permitted covenant adjustments		25,074

Consolidated EBITDA with pro forma effect of acquisitions		68,583
Less: Capital expenditures		4,968

Consolidated EBITDA with pro forma effect of acquisitions less capital expenditures	$	63,615


	2006
	(Dollars in thousands)

Denominator:
Consolidated interest expense	$	11,059
Interest coverage ratio		5.75

The Company’s interest coverage ratio was modified pursuant to Amendment Four. In order for the Company to remain in compliance with this covenant, the interest coverage ratio for any period of four consecutive quarters, in each case taken as one accounting period, can not be less than 1.35 to 1.00.

The calculation of the Company’s interest coverage ratio for the twelve months ended June 30, 2007 is set forth in the table below.

Computation of Interest Coverage Ratio
Under the Term B Senior Credit Facility
For the Twelve Months Ended June 30, 2007


	2007
	(Dollars in thousands)

Numerator:
Consolidated EBITDA	$	72,364
Plus: Permitted covenant adjustments		—

Consolidated EBITDA with pro forma effect of acquisitions		72,364
Less: Capital expenditures		7,227

Consolidated EBITDA with pro forma effect of acquisitions less capital expenditures		65,137


	2007
	(Dollars in thousands)

Denominator:
Consolidated interest expense	$	30,525
Interest coverage ratio		2.13

For the nine months ended June 30, 2007 and 2006, the Company was in compliance with the financial covenants set forth in the Term B Senior Credit Facility.

Bridge Loan Agreement

On June 30, 2006, the Company entered into a Bridge Loan Agreement with Credit Suisse and borrowed $170.0 million (the Bridge Loan). Certain of the Company’s subsidiaries guaranteed the Bridge Loan Agreement. The Company used the proceeds from the Bridge Loan to pay part of the cost of acquiring the Anteon Contracts. On February 8, 2007, the Company used a majority of the proceeds of the issuance and sale of the Private Senior Unsecured Notes to repay all amounts outstanding under the Bridge Loan Agreement.

Subordinated Note

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 PIK notes have the effect of deferring the underlying cash interest expense on the Subordinated Note. Beginning in December 2008, the Subordinated Note will bear interest at 16% per year payable quarterly in cash until the note has been repaid in full. Principal on the Subordinated Note is payable in equal installments of $19.95 million in December 2009 and December 2010. The PIK notes are due in equal installments of approximately $7.4 million on these same dates.

Senior Unsecured Notes

On February 8, 2007, the Company issued and sold $250.0 million of its 10.25% senior unsecured notes due February 1, 2015 (Private Senior Unsecured Notes) to Credit Suisse, which informed the Company that it resold most of the Private Senior Unsecured Notes to qualified institutional buyers.

Security. The Senior Unsecured Notes are currently guaranteed by HFA, CATI, METI, JJMA, BMH, WCI and MA&D and will be guaranteed by certain of the Company’s future subsidiaries.

accrued and unpaid interest to the redemption date, if redeemed during the 12-month period commencing on February 1 of the years set forth below:


Period	Redemption Price

2011		105.125	%
2012		102.563	%
2013 and thereafter		100.000	%

Covenants. The Indenture governing the Senior Unsecured Notes contains covenants that, among other things, limit the Company’s ability and the ability of certain of its subsidiaries to:


	•	incur or guarantee additional indebtedness;

	•	pay dividends on capital stock or redeem, repurchase or retire capital stock or subordinated indebtedness, except in certain circumstances for the junior subordinated notes and junior warrants;

	•	repurchase or redeem shares of Company stock in connection with distributions and diversifications from the ESOP component of the KSOP;

	•	transfer or sell assets including shares of stock of certain subsidiaries of the Company outside the ordinary course of business;

	•	make investments other than certain permitted investments;

	•	engage in business unrelated to the Company’s existing business;

	•	incur certain liens and enter into sale/leaseback transactions;

	•	enter into certain transactions with affiliates;

	•	pay dividends and make their distributions and loans to the Company; and

	•	merge or consolidate with other companies.

Events of Default. The Indenture contains customary events of default, including:


	•	payment default;

	•	uncured covenant breaches;

	•	default under an acceleration of certain other debt exceeding $30 million;

	•	certain bankruptcy and insolvency events;

	•	a judgment for payment in excess of $30 million entered against the Company or any material subsidiary that remains outstanding for a period of 60 days and is not discharged, waived or stayed; and

	•	failure of any guarantee of the Senior Unsecured Notes to be in effect or the denial or disaffirmation by any subsidiary guarantor of its guaranty obligations.

Change of Control. Upon the occurrence of any of the following events, each holder of Senior Unsecured Notes has the right to require that the Company repurchase such holder’s notes at a purchase price in cash equal to 101% of the principal amount of such holder’s notes plus accrued and unpaid interest:


	•	subject to certain exceptions, a person, other than the ESOP Trust, is or becomes the beneficial owner, directly or indirectly, of more than 35% of the total voting power or voting stock of the Company;

	•	individuals who on the date of issuance of the Senior Unsecured Notes constituted the board of directors of the Company, cease for any reason to constitute a majority of the board of directors of the Company;

	•	the adoption of a plan relating to the liquidation or dissolution of the Company; and


	•	subject to certain exceptions, the merger or consolidation of the Company with or into another person or the merger of another person with or into the Company, or the sale of all or substantially all the assets of the Company to another person.

During the remainder of fiscal year 2007 and the next six fiscal years, at a minimum, we expect that we will have to make the estimated interest and principal payments set forth below. The estimates include the effect of additional borrowings of $25.0 million of senior term loans on July 17, 2007, under the Term B Senior Credit Facility (see discussion of debt amendment in Note 18 — Subsequent Events in the Notes to the Condensed Consolidated Financial Statements).


	6-Fiscal Year Period
	2007*		2008		2009		2010		2011		2012		Thereafter
	($ In thousands)

Bank revolving credit facility
- Interest(1)	$	289	$	250	$	250	$	250	$	250	$	250	$	750
Senior Term Loan
- Interest(2)		4,745		19,213		19,399		19,589		19,635		19,529		6,849
- Principal(3)		618		2,474		2,474		2,474		2,474		2,474		233,134
Senior Unsecured Notes
- Interest		12,314		25,625		25,625		25,625		25,625		25,625		64,063
- Principal		—		—		—		—		—		—		250,000
Subordinated Note
- Interest		—		—		6,384		3,192		—		—		—
- Principal		—		—		27,352		27,352		—		—		—

Total cash — Pay interest		17,348		45,088		51,658		48,656		45,510		45,404		71,662
Total cash — Pay principal		618		2,474		29,826		29,826		2,474		2,474		483,134

Total	$	17,966	$	47,562	$	81,484	$	78,482	$	47,984	$	47,878	$	554,796


*		Estimated interest and principal payments for the remainder of fiscal year 2007.

(1)		The Company anticipates accessing, from time to time, its $50.0 million revolving credit facility to finance the Company’s ongoing working capital needs. The remaining term of the revolving credit facility is approximately two years; however, the Company expects to access a revolving credit facility as an on-going requirement to fund working capital at least through 2012. For the remainder of fiscal year 2007, the average balance drawn on the Company’s then revolving credit facility is projected to be approximately $2.0 million. For the fiscal years 2008 through 2012, the Company anticipates the balance drawn on its then revolving credit facility will be minimal. Interest expense value includes an estimate for the unused balance fee on the $50.0 million revolving credit facility.

(2)		The projected average annual senior term loan balance the Company estimates will be drawn under the Term B Senior Credit Facility is as follows: $245.5 million, $244.3 million, $241.8 million, $239.3 million, $236.8 million, and $234.4 million for the remainder of fiscal year 2007 and for fiscal years ending September 30, 2008 through 2012, respectively. The Company expects it will need to refinance the Term B Senior term loan before the end of fiscal year 2012 and expects interest expense to continue at levels similar to prior years. Based on an estimated LIBOR rate plus the Credit Suisse Eurodollar spread, the effective annual interest rate for the remainder of fiscal year 2007, and for fiscal years ending September 30, 2008 through 2012 is estimated to be approximately 7.7%, 7.9%, 8.0%, 8.2%, 8.3%, and 8.3%, 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 through September 2007. Outstanding principal balances not under the cap agreements had interest based on the Eurodollar rate. The senior term loan matures February 6, 2013. Estimated interest expense includes an estimate for the commitment fee on the senior term loan.


(3)		The Term B Senior Credit Facility requires the Company to repay approximately 1.0 percent of the principal balance outstanding under the senior term loan annually. Approximately 6.0% of the principal will be paid during fiscal years 2007 through 2012 and the first quarter of fiscal year 2013 and the remaining principal balance will be repaid on February 6, 2013, the senior term loan maturity date. The table reflects the balance drawn of $221.1 million as of June 30, 2007, plus the $25 million in additional term loans drawn under the Term B Senior Credit Facility on July 17, 2007, resulting in expected aggregate annual principal payments of approximately $0.6 million for the remainder of fiscal year 2007, approximately $2.5 million in each of fiscal years 2008 through 2012, approximately $0.6 million for the first quarter of fiscal year 2013, and the remaining principal balance of approximately $232.5 million on February 6, 2013. The Term B Senior Credit Facility also requires the Company to make mandatory prepayments of principal if the Company generates certain excess cash flow in a given fiscal year, issues or incurs certain debt or sells certain assets. As of June 30, 2007, no mandatory prepayments are due.

Other Obligations

Earn outs

The Company has earn out commitments related to the following acquisitions:

WCI — There is an earn out provision not to exceed a total of $2.6 million based on the revenue of the business units that formerly comprised WCI. The obligation continues until September 2007. In the nine months ended June 30, 2007 and 2006, the Company paid approximately $1.3 million and zero, respectively, in previously recognized earn out obligations related to WCI.

Lease Payments

The Company’s remaining minimum lease payment obligations under non-cancelable operating leases for the remainder of fiscal year 2007 and fiscal years ending 2008 through 2012 are $7.0 million, $25.6 million, $22.4 million, $16.7 million, $14.5 million and $10.0 million, respectively. The remaining aggregate obligations on these leases thereafter are approximately $22.9 million. Commercial facility lease expenses included in these amounts are reimbursable costs under the Company’s government contracts.

Other contingent obligations which will impact the Company’s cash

Other contingent obligations which will impact the Company’s cash flow include:


	•	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.

As of June 30, 2007, the Company has spent a cumulative total of $35.4 million to repurchase shares of its common stock in order to satisfy redemption obligations under the KSOP to former employees.


	Number of
	Shares					Total Value
Date	Repurchased			Share Price		Purchased
						(In thousands)

June 2003		5,248		$	11.13	$	58
July 2003		2,696		$	11.13		30
December 2003		50,031		$	14.71		736
May 2004		117		$	16.56		2
June 2004		727		$	16.56		12
June 2004		743		$	16.56		12
July 2004		48,309		$	16.56		800
December 2004		46,816		$	19.94		934
March 2005		5,691		$	19.94		113
June 2005		45,846		$	29.81		1,367
August 2005		1,090		$	33.78		37
September 2005		170,657		$	33.78		5,765
December 2005		211,537		$	35.89		7,592
June 2006		273,800		$	37.06		10,147
July 2006		32,420		$	37.06		1,201
August 2006		1,695		$	37.06		63
December 2006		2,243		$	41.02		92
January 2007		14		$	41.02		1
February 2007		160,020		$	41.02		6,564
March 2007		73		$	41.02		3
May 2007		238		$	43.37		10
June 2007		(2,549	)	$	40.88		(104	)

Total						$	35,435

The Company believes that cash flow from operations and cash available under its revolving credit facility will provide it with sufficient capital to fulfill its current business plan and to fund its working capital needs for at least the next 24 months. Although the Company expects to have positive cash flow from operations, it will need to generate significant additional revenues beyond its current revenue base and to earn net income in order to repay principal and interest on the indebtedness it assumed under the Term B Senior Credit Facility, Senior Unsecured Notes and the remaining outstanding indebtedness it incurred to fund the Transaction.

The Company’s business plan calls for it to continue to acquire companies with complementary technologies. The Term B Senior Credit Facility and the Indenture governing the Senior Unsecured Notes allow the Company to make certain permitted acquisitions, and the Company intends to use a portion of the financing available to it under the Term B Senior Credit Facility to make permitted acquisitions.

The Company also expects that it will need to refinance the Term B Senior Credit Facility before the end of fiscal year 2012. The Company’s cash from operations will be insufficient to satisfy all of its obligations and it cannot be certain that it will be able to refinance on terms that will be favorable to the Company, if at all. Moreover, if the Company’s plans or assumptions change, if its assumptions prove inaccurate, if it consummates additional or larger investments in or acquisitions of other companies than are currently planned, if it experiences unexpected costs or competitive pressures, or if its existing cash and projected cash flow from operations prove insufficient, it may need to obtain greater amounts of additional financing and sooner than expected. While it is the Company’s intention only to enter into new financing or refinancing that it considers advantageous, it cannot be certain that such sources of financing will be available to the Company in the future, or, if available, that financing could be obtained on terms favorable to the Company.

Contract performance — Joint Spectrum Center Contract

During the Company’s fiscal year ended September 30, 2006, the support services contract to the JSC underwent a full and open competition for the follow-on support contract that was to commence beginning October 2005. Following rounds of protest filings in 2005 and 2006, it was finally determined in October 2006 that we would not receive the follow-on contract. The Company’s performance under the JSC contract ended in December 2006.

Recent Accounting Pronouncements

In September 2006, the FAS issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, which requires employers to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity. This statement is effective for the company in fiscal year 2007. The Company is currently analyzing the expected impact of adoption of this Statement on its financial statements.

Forward Looking Statements

This discussion contains forward-looking statements that involve risks and uncertainties. These statements relate to our future plans, objectives, expectations and intentions and are for illustrative purposes only. These statements may be identified by the use of words such as “believe,” “expect,” “intend,” “plan,” “anticipate,” “likely,” “will,” “pro forma,” “forecast,” “projections,” “could,” “estimate,” “may,” “potential,” “should,” “would,” and similar expressions.

The factors that could cause actual results to differ materially from those anticipated include, but are not limited to, the following:


	•	changes to the ERISA laws related to the Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan;

	•	changes to the tax laws relating to the treatment and deductibility of goodwill, the Company’s subchapter S status, or any change in the Company’s effective tax rate;

	•	additional costs associated with compliance with provisions of the Sarbanes-Oxley Act of 2002, including any changes in the SEC’s rules, and other corporate governance requirements;

	•	failure of government customers to exercise options under contracts;

	•	funding decisions relating to U.S. Government projects;

	•	government contract procurement (such as bid protest) and termination risks;

	•	competitive factors such as pricing pressures and/or competition to hire and retain employees;


	•	the results of current and/or future legal proceedings and government agency proceedings which may arise out of our operations (including our contracts with government agencies) and the attendant risks of fines, liabilities, penalties, suspension and/or debarment;

	•	undertaking acquisitions that could increase our costs or liabilities or be disruptive;

	•	taking on additional debt to fund acquisitions;

	•	failure to adequately integrate acquired businesses;

	•	material changes in laws or regulations applicable to the Company’s businesses;

	•	as well as other risk factors discussed in the Company’s annual report on Form 10-K for the year ended September 30, 2006 filed with the SEC on December 1, 2006.

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s view only as of August 14, 2007. The Company undertakes no obligation to update any of the forward-looking statements made herein, whether as a result of new information, future events, changes in expectations or otherwise. This discussion addresses only our continuing operations.


Item 3.	*Quantitative and Qualitative Disclosures About Market Risk*

The Company’s exposure to interest rate risk is primarily due to the debt it incurred to finance the Transaction, the subsequent refinancing of a portion of that debt in August 2004 and additional financing undertaken by the Company in October 2004, April 2005, March 2006, June 2006, January 2007 and February 2007. The Subordinated Notes bear interest at (i) 6.4% from December 21, 2006 though December 20, 2007, (ii) 6.7% from December 21, 2007 through December 20, 2008, and (iii) 16.0% annually after December 20, 2008 until the Subordinated Note is repaid in full. The Senior Unsecured Notes bear interest at a fixed rate of 10.25% annually. None of the Subordinated Notes, the PIK Notes and the Senior Unsecured Notes are subject to the risk of change to interest charges as a result of an increase in market interest rates.

The balance drawn under the $50.0 million senior revolving credit facility bears interest at variable rates based on Credit Suisse’s prime rate plus a maximum spread of 225 basis points. The balance on the senior term loan outstanding under the Term B Senior Credit Facility bears interest at variable rates tied to the Eurodollar rate. Such variable rates increase the risk that interest charges will increase materially if market interest rates increase. As of June 30, 2007, the Company has reduced, in part, the maximum total amount of variable interest rate risk on the senior term loan outstanding under the Term B Senior Credit Facility by entering into three interest rate cap agreements that cover the first $92.5 million borrowed under the Term B Senior Credit Facility, or approximately 41.7% of the principal borrowed as of June 30, 2007.

The approximate impact of a 1% increase in the interest rate, as applied to principal balances drawn under the Senior Term B Credit Facility that are not covered by the current interest rate cap agreement, would be $0.4 million, $2.5 million, $2.5 million, $2.4 million, $2.4 million and $2.4 million for the remainder of fiscal year 2007 and for the fiscal years ending September 30, 2008 through 2012, respectively.

The Company does not use derivatives for trading purposes. It invests its excess cash in short-term, investment grade, and interest-bearing securities.

Foreign currency risk

The Company’s expenses and revenues from its international contracts are generally denominated in U.S. dollars. The Company does not believe that its operations are subject to material risks associated with currency fluctuations.

Risk associated with the value of Alion common stock

The Company has exposure to change in the fair market value of Alion’s common stock as the economic basis for the estimate of contingent obligations relating to the holder’s put rights associated with the Subordinated Note warrants. The value of this obligation would increase by approximately $4.7 million if the price of the Company’s

stock were to increase by 10% and would decrease by approximately $4.7 million if the price of the Company’s stock were to decrease by 10%.

The Company also has exposure to change in the fair market value of Alion’s stock as the economic basis for the estimate of contingent obligations relating to its repurchase obligations under the KSOP and obligations relating to stock appreciation rights and phantom stock programs. The amount of such exposure will depend upon a number of factors including but not limited to, the number of employees who might exercise their rights under the stock appreciation and phantom stock programs during any particular time period.


Item 4.	*Controls and Procedures*

(a) Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this quarterly report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.

(b) Internal Control Over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


Item 4T.	*Controls and Procedures*

Not applicable.

PART II — OTHER INFORMATION


Item 1.	*Legal Proceedings*

See Footnote 17 to the Condensed Consolidated Financial Statements. Other than the actions discussed in Footnote 17, the Company is not involved in any legal proceeding other than routine legal proceedings occurring in the ordinary course of business. The Company believes that these routine legal proceedings, in the aggregate, are not material to its financial condition and results of operations.

As a government contractor, the Company may be subject from time to time to federal government inquiries relating to its operations and audits by the Defense Contract Audit Agency. Contractors found to have violated the False Claims Act, or which are indicted or convicted of violations of other federal laws, may be suspended or debarred from federal government contracting for some period. Such an event could also result in fines or penalties.


Item 1A.	*Risk Factors*

None.


Item 2.	*Unregistered Sales of Equity Securities and Use of Proceeds*

None, other than sales of securities already reported by the Company in current reports on Form 8-K.


Item 3.	*Defaults Upon Senior Securities*

None.


Item 4.	*Submission of Matters to a Vote of Security Holders*

None.


Item 5.	*Other Information*

None.


Item 6.	*Exhibits*


Exhibit No.			Description

	10	.85	Employment Agreement between Alion Science and Technology Corporation and Dr. Bahman Atefi. (1)
	31	.1	Certification of Chief Executive Officer of Alion Science and Technology Corporation pursuant to Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
	31	.2	Certification of Chief Financial Officer of Alion Science and Technology Corporation pursuant to 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
	32	.1	Certification of Chief Executive Officer of Alion Science and Technology Corporation, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32	.2	Certification of Chief Financial Officer of Alion Science and Technology Corporation, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


(1)		Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Form 8-K filed with the Securities and Exchange Commission on June 21, 2007.


PART I — Financial Information
	Item 1.	Financial Statements (unaudited)
		Condensed Consolidated Balance Sheets	2
		Condensed Consolidated Statements of Operations	3
		Condensed Consolidated Statements of Cash Flows	4
		Notes to Condensed Consolidated Financial Statements	5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
	Item 4.	Controls and Procedures	54
	Item 4T.	Controls and Procedures	54
PART II — Other Information			55
	Item 1.	Legal Proceedings	55
	Item 1A.	Risk Factors	55
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
	Item 3.	Defaults Upon Senior Securities	55
	Item 4.	Submission of Matters to a Vote of Security Holders	55
	Item 5.	Other Information	55
	Item 6.	Exhibits	55

	a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)		[Reserved]

	c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


		/s/ Bahman Atefi Name: Bahman Atefi
		Title: Chief Executive Officer


		/s/ John M. Hughes Name: John M. Hughes
		Title: Chief Financial Officer

	(1)		The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

	(2)		The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Corporation.