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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K/A
(Amendment No. 1)


		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended September 30, 2007

Alion Science and Technology Corporation

(Exact name of Registrant as Specified in its Charter)


Delaware	333-89756	54-2061691
(State or Other Jurisdiction of Organization)	(Commission File Number)	(IRS Employer Incorporation or 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, including

Area Code, of Principal Executive Offices)

Securities registered pursuant to Section 12(b) or 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ (Do not check if a smaller reporting company)		Smaller reporting company o

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

Aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter: None

The number of shares outstanding of Alion Science and Technology Corporation common stock as of September 30, 2007 was 5,012,934.

Documents Incorporated by Reference:
None

EXPLANATORY NOTE

Alion Science and Technology Corporation (“Alion” or the “Company”) has restated its consolidated financial statements as of September 30, 2007 and 2006, and for the years ended September 30, 2007, 2006 and 2005. This restatement arose from two issues that management determined during the second quarter of fiscal year 2008:

1) The Company has restated its consolidated balance sheet to classify its common stock in accordance with Section 210.5-02(28) of Regulation S-X. The Alion Science and Technology Corporation Employee Stock Ownership, Savings and Investment Trust (the ESOP Trust) is holder of record of all of Alion’s common stock for the benefit of participants in the Alion Science and Technology Corporation Employee Stock Ownership Plan (ESOP). Participants or beneficiaries are entitled to a distribution of the fair value of their vested ESOP account balance upon death, disability, retirement or termination of employment. The Company can choose whether to make a distribution in cash or shares of Alion common stock. The Internal Revenue Code and the Employee Retirement Income Security Act require that if Alion distributes common stock to a participant or beneficiary, the Company must provide a put option to permit the recipient to sell the stock back to the Company at the estimated fair value price per share. Although the Company and the ESOP retain the right to delay distributions consistent with the terms of the plan and to control the circumstances of future distributions, eventual redemption of shares of Alion common stock is deemed to be outside the Company’s control. As a result, in accordance with Section 210.5-02(28) of Regulation S-X, shares of common stock held by the ESOP Trust will be presented as “Redeemable common stock” on the Company’s consolidated balance sheet and not as permanent capital under “Shareholder’s equity.” The reclassification had no impact on the Company’s results of operations for any period presented or compliance with covenants related to any credit facilities for the fiscal years presented.

2) The Company erred in its statement of cash flows in the presentation of certain stock redemptions that occurred in late July and early August 2007. Total reported cash flow was correct. The Company overstated cash used in operations and cash provided by financing activities by approximately $23 million.

The Company has revised the following disclosures:


	•	The Company updated the goodwill, earn-out obligations and intangibles amounts for Washington Consulting and Anteon in Item 6 to conform to the amounts presented in the Notes to the Financial Statements.

	•	The Company updated its selected financial data in Item 6 to include outstanding subordinated debt in long term debt excluding current portion.

	•	The Company updated the cash paid for taxes for the three years ended September 30, 2007 on the statement of cash flows. The original amounts in the Form 10-K incorrectly included cash paid for other taxes as well as income taxes.

	•	The Company removed the marketable securities paragraph from the significant accounting policies footnote as the Company did not have marketable securities in fiscal years 2007 or 2006.

	•	The Company updated the intangibles accounting policy to state that intangibles are amortized as the economic benefits are consumed, instead of amortized using the straight-line method.

	•	The Company updated the “Leases” Note to the Financial Statements regarding the lease payments and the composition of total rent expense for fiscal years 2005, 2006 and 2007.

	•	The Company reclassified its $1.5 million investment in VectorCommand Ltd. to other non-current assets from other current assets in its balance sheets as of September 30, 2007 and 2006.

The following sections in this report have been amended as a result of the restatement:


	•	Part II — Item 6. Selected Financial Data;

	•	Part II — Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations;

	•	Part II — Item 8. Financial Statements and Supplementary Data:

	•	Part II — Item 9A. Controls and Procedures; and

PART I


Item 1.	*Business*

Some of the statements under “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this annual report on Form 10-K/A constitute forward-looking statements, which involve known and unknown 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,” “forecast,” “projections,” “could,” “estimate,” “may,” “potential,” “should,” “would” and similar expressions and may also include references to assumptions.

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 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 risks, such as protests of contract awards and government contract terminations; competitive factors such as pricing pressures and/or ability 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 governmental 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 other laws or regulations applicable to the Company’s businesses, as well as other risks discussed elsewhere in this annual report.

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s view only as of December 28, 2007. We undertake no obligation to update any of these factors or to publicly announce any change to our forward-looking statements made herein, whether as a result of new information, future events, changes in expectations or otherwise.

Overview

Alion Science and Technology Corporation (“Alion”, “the Company”, “we”, “our”) is an employee-owned company. We provide scientific, engineering and information technology solutions for problems relating to national defense, homeland security and energy and environmental analysis. We provide these research and developmental services primarily to U.S. government agencies, in particular U.S. Department of Defense (DoD), state and foreign governments, and other commercial customers.

Our revenue for the year ended September 30, 2007 was $737.6 million, a 45.0% increase over the prior year. Federal government contracts accounted for 93.3% of our revenues in the year ended September 30, 2007, of which 88.9% came from the DoD alone. For the year ended September 30, 2006, federal government contracts accounted for 94.7% of our revenues and 88.8% came from the DoD.

We apply our expertise to a range of specialized fields, which we refer to as core business areas. The core business areas are further described below. The percentage distribution of our annual revenues, by core business area, is provided in the table below.

Revenue by Fiscal Year


Core Business Area	2007				2006				2005
	(In millions)

-Defense Operations	$	151.3	20.5	%	$	134.1	26.3	%	$	135.4	36.7	%
-Wireless Communications		18.4	2.5	%		47.2	9.3	%	$	56.0	15.2	%
-Industrial Technology Solutions		31.6	4.3	%		37.0	7.3	%	$	45.1	12.2	%
-Naval Architecture and Marine Engineering		296.7	40.2	%		140.4	27.6	%	$	51.1	13.8	%
-Modeling and Simulation		52.4	7.1	%		50.9	10.0	%	$	34.4	9.3	%
-Chemical, Biological, Nuclear, and Environmental Sciences		70.3	9.5	%		51.0	10.0	%	$	32.0	8.7	%
-Information Technology		39.0	5.3	%		25.8	5.1	%	$	11.4	3.1	%
-Systems Engineering		77.9	10.6	%		22.2	4.4	%	$	3.8	1.0	%

	$	737.6	100.0	%	$	508.6	100.0	%	$	369.2	100.0	%

Defense Operations. We provide defense operations services to the DoD, including the following individual service components:


	•	Military transformation: we identify and analyze issues and programs of major importance for the Office of the Secretary of Defense and related U.S. military services transformation initiatives such as joint warfare experimentation. We also integrate Command, Control, Communication, and Computer Intelligence (C4I) initiatives and develop net-centric initiatives.

	•	Logistics management: we provide support to the U.S. Army on a broad range of requirements including infrastructure assessment, defense industrial base assessment, financial management, cost analysis, and base realignment, from planning to implementation.

	•	Readiness assessments and operational support: we deliver strategic planning and decision-making process improvements by providing technical assistance and decision support tools, such as Full Spectrum Analysis and Distributed Information System Collaboration Architecture.

	•	Training and education services: we assist the DoD in the development of its department-wide education and training policies. We develop the necessary technology, compile the information to be used in the courseware, and then translate this into an electronic or web-based advanced distant learning medium so that the student can interact with the courseware from a remote location.

	•	Critical infrastructure protection, risk and vulnerability analysis: we provide techniques, tools, and operational support to assess vulnerabilities and defend infrastructure, including ports, power plants and communications nodes.

Wireless Communications. We provide wireless communications research and spectrum engineering services primarily to the DoD, but also to other agencies of the U.S. government. To a lesser extent, we provide wireless communications research and spectrum engineering services to commercial customers and foreign governments. We have expertise in four primary areas:


	•	Wireless and communications-electronics engineering: we perform work for the government “communications-electronics” and commercial wireless communities. The term “communications-electronics” refers to all devices or systems that use the radio frequency spectrum. Our work for the government sector includes such tasks as conducting modeling and simulation of communications networks and analyzing radar and space systems performance. For our commercial customers, both foreign and domestic, we determine whether wireless communication networks have the geographic coverage the customers desire,


		and whether the systems operate free of interference, and we make recommendations designed to improve network performance. We also evaluate and make recommendations for the design of radio transmitters, receivers and antennas for our commercial customers. In the area of net-centric operations, we design next generation wireless networks and devices, including frequency and bandwidth-adaptive systems.


	•	Spectrum management: we perform studies and analyses related to the manner in which the radio frequency spectrum may be utilized without interruption or interference by both new and existing users and technologies. In addition, we assess existing and new technologies for their ability to utilize the radio frequency spectrum efficiently — in other words, to accomplish designated tasks without using too much of the available radio frequency spectrum. Our services, which include providing spectrum policy advice, are used to support decisions of senior government officials in the U.S. and abroad.

	•	C4ISR system engineering: we deliver Command, Control, Communication and Computer Intelligence, Surveillance, and Reconnaissance (C4ISR) engineering and analysis support for radio frequency communications, radar, and Identification Friend or Foe to DoD system developers and integrators. We also develop automated spectrum management software to assign frequencies to multiple users of the radio frequency spectrum in an effort to minimize interference. Our software tool, Spectrum XXI^tm, is the automated spectrum management system used worldwide by the DoD, and it is now also being used by other agencies of the U.S. federal government. We also design, integrate and deploy spectrum monitoring software to locate and track violators of the rules and regulations of spectrum usage.

	•	Electromagnetic environmental effects: we perform studies and analyses to measure and predict electromagnetic environmental effects for both government and commercial customers. Our work has involved building automated tools designed to predict the effects of potential hazards of electromagnetic radiation to ordnance, fuel and personnel. We also analyze electronic components in automotive parts such as brakes and airbags for electromagnetic interference issues on behalf of various commercial customers.

Industrial Technology Solutions. We provide the following services to our federal government customers, including the DoD, and, to a lesser extent, to commercial customers:


	•	Reliability, material and manufacturing engineering: we apply technology to enhance production, improve performance, reduce cost and extend life of complex engineered products.

	•	Sensor technology development: we develop, evaluate, adapt and integrate sensor technologies and provide support to the DoD’s Night Vision and Electronic Sensors Directorate.

	•	Facilities engineering/construction management: we provide expertise in engineering, architecture and related disciplines (e.g., construction management, logistics, design oversight and inspection).

	•	Research and analysis center management: we manage a number of DoD information analysis centers such as the: Advanced Materials, Manufacturing and Testing Information Analysis Center (AMMTIAC) which is a recent combination of the Advanced Materials Processes Technology Information Analysis Center (AMPTIAC), the Manufacturing Technology Information Analysis Center (MTIAC), and the Non Destructive Testing Information Analysis Center (NTIAC). We also manage the DuPage Manufacturing Research Center.

	•	Aerospace coating production and application: we develop and apply coatings to protect government and commercial satellites.

	•	Innovative manufacturing technologies: we develop and integrate systems for low-volume productivity (e.g., laser cladding of parts) and rapid manufacturing systems.

We also operate acoustical laboratories through which we have the capability to test and evaluate various components for sound transmission, absorption and intensity; field measurement testing; equipment vibration and isolation; noise abatement; and active silencing.

Naval Architecture and Marine Engineering. We provide technical services for ship and systems design from the initial phase of mission analysis and feasibility trade-off studies through contract and detail design, production supervision, testing and logistics support for the commercial and naval markets.


	•	Ship design: we provide total ship design services for military and commercial customers. The services encompass whole ship systems engineering including requirements definition, concept analysis, feasibility studies and contract design, detail design and production support.

	•	Naval architecture: we provide systems engineering/design integration, hull form development and performance analysis, structural design and analysis, weight engineering and intact and damage stability analysis.

	•	Marine engineering: we design and engineer ship systems including propulsion, electrical, fluids/piping, auxiliary, HVAC, deck machinery, and machinery automation and control systems. We provide expertise for machinery integration, test and trials, failure analysis, modeling and simulation, and integrated logistics support.

	•	Combat systems engineering: we provide services including mission and threat analysis, evaluation of candidate warfare and combat systems, development of specifications and installation drawings for topside and below-deck interface requirements, and ship modernizations.

	•	Program management: we furnish acquisition planning, business and financial management, configuration and data management, test and evaluation support, and production analysis and management in all life cycle phases of equipment, systems, and ships.

Modeling and Simulation. Our modeling and simulation operations assist our customers in examining the outcome of events by providing services such as:


	•	Wargaming, experimentation, scenario design and execution: we design and conduct strategic and operations analytic wargames to evaluate future operational concepts and force transformation initiatives, create and implement training scenarios for two-dimensional and three-dimensional (3-D) simulation systems, support Joint Forces Command’s Millennium Challenge, and we support Joint Conflict and Tactical Simulation (JCATS) scenarios.

	•	C4I integration: we design and develop policies for the DoD to enable standard automated interfaces between simulation and C4I systems which support improved planning, training and military operations.

	•	Analysis and visualization: we develop terrain modeling databases and realistic 3-D visual systems for flight simulation and other training systems. We manage the Modeling and Simulation Information Analysis Center (MSIAC) for the DoD.

	•	Phenomenological modeling: we develop phenomenological models for nuclear, chemical, biological and electromagnetic environments.

Chemical, Biological, Nuclear and Environmental Sciences. Our chemical, biological, nuclear and environmental sciences operations provide a wide range of research primarily to the DoD and the U.S. Environmental Protection Agency, but also to other departments of U.S. federal and state governments, including:


	•	Chemical/biological agent detection and decontamination: we develop, test and evaluate methods for detection and chemical decontamination of chemical, biological and other toxic agents; and operate a chemical agent surety laboratory. We provide analytical methods to enhance safe handling of chemical substances and design methods to convert harmful chemical and biological materials into harmless materials.

	•	Laboratory support: using our laboratory facilities we analyze materials, wastes and effluents to determine constituents and/or properties; develop and validate analytical methods and instruments; and develop, test and implement methods for measuring air quality.

	•	Life sciences: we provide analysis, testing, operational and laboratory support in the areas of: biotechnology, biomedical sciences and toxicology.

	•	Detection, recovery and disposal of unexploded ordnance and explosives: we demilitarize conventional, toxic/radioactive and chemical warfare material; and we decontaminate and demolish buildings and


		equipment contaminated with explosives. We provide these services through our wholly-owned subsidiary, Human Factors Applications, Inc.


	•	Environmental sciences: we provide analysis, operational and laboratory support in: air pollution research, toxicology, ecology and habitat, and quality assurance program support; exhaust plume dispersion calculations and modeling; emissions modeling; air and water pollution equipment evaluations; and technology evaluations of waste streams.

	•	Nuclear safety and analysis: we provide nuclear safety and analysis services to the U.S. Department of Energy and its National Laboratories as well as to the commercial nuclear power industry.

Information Technology. Our information technology operations provide the following services primarily to agencies of the U.S. government, including the DoD, as well as to commercial customers:


	•	Enterprise architecture development and integration: we design, develop and implement enterprise information systems.

	•	Applications development: we develop web-based and stand-alone solutions, as well as decision support tools.

	•	Knowledge management: we deliver solutions for data warehousing/mining, decision support, and information analysis.

	•	Network design and secure network operations: we provide information assurance, business continuity and disaster planning, network planning and designs for virtual private networks.

	•	Independent verification and validation: we implement modeling and simulation, test and evaluation, and database monitoring.

	•	Medical informatics: we develop and integrate technologies for acquisition, storage and use of information, including decision support in the field of biomedicine.

Systems Engineering. We provide systems engineering to the DoD, including the following individual service components:


	•	System design, integration and process optimization: our systems engineering expertise is designed to ensure that operational and client requirements are optimized throughout the design process, resulting in solutions that meet critical needs and support long-term goals.

	•	Logistics analysis and assets management: we provide complete DoD program support and management, from acquisition and financial management to logistics and strategic planning. We support a broad range of requirements including infrastructure, reserve mobilization, cost analysis, and base realignment.

	•	Human-Systems integration: our engineers provide insight to how the operators of a system interact with technology and the working environment. Our extensive capabilities in this area include human factors engineering, system safety analysis, and crew resource requirements modeling.

	•	Major systems acquisition management: our experts develop and use tested methodologies and tools to provide oversight of all aspects of the acquisition lifecycle, resulting in greater control over costs and deadlines.

	•	Design for life cycle management: our technical and operational experts can assess needs and develop and implement systems designed to provide maximum return on investment from cradle to exit.

Software Tools and Technology Products. We provide a series of software tools and technology products that complement our core business areas. While our software tools and technology products represent less than 1.0% of

our total revenue, they play an important role in enhancing our service and solutions offerings and increasing customer satisfaction. Examples include:


	•	Frequency Assignment & Certification Engineering Tool (FACET^tm): this software tool automates the assignment of radio frequencies, which we refer to as spectrum management, in a way that is designed to minimize interference between multiple users of the radio frequency spectrum.

	•	Advanced Cosite Analysis Tool (ACAT^tm): this software tool is designed to permit co-location of numerous antennas on towers, rooftops and other platforms by predicting interference between the various systems and informing the user how to minimize interference.

	•	Spectrum Monitoring Automatic Reporting and Tracking System (SMART^tm): this system characterizes the frequency usage in a given geographic area, allowing the customer to remotely monitor the spectrum to identify unauthorized users and to look for gaps in the spectrum usage.

	•	X-IG^tm: this software provides 3-D images for managing and displaying visuals of terrain and environment used in flight simulation and other training systems.

	•	MobSim^tm/SimViewer^tm: this software provides for tracking components across multiple modes of transportation (e.g., air, sea, rail and truck).

	•	Virtual Ocean^tm: this software provides visualization of ship motions based on analytically correct representation of the seaway.

	•	Countermeasures^tm: we provide vulnerability/risk assessment software used to analyze and quantify physical or electronic security.

	•	CaveDog^tm: this product is a small, remote-controlled hemispherical, multi-spectral vision robot vehicle used for surveillance and reconnaissance.

	•	Real Time Location System (RTLS^tm): this product is designed to enable customers to track thousands of users in a defined area, such as a seaport, a football stadium or an office building, using low cost antennas and badges.

	•	Isis- 3D^tm: we provide fire code software with specific models for weapon thermal hazard response, including aerosol and radiation models.

	•	PRISM^tm: we provide software used for system level failure rate modeling with the ability to model both operating and non-operating failure rates. The system considers non-component failure causes through process assessment.

Corporate History

Alion Science and Technology Corporation was organized on October 10, 2001, as a for-profit Delaware corporation for the purposes of purchasing substantially all of the assets and assuming certain liabilities of IITRI, a not-for-profit Illinois corporation. Alion is a 100% Employee Stock Ownership Plan (ESOP) owned, S corporation that is the successor in interest to IITRI, a government contractor in existence for more than sixty years. The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Trust (the ESOP Trust) holds record title to all issued and outstanding shares of Alion’s common stock. On December 20, 2002, some of the eligible employees of IITRI directed funds from their eligible retirement account balances into Alion’s ESOP. State Street Bank and Trust Company, trustee of the ESOP Trust (the ESOP Trustee), used these proceeds, together with funds described elsewhere in this annual report, to purchase substantially all of IITRI’s assets and certain liabilities (hereafter referred to as the “Selected Operations of IITRI”). We refer to this purchase as “the Transaction.” Given the significance of the Transaction, and its effect on Alion’s capital structure, summary descriptions of the acquisition and the related deal terms, the purchase of Alion common stock by the ESOP, and Alion’s ESOP are provided below.

The Acquisition and Deal Terms for the Purchase of Assets from IITRI (the Transaction)

Acquired Business. On December 20, 2002, Alion acquired substantially all of the assets, rights and liabilities of IITRI’s business except for, amongst others, those assets, rights and liabilities associated with the Life Sciences Operation (other than its accounts receivable, which Alion did acquire), and IITRI’s real property, some of which we leased upon completion of the acquisition.

Purchase Price. The aggregate purchase price we paid to IITRI for its assets was approximately $127.3 million.

Assumption of Liabilities. Alion assumed substantially all of the liabilities of IITRI’s business, with certain identified exceptions.

Indemnification. IITRI agreed to indemnify us, within limits agreed to by the parties, against any losses resulting from its breach of any of its representations, warranties or covenants and against losses resulting from liabilities retained by IITRI. We, in turn, indemnified IITRI, within limits agreed to by the parties, against losses resulting from our breach of any of our representations, warranties or covenants and against losses resulting from liabilities we assumed.

The Purchase of Alion Common Stock by ESOP Trust

On December 20, 2002, we entered into a stock purchase agreement with the ESOP Trust pursuant to which at closing we issued 2,575,408 shares of our common stock at $10 per share, in exchange for the funds our employees directed to be invested in the ESOP component of the KSOP (a “KSOP” is an employee benefit plan that consists of an ESOP and a 401(k) element, which allows employees to have diversified retirement savings in other investments) in the initial one-time ESOP investment election.

Representations and Warranties. Within the stock purchase agreement, we made representations and warranties to the ESOP Trust that are customary to transactions of this type.

Covenants. As part of the stock purchase agreement, we agreed with the ESOP Trust that:


	•	we will not take any steps without the ESOP Trust’s consent to change our status as an S corporation;

	•	we will not enter into any transactions with any of our officers or directors without approval from our Board of Directors or Compensation Committee;

	•	we will obtain the ESOP Trust’s consent before effecting our first public offering of stock to be listed on any securities exchange;

	•	we will not take actions that would prevent the ESOP Trust from acquiring any additional shares of our stock under the control share acquisition provisions of the Delaware General Corporation Law;

	•	we will repurchase any shares of common stock distributed to participants in the ESOP component of the KSOP, to the extent required by the ESOP, any ESOP related documents and applicable laws;

	•	we will maintain the KSOP and the ESOP Trust so that they will remain in compliance with the qualification and tax exemption requirements under the Internal Revenue Code; and

	•	we will use our best efforts to ensure that the ESOP Trust fully enjoys its right to elect a majority of our Board of Directors and to otherwise control Alion.

Certain of the covenants listed above will lapse if the ESOP Trust fails to own or otherwise control at least 20% of the voting power of all our capital stock.

Indemnification. We agreed to indemnify the ESOP Trust, within limits agreed to by the parties, against any losses resulting from our breach of any of our representations, warranties or covenants. The ESOP Trust will indemnify us, within limits agreed to by the parties, against losses resulting from its breach of any of its representations, warranties or covenants.

The Alion ESOP

The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan, which we refer to as the KSOP, is a qualified retirement plan and is comprised of what we refer to as an ESOP component and a non-ESOP component. One hundred percent of our outstanding shares of common stock are held in the ESOP component of the KSOP. Eligible employees can purchase beneficial interests in our common stock by:


	•	rolling over their eligible retirement account balances into the ESOP component of the KSOP by making an individual one-time ESOP investment election available to new hires; and/or

	•	directing a portion of their pre-tax payroll income to be invested in the ESOP component of the KSOP.

The ESOP Trustee, State Street Bank and Trust Company, uses the monies that eligible employees invest in the ESOP to purchase shares of our common stock, for allocation to those employees’ ESOP accounts.

We make retirement plan contributions to all of our employees who are eligible participants in the KSOP. These retirement plan contributions are made to eligible employees’ accounts in both the ESOP and the non-ESOP components of the KSOP. We also make matching contributions on behalf of eligible employees, in the ESOP component, based on their pre-tax deferrals of their Alion salary.

The ESOP Trustee holds record title to all of the shares of Company common stock allocated to the employees’ ESOP accounts, and except in certain limited circumstances, the ESOP Trustee will vote those shares on behalf of the employees at the direction of the ESOP committee. The ESOP committee is comprised of four members of Alion’s management team and three other Alion employees and is responsible for the financial management and administration of the ESOP component.

By law, Alion is required to value the common stock held in the ESOP component at least once a year. Alion has elected to have the common stock in the ESOP component valued by the ESOP Trustee twice a year — as of March 31 and September 30. Because all ESOP transactions must occur at the current fair market value of the common stock held by the ESOP Trust, having bi-annual valuations affords eligible employees the opportunity to invest in Company common stock and, when applicable, request distributions of their ESOP accounts at the end of each semi-annual period, rather than waiting until the end of each plan year.

Business Strategy

Broaden our existing core competencies. We continually seek to develop new expertise and keep pace with developments in technology by hiring skilled employees, investing in research and development and acquiring new technologies that broaden the scope of our core business areas. In recent years through our acquisition program, we have significantly enhanced several of our core business areas including defense operations, information technology, modeling and simulation, and naval architecture and marine engineering. We also seek to broaden our technology skills by providing training to new and current employees. For example, we have established Alion University to provide our employees with financial, administrative and managerial training and education. In addition, we conduct customer-funded, and to a lesser degree, internally-funded, research and development activities each year. These efforts are designed to position us to remain at the forefront of the federal and commercial technology solutions markets and enhance our ability to service the needs of our customers.

Leverage experience and reputation to expand market share. We perform a variety of services for a broad base of approximately 730 customers, including a number of Cabinet-level U.S. government agencies, as well as state and foreign governments to a lesser degree. We plan to leverage our sophisticated set of capabilities as well as our customer relationships in order to expand our market presence by delivering solutions to new customers. We also believe we can grow our revenue by offering the new solutions capabilities we have obtained through our recent acquisitions or developed internally for our existing customers. We believe that our strong relationships with our customers and sophisticated technology capabilities will allow us to continue to increase market share.

Continue to improve financial performance and increase scale. We believe a key element of our success has been our continued focus on growing our business and achieving operating efficiencies attendant to increased size. Over the last five years we achieved a track record for consistent revenue growth. From fiscal year 2002 to fiscal year 2007, our revenue grew at a compounded annual growth rate of 29.6% from $201.7 million to $737.6 million. We believe our cost structure will benefit from operating cost synergies achieved through our acquisitions. We intend to continue to strengthen our financial performance by growing our business, both organically and through strategic acquisitions, by achieving additional cost efficiencies, and by continuing to reduce operating costs where possible. As we improve financial performance, we believe we will strengthen our position to win business as a result of a more competitive cost structure. In recent years, we have also increased the scale of our business. We plan to leverage our increased scale and skill set to allow us to bid on larger government programs and broaden our customer base.

Pursue a disciplined acquisition strategy. The U.S. government technology industry provides many opportunities to grow through acquisitions. We have maintained a disciplined acquisition strategy. We have evaluated a large number of opportunities, pursued a more limited number and completed 12 acquisitions since January 1, 2003. The success of our acquisition strategy stems from our pricing discipline and successful integration. We have successfully integrated all of our acquisitions into our operations and information systems with an average integration completion time of approximately 90 days. We intend to continue to pursue strategic acquisitions of companies with talents and technologies complementary to our current fields and to our future business goals in order to broaden our customer base and expand our core competencies.

Market and Industry Background

We see the following trends that will continue to drive increased DoD and other U.S. government agencies’ spending for and greater dependence on technology services contractors.

Continuing Growth in Overall DoD Budget/Spending. In addition to projected increases in overall DoD spending on contracting out to the private sector, our government customers are also increasing their dependence and spending on the specific types of services and solutions we provide. The DoD budget for federal fiscal year 2008, excluding supplemental funding relating to operations in Iraq and Afghanistan, has been proposed to Congress at $481.4 billion, representing a 62.0% increase over federal fiscal year 2001. Federal fiscal year 2006 DoD actual spending excluding supplemental funding relating to operations in Iraq and Afghanistan was $410.7 billion. This growth is expected to continue, with the DoD forecasting its budget to grow to over $524.0 billion (excluding supplemental funding) by federal fiscal year 2012.

Growing Spending in the DoD Operations and Maintenance Accounts. The current growth in U.S. military spending is being particularly driven by increases in the Operations and Maintenance (O&M) portion of the budget, rather than weapons and other procurement. The O&M portion of the DoD budget, which includes the majority of the services we provide to the U.S. military, such as engineering, information technology and logistics, is the largest and fastest growing segment of DoD military spending. For federal fiscal year 2007, the DoD budgeted O&M spending to be $152.0 billion, which represented 34.0% of the total DoD military budget. The federal fiscal year 2008 budget for O&M spending has been proposed at $164.7 billion, and is projected by the DoD to increase through federal fiscal year 2012 to $189.1 billion.

Projected Increases in Private Sector Information Technology Government Spending. The U.S. government is the largest consumer of information technology services and solutions in the United States. We believe that the U.S. government’s spending on information technology will continue to increase in the next several years. According to the Federal IT Market Forecast, FY 2007 — FY 2012 report published by INPUT, an independent federal government market research firm, the contracted portion of federal government spending on information technology is forecasted to grow at an annual rate of 5.6% from $65.2 billion in fiscal year 2007 to $85.6 billion in fiscal year 2012. Moreover, this data may not fully reflect U.S. government spending on classified programs such as intelligence programs, operational support services to U.S. armed forces and complementary technical services, such as sophisticated systems engineering.

Expected Growth in DoD Research and Development Expenditures. The DoD research and development budget is expected to grow by 1.0% to $75.1 billion in the federal fiscal year 2008. That budget includes increased funding for both the Defense Advanced Research Projects Agency (DARPA) and the U.S. Air Force.

Increased Budget Dollars for Homeland Security. There has been significant growth in the Department of Homeland Security (DHS) budget, which is estimated at $46.4 billion in federal fiscal year 2008, up from the $42.7 billion budget for federal fiscal year 2007. From fiscal year 2002 through federal fiscal year 2007, the budget for DHS and its predecessor organizations has grown at a 17% compounded annual rate.

Increased Reliance on Technology Services Contractors. The U.S. government is expected to continue its practice of contracting out for technical services as it downsizes and replaces government employees with more cost-effective commercial vendors. In addition, the DoD estimates that over 40.0% of civilian personnel in military depots and industrial facilities will be eligible to retire by federal fiscal year 2009. We believe this will result in a shortage of technically-skilled replacements in the U.S. government and increased use of contracted services.

Growing Opportunities for Sophisticated Technology Solution Providers. In February 2006, the DoD completed its Quadrennial Defense Review (QDR), which details the DoD’s strategic plans and procurement trends. According to a summary of the QDR prepared by the DoD, the QDR is aimed at emphasizing agility, flexibility, speed, responsiveness and pre-emptive military concepts, all of which rely on information technology systems. The QDR also emphasizes the increasing importance of net-centric warfare, which involves enabling critical relationships between organizations and people to accelerate the speed of business processes, operational decision-making and subsequent actions. Finally, the QDR introduces the concept of the 21st Century Total Force, highlighting the contractor’s role in integrated long-term support of the DoD. We believe the following specific industry trends, as excerpted from the QDR, will further increase demand for contracted-out services in our target markets:


	•	Shift from an emphasis on ships, guns, tanks and planes to a focus on information, knowledge, and timely, actionable intelligence.

	•	Implement enterprise-wide changes to ensure that organizations, processes and procedures effectively support DoD’s strategic direction.

	•	Emphasize joint command and control for homeland defense and civil support missions, including communication and command and control systems that are interoperable with other agencies and state and local governments.

	•	Nearly double unmanned aerial vehicle (UAV) coverage capacity by accelerating the acquisition of Predator UAVs and Global Hawk UAVs.

	•	Build a larger naval fleet that includes 11 Carrier Strike Groups, balance the need to transform and recapitalize the naval fleet, improve affordability and provide stability for the shipbuilding industry.

	•	Accelerate procurement of Littoral Combat Ships to provide power projection capabilities in littoral waters.

	•	Make additional investments in information assurance capabilities to protect information and the DoD’s computer networks.

	•	Improve DoD’s information sharing with other U.S. agencies and with international allies and partners by developing information protection policies and exploiting the latest commercial technologies.

	•	Continue to pursue enabling technologies for transformational logistics and innovative operational concepts such as Seabasing.

	•	Increase investment to implement the Global Information Grid, protect information and networks and focus research and development on its protection.

	•	Develop a new bandwidth requirements model to determine optimum network size and capability to best support operational forces.

	•	Expand training programs to accommodate planners from other agencies and working with the DHS.

Continuing Impact of U.S. Government Procurement Reform. In recent years, U.S. government agencies have had increased access to alternative choices in contract vehicles — such as indefinite delivery/indefinite quantity contracts (ID/IQs), Government Wide Acquisition Contracts (GWACs), General Services Administration (GSA) schedule contracts and agency-specific Blanket Purchase Agreements (BPAs). These choices have created a more market-based environment in U.S. government procurement, increased contracting flexibility and provided U.S. government agencies with multiple channels to access contractor services. Contractors’ successful past performance, as well as technical capabilities and management skills, remain critical elements of the award process. We believe the increased flexibility associated with multiple channel access, such as ID/IQs, GWACs, GSA schedule contracts and BPAs, will result in continued utilization of these contracting vehicles in the future, and will facilitate access to service providers to meet increased demand for required services and solutions.

We are primarily a government contractor.

For the years ended September 30, 2007, 2006, and 2005, revenue that we obtained from federal government contracts was 93.3%, 94.7%, and 96.0% of our total revenue for each respective year. The DoD is our largest customer. We expect that most of our revenues will continue to result from contracts with the federal government. We perform our government contracts as a prime contractor or as a subcontractor. As a prime contractor, we have direct contact with the applicable government agency. As a subcontractor, we perform work for a prime contractor, which serves as the point of contact with the government agency overseeing the program.

Our federal government contracts are generally multi-year contracts but are funded on an annual basis at the discretion of Congress. Congress usually appropriates funds for a given program on an October 1 fiscal year commencement basis. That means that at the outset of a major program, the contract is usually only partially funded, and normally the procuring agency commits additional monies to the contract only as Congress makes appropriations for future fiscal years. The government can modify or discontinue any contract at its discretion or due to default by the contractor. Termination or modification of a contract at the government’s discretion may be for any of a variety of reasons, including funding constraints, modified government priorities or changes in program requirements. If one of our contracts is terminated at the government’s discretion, we typically get reimbursed for all of our services performed and costs incurred up to the point of termination, a negotiated amount of the fee on the contract, and termination-related costs we incur.

Contract Types. We have a diverse contract base, with no single contract representing more than 18% of our revenue in fiscal year 2007. As of September 30, 2007, we had a portfolio of approximately 1,200 individual active contracts and task orders. Our contracts have one of three types of pricing structures: cost-reimbursement contracts, fixed-price contracts and time-and-material contracts.


	•	Cost-reimbursement contracts are structured to allow us to recover our direct labor and allocable indirect costs, plus a fee that may be fixed or variable depending on the contract arrangement. Allocable indirect costs refer to those costs related to operating our business that can be recovered under a contract.

	•	Fixed-price contracts oblige customers to pay us a fixed dollar amount to cover all direct and indirect costs, and fees. Under fixed-price contracts we assume the risk of any cost overruns and receive the benefit of any cost savings.

	•	Time-and-material contracts are structured to allow us to recover our labor costs, related indirect expenses and a fee through fixed hourly labor billing rates, and to recover certain material and other direct costs through cost reimbursable provisions without fee.

In addition to traditional, close-ended contracts, our contracts may be structured as multiple award contracts (such as ID/IQ contracts, GSA schedule contracts, BPAs and GWACs), under which we are required to make sustained post-award efforts to realize revenue under such contracts.

Our historical contract mix, measured as a percentage of total revenue for the years ended September 30, 2007, 2006, and 2005, is summarized in the table below.


	For the Year Ended September 30,
Contract Type	2007				2006*				2005*
	(Amounts in millions)

Cost-reimbursement	$	514.4	69.7	%	$	335.0	65.9	%	$	225.1	61.0	%
Fixed-price		70.0	9.5	%		61.6	12.1	%		51.4	13.9	%
Time-and-material		153.2	20.8	%		112.0	22.0	%		92.7	25.1	%

Total	$	737.6	100.0	%	$	508.6	100.0	%	$	369.2	100.0	%


*		The 2006 and 2005 amounts were revised to conform to the current presentation for the reallocation of the ID/IQ contracts.

Any costs we incur prior to the award of a new contract or prior to modification of an existing contract are at our own risk. This is a practice that is customary in our industry, particularly when a contractor has received oral advice of a contract award, but has not yet received the authorizing contract documentation. In most cases the contract is later executed or modified and we receive full reimbursement for our costs. We cannot be certain, however, when we commence work prior to authorization of a contract, that the contract will be executed or that we will be reimbursed for our costs. As of September 30, 2007, we had incurred $17.7 million in contract costs at our own risk.

We compete for key contracts from various agencies of the U.S. government. Our business development and technical personnel target contract opportunities and perform detailed analyses on each customer’s priorities and overall market dynamics. Depending upon whether the targeted contract is a renewal or a new opportunity, we typically will have from three to 18 months to develop and execute our competitive strategy regarding that contract. Once we have decided to pursue a contract, we mobilize a core group of employees with the requisite expertise to lead the bidding and proposal preparation effort. We have a network of consultants and other industry experts to supplement our internal capabilities as necessary.

At each stage of the contracting process, we attempt to reduce financial and performance risks. At the pre-award state, we frequently bid through teaming agreements with other contractors having complementary technical strengths that enhance the likelihood of winning the contract, including, in many instances, our main competitors. Sometimes, before a U.S. government agency has actually signed or begun funding for services under a contract or task order, our employees will begin providing services. We have internal procedures in place to ensure that such “at risk” provisions of services only occur when funding is delayed due to bureaucratic or other technical reasons and it remains highly probable that we will ultimately receive funding.

Once we win a contract or task order, we assign a program manager and, at a lower level, a task leader, to ensure timely and high quality performance of services. Program managers are given access to our financial management information systems to assist them in making sure that our incurred costs do not exceed funded costs under our contracts and task orders. Program managers also constantly interface with our customers to ensure their needs are being satisfied.

Government Oversight. Our contract administration and cost accounting policies and practices are subject to oversight by federal government inspectors, technical specialists and auditors. All costs associated with a federal government contract are subject to audit by the federal government. An audit may reveal that some of the costs that we may have charged against a government contract are not in fact allowable, either in whole or in part. In these circumstances, we would have to return to the federal government any monies paid to us for non-allowable costs, plus interest and possibly penalties. Contract costs on federal government contracts are subject to audit by the federal government and adjustment through negotiations with government representatives. The government considers Alion to be a major contractor and maintains an office at our facilities 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 2005 and 2006 indirect expense rates to the government in March 2006 and 2007, respectively, and expects to submit its fiscal year 2007 indirect expense rates to the government in March 2008. The Company has recorded revenue on federal government contracts in amounts it expects to realize.

Backlog. Our contract backlog represents an estimate, as of a specific date, of the remaining future revenue anticipated from existing contracts. On September 30, 2007, our total contract backlog was $5,029 million of which approximately $360 million was funded. The two elements of our backlog are described below.


	•	Funded backlog reflects amounts that have been awarded to us and whose funding has been authorized by the customer, less revenue previously recognized under the same contracts.

	•	Unfunded backlog represents the total estimated value of contracts awarded to us, but whose funding has not yet been authorized by the customer.

Because the U.S. government operates under annual appropriations, agencies of the U.S. government typically fund contracts on an incremental basis. As a result, only a portion of the total contract backlog is “funded.” Funded backlog generally varies depending on procurement and funding cycles and other factors beyond our control. In addition, pre-negotiated contract options, options not yet exercised by a customer for additional years and other extension opportunities included in contracts are included in unfunded backlog. Changes in our contract backlog calculation result from additions for future revenue as a result of the execution of new contracts or the extension or renewal of existing contracts, reductions as a result of completing contracts, reductions due to early termination of contracts, and adjustments due to changes in estimates of the revenue to be derived from previously included contracts. Estimates of future revenue from contract backlog are by their nature inexact and the receipt and timing of this revenue are subject to various contingencies, many of which are outside of our control. Accordingly, period-to-period comparisons are difficult and not necessarily indicative of any future trends in revenue. The table below shows the value of our funded and unfunded contract backlog as of September 30, 2007, 2006, and 2005, respectively.


	September 30,
	2007		2006		2005
	(In millions)

Backlog:
Funded	$	360.0	$	386.0	$	193.0
Unfunded		4,669.0		3,861.0		2,581.0

Total	$	5,029.0	$	4,247.0	$	2,774.0

Proposal backlog represents an estimate, as of a specific date, of the proposals we have in process or submitted and for which we are waiting to hear results of the award. It consists of two elements:


	•	in-process backlog, which refers to proposals that we are preparing to submit following a request from a customer, and

	•	submitted backlog, which refers to proposals that we have submitted to a customer and for which we are awaiting an award decision.

The amount of our proposal backlog that ultimately may be realized as revenues depends upon our success in the competitive proposal process, and on the receipt of tasking and associated funding under the ensuing contracts. We will not be successful in winning contract awards for all of the proposals that we submit to potential customers. Our past success rates for winning contract awards from our proposal backlog should not be viewed as an indication of our future success rates. The table below shows the value of our proposal backlog as of September 30, 2007, 2006, and 2005, respectively.


	September 30,
	2007		2006		2005
	(In millions)

In-process	$	250.0	$	650.0	$	276.0
Submitted		834.0		474.0	$	1,121.0

Total	$	1,084.0	$	1,124.0	$	1,397.0

Corporate Culture, Employees and Recruiting

We strive to create an organizational culture that promotes excellence in job performance, respect for the ideas and judgment of our colleagues and recognition of the value of the unique skills and capabilities of our professional staff. We seek to attract highly qualified and ambitious staff. We strive to establish an environment in which all employees can make their best personal contribution and have the satisfaction of being part of a unique team. We believe that we have a track record of successfully attracting and retaining highly skilled employees because of the quality of our work environment, the professional challenges of our assignments, and the financial and career advancement opportunities we make available to our staff.

As of September 30, 2007, we employed approximately 3,400 employees, of which approximately 3,140 were full-time employees. Approximately 19% of our employees have Ph.D.s and masters degrees, and approximately 48% of our employees have college degrees. Approximately 22% of our employees have Top Secret level or above security clearances. We believe that our relationship with our employees is good. None of our employees are covered by a collective bargaining agreement.

We view employees as our most valuable asset. Our success depends in large part on attracting and retaining talented, innovative and experienced professionals at all levels. We rely on the availability of skilled technical and administrative employees to perform our research, development and technological services for our customers. The market for certain skills in areas such as information technology and wireless communications is at times extremely competitive. This makes recruiting and retention of employees in these and other specialized areas extremely important. We recognize that our benefits package, work environment, incentive compensation, and employee-owned culture will be important in recruiting and retaining these highly skilled employees.

Our Customers

We provide scientific, research and development and technical expertise and operational support to a diverse group of U.S. government customers, in addition to state, local and international government organizations and commercial customers. As of September 30, 2007, we serviced approximately 730 customers, including a number of Cabinet-level U.S. government agencies, as well as state and foreign governments to a lesser degree. For fiscal year 2007, the DoD accounted for 88.9% of our total revenue, including approximately 230 contracts with customers such as the U.S. Navy, the U.S. Army, the U.S. Air Force, U.S. Joint Forces Command (USJFCOM), Defense Information Systems Agency and DARPA. Other U.S. federal, state, and local government customers accounted for 4.4% of total revenue, including the National Institute of Environmental Health Sciences (NIEHS), U.S. Department of Energy (DOE) and the EPA. Lastly, commercial and international customers accounted for the remaining 6.7% of total revenue. The table below shows revenue by customer type for the fiscal years ended September 30, 2007, 2006, and 2005.


	2007				2006				2005
					(In millions)

U.S. Department of Defense (DoD)	$	655.9	88.9	%	$	451.8	88.8	%	$	324.1	87.8	%
Other Federal Civilian Agencies		32.3	4.4	%	$	30.1	5.9	%	$	30.3	8.2	%
Commercial and International		49.4	6.7	%	$	26.7	5.3	%	$	14.8	4.0	%

Total	$	737.6	100.0	%	$	508.6	100.0	%	$	369.2	100.0	%

Competition

The U.S. government engineering and technology services industries are comprised of a large number of enterprises ranging from small, niche oriented companies to multi-billion dollar corporations that serve a large number of U.S. government customers. Due to the diverse requirements of U.S. government customers and the highly competitive nature of large contracting initiatives, corporations frequently form teams to pursue contract opportunities. Prime contractors leading large proposal efforts typically select team members on the basis of their relevant capabilities and experience particular to each opportunity. As a result of these circumstances, companies that are competitors for one opportunity may be team members for another opportunity.

We frequently compete against well-known firms in the industry as a prime contractor. Our competitors include Booz Allen Hamilton, CACI International, Inc., Science Applications International Corporation, Battelle Memorial Institute, SRA International, Inc. and the services divisions of Lockheed Martin Corporation, General Dynamics Corporation and Northrop Grumman Corporation. In the commercial arena, we compete most often with smaller, but highly specialized technical companies, as well as a number of larger companies. These competitors include, Westinghouse, General Electric, Enercon, Accenture, BearingPoint, Evans and Sutherland, CAE and L-3 Communications Corporation.

Competition also takes place at the task level, where knowledge of the customer and its procurement requirements and environment is often the key to winning business. We have been successful in ensuring our presence on numerous contracts and General Services Administration Schedules, and in competing for tasks under those contracts. Through the variety of contractual vehicles at our disposal, as either a prime contractor or subcontractor, we have the capability to market our services to any U.S. government agency. Because of our experience with providing services to a diverse array of U.S. government departments and agencies, we have first-hand knowledge of our customers and their goals, problems and challenges. In most cases, government contracts for which we compete are awarded based on a competitive process. We believe that in general, the key factors considered in awarding contracts are:


	•	technical capabilities and approach;

	•	quality of personnel, including management capabilities;

	•	successful past contract performance; and

	•	price.

It is our experience that in awarding contracts to perform complex technological programs, the two most important considerations for a customer are technical capabilities and price. Our overall win rate over the past three years has been approximately 52%, based on the dollar value of the relevant contracts. For re-bid of contracts where we are the incumbent, our win rate has been approximately 84% over the last three years, based on the number of those contracts. We believe that our knowledge of our customers, our U.S. government contracting and technical capabilities, and our pricing policies enable us to compete effectively.

S Corporation Status

The Internal Revenue Code provides that a corporation that meets certain requirements may elect to be taxed as an S corporation for federal income tax purposes. These requirements provide that an S corporation may only have:


	•	one class of stock;

	•	up to 100 shareholders; and

	•	certain types of shareholders, such as individuals, trusts and some tax-exempt organizations, including ESOPs.

Since the ESOP Trust (which counts as one shareholder for S corporation purposes) is our only stockholder, and we only have one class of stock, we currently meet the requirements to be taxed as an S corporation.

Alion filed an election with the IRS to be treated as an S corporation under the Internal Revenue Code. The election was accepted and became effective on October 11, 2001. An S corporation, unlike a C corporation, generally does not pay federal corporate income tax on its net income. Rather, such income is allocated to the S corporation’s shareholders. Shareholders must take into account their allocable share of income when filing their income tax returns. An ESOP is a tax-exempt entity and does not pay tax on its allocable share of S corporation income. Because neither we nor the ESOP should be required to pay federal corporate income tax, we expect to have substantially more cash available to repay our debt and invest in our operations than we would if Alion were to be taxed as a C corporation.

Many states follow the federal tax treatment of S corporations. In some states, Alion is subject to different tax treatment for state income tax purposes than for federal income tax purposes. The Company and its subsidiaries

operate in several states where we are subject to state income taxes. The Company is also subject to other taxes such as franchise and business taxes in certain jurisdictions.

The Company’s wholly-owned operating subsidiaries are qualifying subchapter S subsidiaries. For federal income tax purposes, these subsidiaries are consolidated into Alion’s federal income tax returns.

Under a provision of the Internal Revenue Code, significant penalties can be imposed on a subchapter S employer which maintains an ESOP (i) if the amount of ESOP stock allocated to certain “disqualified persons” exceeds certain statutory limits or (ii) if disqualified persons together own 50% or more of the company’s stock. For this purpose, a “disqualified person” is generally someone who owns 10% or more of the subchapter S employer’s stock (including deemed ownership through stock options, warrants, stock appreciation rights, or SARs, phantom stock, and similar rights). The KSOP, the SAR plan and the phantom stock plan include provisions designed to prohibit allocations in violation of these Internal Revenue Code limits. We expect never to exceed the 50% limit. Apart from the warrants representing approximately 18% of our common stock that were issued to IITRI at the closing of the Transaction (and subsequently transferred to the Illinois Institute of Technology), no one person is expected to hold ownership interests representing more than 5% of Alion.

Business Development and Promotional Activities

We primarily promote our contract research services by meeting face-to-face with customers or potential customers, by obtaining repeat work from satisfied customers, and by responding to requests for proposals (RFPs) and international tenders that our customers and prospective customers publish or direct to our attention. We use our knowledge of and experience with U.S. government procurement procedures, and relationships with government personnel, to help anticipate the issuance of RFPs or other potential customer requests and to maximize our ability to respond effectively and in a timely manner to these requests. We use our resources to respond to RFPs and other potential customer requests that we believe we have a good opportunity to win and that represent either our core business areas or logical extensions of those fields for new research. In responding to an RFP or other potential customer requests, we draw on our expertise in various business areas to reflect the technical skills we could bring to the performance of a particular contract.

Our business developers, who also work face to face with our customers, are experienced in marketing to government customers and have knowledge of the services and products they are representing as well as the particular customer’s organization, mission and culture. These professionals also possess a working knowledge of rules governing the marketing limitations that are unique to the government arena. This includes knowledge of government funding systems, conflict of interest restrictions, procurement integrity limitations and other pertinent procedural requirements designed to establish a level competitive playing field and to ensure the appropriate use of public funds.

Our technical staff is an integral part of our promotional efforts. They develop relationships with our customers over the course of contracts that can lead to additional business. They are also exposed to new research opportunities that become available in the course of performing tasks on current contracts. We hold weekly company-wide business development meetings to review specific proposal opportunities and to agree on our strategy in pursuing these opportunities. At times we also use independent consultants for promoting business, developing proposal strategies and preparing proposals.

For internally-funded research and development, we spent approximately $2.4 million, $2.0 million, and $0.5 million for the years ended September 30, 2007, 2006, and 2005, respectively. This is in addition to the substantial research and development activities that we have undertaken on projects funded by our customers. We believe that actively fostering an environment of innovation is critical to our ability to grow our business and attract new business in that it allows us to be proactive in addressing issues of national concern in public health, safety and national defense.

Resources

For most of our work, we use computer and laboratory equipment and other supplies that are readily available from multiple vendors. As such, disruption in availability of these types of resources from any particular vendor

should not have a material impact on our ability to perform our contracts. In some of the specialized work we perform in a laboratory, we depend on the supply of special materials and equipment whose unavailability could have adverse effects on the experimental tasks performed at the laboratory. However, we believe that the overall impact of these types of delays or disruptions on our total operations and financial condition is likely to be minimal.

Patents and Proprietary Information

Our research and development and engineering services do not depend on patent protection. In accordance with applicable law, our U.S. government contracts often provide government agencies with certain rights to our inventions and copyright works, including use of the inventions by government agencies, and a right to exploit these inventions or have them exploited by third-party contractors, including our competitors. Similarly, our U.S. government contracts often license to us patents and copyright works owned by third parties. We maintain an active program to track and protect our intellectual property. We routinely enter into intellectual property assignment agreements with our employees to protect our rights to any patents or technologies developed during their employment with us.

Foreign Operations

In fiscal years 2007, 2006 and 2005, nearly 100% of the Company’s revenue was derived from services provided under contracts with U.S.-based customers. The Company treats revenues resulting from U.S. government customers as sales within the United States regardless of where the services are performed.

Company Information Available on the Internet

The Company’s internet address is www.alionscience.com.

Environmental Matters

Our operations are subject to U.S. federal, state and local and foreign laws and regulations relating to, among other things, emissions and discharges into the environment, handling and disposal of regulated substances, and contamination by regulated substances and wastes. Some of our operations may require environmental permits and/or controls to prevent and reduce air and water pollution, and these permits are subject to modification, renewal and revocation by issuing authorities.

Operating and maintenance costs associated with environmental compliance and prevention of contamination at our facilities are a normal, recurring part of our operations. These costs are not material relative to our total operating costs or cash flows and are generally allowable as contract costs under our contracts with the U.S. government. These costs have not been material in the past and, based on information presently available to us and on U.S. government environmental policies relating to allowable costs in effect at this time, all of which are subject to change, we do not expect these to have a material impact on us. Based on historical experience, we believe that a significant percentage of the total environmental compliance costs associated with our facilities will continue to be allowable costs.

Under existing U.S. environmental laws, potentially responsible parties can be held jointly and severally liable and, therefore, we would be potentially liable to the government or third parties for the full cost of investigating or remediating contamination at our sites or at third-party sites in the event contamination is identified and remediation is required. In the unlikely event that we were required to fully fund the remediation of a site, the statutory framework would allow us to pursue rights of contribution from other potentially responsible parties


Item 1A.	*Risk Factors*

Risks Related to Our Business

We have incurred a significant amount of debt, and our debt load may limit our operational flexibility and negatively affect the value of your investment in the ESOP component.

On August 2, 2004, we refinanced the senior debt we borrowed to complete the acquisition of IITRI’s assets. To partially fund our growth through the completion of subsequent acquisitions, we have incurred a substantial amount of additional indebtedness. As of September 30, 2007, we have borrowed approximately $245.5 million in senior term loans, we have borrowed approximately $13.1 million through actual loans and letters of credit on our senior revolving line of credit, we have borrowed $250 million in senior unsecured notes, and we have issued our $39.9 million junior subordinated note in connection with our formation and completion of the Transaction. Since refinancing our original senior credit facility, we have added significantly to our total senior debt load.

On April 1, 2005, we entered into an incremental term loan and amended our Term B Senior Credit Facility, which added $72.0 million in term loans to our total indebtedness. On March 24, 2006, we entered into a second incremental term loan facility and second amendment (Amendment Two), which increased the term loan commitment under the Term B Senior Credit Facility by $68.0 million. Amendment Two also increased the revolving credit commitment under the senior revolving credit facility from $30.0 million to $50.0 million. On June 30, 2006, we entered into a third incremental term loan facility and amendment three to the Term B Senior Credit Facility (Amendment Three), which added $50.0 million in term loans to our total indebtedness. On January 4, 2007, we entered into a fourth increment to the Term B Senior Credit Facility (Increment Four), which added $15.0 million in term loans to the Company’s total Term B Senior Credit Facility debt. On February 6, 2007, we entered into a fourth amendment to the Term B Senior Credit Facility (Amendment Four), which 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 our ability to incur permitted indebtedness. On July 17, 2007, we 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.

As of September 30, 2007, our senior consolidated debt, at face value, was approximately $504.8 million. Although we have managed significant amounts of debt since December 2002, we do not have extensive experience in functioning as a highly leveraged company for sustained periods of time.

Our substantial debt could have important consequences to you, including:


	•	making it more difficult for us to satisfy our obligations with respect to our debt, and any failure to comply with the obligations of any of our debt instruments, including restrictive and financial covenants, could result in an event of default under the agreements governing our debt;

	•	making it more difficult for us to satisfy our repurchase obligations to ESOP participants;

	•	increasing our vulnerability to general adverse economic and industry conditions by making it more difficult for us to react to changing conditions;

	•	limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions and other business opportunities, introductions of new technologies and other general corporate requirements;

	•	requiring a substantial portion of our cash flow from operations for the payments of interest on our debt and reducing our ability to use our cash flow to fund future working capital, capital expenditures, acquisitions and other business opportunities, introductions of new technologies and other general corporate requirements;

	•	exposing us to risks inherent in interest rate fluctuations because some of our borrowings will be at variable rates of interest, which could result in higher interest expense in the event of increases in interest rates;


	•	limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and

	•	placing us at a competitive disadvantage compared with our competitors that have less debt.

Despite current indebtedness levels, we and our subsidiaries may still be able to incur more debt. This could further exacerbate the risks associated with our substantial leverage.

We have the capacity to issue additional indebtedness, including the ability to raise up to $110.0 million of additional senior secured indebtedness under our Term B Senior Credit Facility, subject to limitations imposed by the covenants in our Term B Senior Credit Facility and the Indenture governing the Senior Unsecured Notes. Although our Term B Senior Credit Facility and the Indenture governing the Senior Unsecured Notes contain restrictive covenants, these restrictive covenants do not and will not fully prohibit us from incurring additional debt.

Our Term B Senior Credit Facility and the Indenture governing the Senior Unsecured Notes will restrict our operations.

Our Term B Senior Credit Facility and the Indenture governing the Senior Unsecured Notes, and our future debt agreements may contain, covenants that may restrict our ability to engage in activities that may be in our long-term best interest, including financing future operations or capital needs or engaging in other business activities. Our Term B Senior Credit Facility and the Indenture will restrict, among other things, our ability and the ability of our subsidiaries to:


	•	incur additional debt other than permitted additional debt;

	•	pay dividends or distributions on our capital stock or purchase, redeem or retire our capital stock other than distributions necessary for the ESOP to satisfy its repurchase obligations and certain payments required under our equity based compensation plans;

	•	make acquisitions and investments other than permitted acquisitions and permitted investments;

	•	issue or sell preferred stock of subsidiaries;

	•	create liens on our assets;

	•	enter into certain transactions with affiliates;

	•	merge or consolidate with another company; and

	•	transfer and sell assets outside the ordinary course of business.

Our Term B Senior Credit Facility and the Indenture governing the Senior Unsecured Notes requires us, and our future debt agreements may require us, to maintain specified financial ratios relating to, among other things, our interest coverage and leverage coverage levels. Our ability to satisfy these financial ratios can be affected by events beyond our control, and we cannot guarantee that we will meet these ratios. Default under our Term B Senior Credit Facility or the Indenture could allow lenders to declare all amounts outstanding under both our Term B Senior Credit Facility and the Senior Unsecured Notes to be immediately due and payable. We have pledged substantially all of our assets to secure the debt under our Term B Senior Credit Facility. If the lenders declare amounts outstanding under the Term B Senior Credit Facility to be due, the lenders could proceed against those assets. Any event of default, therefore, could have a material adverse effect on our business, financial condition and results of operations if the creditors determine to exercise their rights.

From time to time we may require consents or waivers from our lenders to permit actions that are prohibited by our Term B Senior Credit Facility or our Indenture. If, in the future, these lenders refuse to provide waivers of our Term B Senior Credit Facility’s and/or the Indenture’s restrictive covenants and/or financial ratios, then we may be in default under the terms of the Term B Senior Credit Facility and/or our Indenture, and we may be prohibited from undertaking actions that are necessary or desirable to maintain or expand our business. There is no guarantee we will be able to obtain consents or waivers from our lenders.

We expect to experience net losses in at least our next five years of operation.

We have incurred a net loss in each year of operation since our inception in late 2002, and we expect to incur a net loss in at least our next five years of operation, fiscal years 2008 through 2012. Contributing factors to our net losses include the significant amounts of interest expense associated with the debt financing for the acquisitions that we have completed, expense related to our repurchase obligations for outstanding warrants, compensation expense associated with stock appreciation rights and phantom stock plans, and amortization expense related to intangible assets acquired. The amount of net losses and our ability to achieve future profitability are subject to our ability to achieve and sustain a significant level of revenue growth coupled with our ability to manage our operating expenses. If revenue grows slower than we anticipate, or if operating expenses exceed our expectations, we may not become profitable. Even if we become profitable we may not be able to sustain our profitability.

Our ability to meet our financial and other future obligations is dependent on our future operating results and we cannot be sure that we will be able to meet these obligations as they come due.

Our ability to make payments on our debt, to comply with our financial covenants, and to fund working capital needs and planned capital expenditures depends on our ability to generate cash flow in the future. We cannot assure you that our business strategy will succeed or that we will achieve our anticipated financial results. Our financial and operational performance depends upon a number of factors, many of which are beyond our control. These factors include:


	•	funding of our contract backlog;

	•	the time within which our customers pay our accounts receivable;

	•	new contract awards and our performance under those contracts;

	•	continued increase in revenue on an annual basis;

	•	increase in operating income on an annual basis;

	•	the amount of our common stock purchased by our employees via payroll deferrals and rollovers to our ESOP;

	•	the amount of our common stock repurchased from our former employees;

	•	interest rate levels;

	•	our status as an S corporation for U.S. federal income tax purposes;

	•	the current economic condition and conditions in the defense contracting industry;

	•	U.S. government spending levels, both generally and by our particular customers;

	•	the failure by the Congress to approve budgets timely for the U.S. federal agencies we support;

	•	any operating difficulties, operating costs or pricing pressures we may experience;

	•	the passage of legislation or other regulatory developments that affects us adversely; and

	•	any delays in implementing any strategic projects we may have.

These factors will also affect our ability in the future to meet our repurchase obligations under the KSOP. We also are required to re-pay all principal and accrued interest outstanding under our Term B Senior Credit Facility on February 6, 2013 and are required to pay fifty percent of the principal amount outstanding, under the junior subordinated note and fifty percent of the principal amount outstanding under the payment-in-kind notes in each of 2009 and 2010. We further may be required to redeem fifty percent of our subordinated warrant in each of 2009 and 2010 in accordance with the put rights included in our subordinated warrant.

We may not generate sufficient cash flows to comply with our financial covenants and to meet our payment obligations when they become due. If we are unable to comply with our financial covenants, or if we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make the required payments on our

indebtedness, then we may be required to refinance our indebtedness. We cannot be certain that our indebtedness could be refinanced on terms that are favorable to us, if at all. In the absence of a refinancing, our lenders would be able to accelerate the maturity of our indebtedness. As a result, we could default under our other senior indebtedness, expose our assets to seizure or declare bankruptcy.

We face intense competition from many competitors that have greater resources than we do, which could result in price reductions, reduced profitability, and loss of market share.

We operate in highly competitive markets and generally encounter intense competition to win contracts. If we are unable to successfully compete for new business, our revenue growth and operating margins may decline. Many of our competitors are larger and have greater financial, technical, marketing, and public relations resources, larger client bases, and greater brand or name recognition than we do. Larger competitors include U.S. federal systems integrators such as Booz Allen Hamilton, CACI International, Inc., Science Applications International Corporation, Battelle Memorial Institute, SRA International, Inc., and the services divisions of large defense contractors such as Lockheed Martin Corporation, General Dynamics Corporation and Northrop Grumman Corporation. Our larger competitors may be able to compete more effectively for very large-scale government contracts. Our larger competitors also may be able to provide clients with different or greater capabilities or benefits than we can provide in areas such as technical qualifications, past performance on large-scale contracts, geographic presence, price, and the availability of key professional personnel. Our competitors also have established or may establish relationships among themselves or with third parties, including through mergers and acquisitions, to increase their ability to address client needs. Accordingly, it is possible that new competitors or alliances among competitors may emerge.

Our ability to compete for desirable contracts will depend on:


	•	the effectiveness of our research and development programs;

	•	our ability to offer better performance than our competitors at a lower or comparable cost;

	•	the readiness of our facilities, equipment and personnel to perform the programs for which we compete; and

	•	our ability to attract and retain key personnel.

If we do not continue to compete effectively and win contracts, our future business, financial condition, results of operations and our ability to meet our financial obligations may be materially compromised.

Historically, a few contracts have provided us with most of our revenues, and if we do not retain or replace these contracts our operations will suffer.

The following five federal government contracts accounted for approximately 43.5% of our revenues for the year ended September 30, 2007:

1. SeaPort Multiple Award Contract for the Naval Sea Systems Command (17.9%);

2. Technical and Analytical Support for the U.S. Air Force (8.7%);


	3.	Engineering, Financial and Program Management Services to the Virtual SYSCOM for the U.S. Navy (6.7%);

	4.	Modeling and Simulation Information Analysis Center for the DoD for the Defense Modeling and Simulation Office (5.9%); and

5. Night Vision HighTech Omnibus Contract for the U.S. Army (4.3%)

The termination of these contracts or our inability to renew or replace them when they expire could cause our revenue to decrease and could have a material adverse effect on our business, financial condition, results of operations or our ability to meet our financial obligations.

If we are unable to manage our growth, our business could be adversely affected.

Sustaining our growth has placed significant demands on our management, as well as on our administrative, operational and financial resources. To continue to manage our growth, we must continue to improve our operational, financial and management information systems and expand, motivate and manage our workforce. If we are unable to successfully manage our growth without compromising our quality of service and our profit margins, or if new systems we implement to assist in managing our growth do not produce the expected benefits, our business, prospects, financial condition, operating results or our ability to meet our financial obligations could be materially and adversely affected.

Our acquisitions could increase our costs or liabilities or be disruptive.

One of our key operating strategies has been and continues to be to selectively pursue and implement acquisitions. We have made a number of acquisitions in the past, are currently pursuing a number of potential acquisition opportunities, and will consider other acquisitions in the future. We may not be able to successfully implement our past or future acquisitions. We may not be able to consummate the acquisitions we are currently pursuing on favorable terms, or at all. We may not be able to locate other suitable acquisition candidates at prices we consider appropriate or to finance acquisitions on terms that are satisfactory to us. If we do identify an appropriate acquisition candidate, we may not be able to successfully negotiate the terms of an acquisition, finance the acquisition or, if the acquisition occurs, integrate the acquired business into our existing business. Negotiations of potential acquisitions and the integration of acquired business operations could disrupt our business by diverting management away from day-to-day operations. Acquisitions of businesses or other material operations may require additional debt or equity financing, resulting in additional leverage or dilution of ownership. The difficulties of integration may be increased by the necessity of coordinating geographically dispersed organizations, integrating personnel with disparate business backgrounds and combining different corporate cultures. We also may not realize cost efficiencies or synergies that we anticipated when selecting our acquisition candidates. In addition, we may need to record write-downs from future impairments of intangible assets, which could reduce our future reported earnings. At times, acquisition candidates may have liabilities or adverse operating issues that we fail to discover through due diligence prior to the acquisition, but which we generally assume as part of an acquisition. Such liabilities could have a material adverse effect on our business, financial condition, results of operations and our ability to meet our financial obligations.

Due to the inherent danger involved in some of the businesses that we conduct, there are risks of claims by clients and third parties that could have a substantial adverse economic impact upon us.

Some of the businesses that we conduct, such as those that involve unexploded ordnance through a wholly-owned subsidiary of ours, inherently involve dangerous materials or other risks that could expose us to substantial liability, if, for example, our services are involved in situations involving substantial loss of life, personal injury, property damage or consequential damages. There can be no assurance that our efforts to protect against such risks, including the purchase of liability insurance, will be sufficient to avoid the adverse economic impact upon us, should claims by clients and third parties arise in the future.

We depend on key management and may not be able to retain those employees due to competition for their services.

We believe that our future success will be due, in part, to the continued services of our senior management team. The loss of any one of these individuals could cause our operations to suffer. We do not maintain key man life insurance policies on any members of management.

Our business could suffer if we fail to attract, train and retain skilled employees.

The availability of highly trained and skilled professional, administrative and technical personnel is critical to our future growth and profitability. Competition for scientists, engineers, technicians, management and professional personnel is intense and competitors aggressively recruit key employees. Due to our growth and this competition for experienced personnel, particularly in highly specialized areas, it has become more difficult to meet all of our needs

for these employees in a timely manner. We cannot be certain that we will be able to attract and retain such employees on acceptable terms. Any failure to do so could have a material adverse effect on our business, financial condition, results of operations and our ability to meet our financial obligations. If we are unable to recruit and retain a sufficient number of these employees, our ability to maintain and grow our business could be negatively impacted. In addition, some of our contracts contain provisions requiring us to commit to staff a program with certain personnel the customer considers key to our successful performance under the contract. In the event we are unable to provide these key personnel or acceptable substitutions, the customer may terminate the contract, and we may not be able to recover our costs.

If we do not, or the ESOP Trust does not, continue to be exempt from U.S. federal income tax and any unrelated business income tax, our cash flow available to meet our financial obligations and to reinvest in our operations may decrease.

We have made an election to be taxed as an S corporation for U.S. federal income tax purposes. As an S corporation, we generally are not subject to U.S. federal income taxation or state income taxation in most U.S. states. Rather, our income, gains, losses, deductions and credits should flow through to the ESOP Trust. Under current provisions of the U.S. Internal Revenue Code (Code), the ESOP Trust is exempt from U.S. federal income taxation and any unrelated business income tax. Unrelated business income tax is a special U.S. federal income tax imposed on an otherwise tax-exempt entity (such as a tax-exempt charity or qualified pension plan, including an employee stock ownership plan) to the extent it earns income from a trade or business unrelated to its exempt purpose. The Code specifically exempts ESOPs that invest in S corporation stock of the employer from unrelated business income tax.

If for any reason we lose our S corporation status, we could be required to pay U.S. federal and state income tax, thereby reducing the amount of cash available to reinvest in our operations or fulfill our financial obligations. Applicable laws and regulations may change in a way that results in the taxation of us as a corporation other than as an S corporation. Furthermore, current law that exempts the ESOP Trust from U.S. federal income taxation and unrelated business income tax may change. Similarly, if the ESOP Trust becomes subject to U.S. federal and state income taxation, we may have to distribute cash to the ESOP Trust to allow it to pay these taxes, again reducing the amount of cash we have available to reinvest in our operations or to fulfill our financial obligations.

In order to succeed, we will have to keep up with rapid technological changes in a number of industries and various factors could impact our ability to keep pace with these changes.

Our success will depend on our ability to keep pace with technology changes in the following research fields:


	•	defense operations support;

	•	wireless communications;

	•	industrial technology solutions;

	•	naval architecture and marine engineering;

	•	modeling and simulation;

	•	chemical, biological, nuclear and environmental sciences;

	•	information technology; and

	•	systems engineering

Technologies in these fields can change rapidly. Even if we remain abreast of the latest developments and available technology, the introduction of new services or technologies in these industries could have a negative effect on our business. The integration of diverse technologies involved in our research services is complex and in many instances has not been previously attempted. Our success will depend significantly on our ability to develop, integrate and deliver technologically advanced products and services at the same or greater pace as our competitors, many of which have greater resources than we do.

An economic downturn could harm our business.

Our business, financial condition, results of operations and our ability to meet our financial obligations may be affected by various economic factors. Unfavorable economic conditions may make it more difficult for us to maintain and continue our revenue growth. In an economic recession, or under other adverse economic conditions which may arise as a result of certain major events, including without limitation, hurricanes, earthquakes or terrorist attacks, customers and vendors may be more likely to be unable to meet contractual terms or their payment or delivery obligations. A decline in economic conditions may have a material adverse effect on our business, financial condition, results of operations and our ability to meet our financial obligations.

Our employees may engage in misconduct or other improper activities, which could harm our business.

We are exposed to the risk that employee fraud or other misconduct could occur. Misconduct by employees could include intentional failures to comply with U.S. government procurement regulations, unauthorized activities, attempts to obtain reimbursement for improper expenses or the submission of falsified time records. Employee misconduct could also involve the improper use of our customers’ sensitive or classified information, which could result in regulatory sanctions against us and serious harm to our reputation. It is not always possible to deter employee misconduct, and the precautions we take to prevent and detect this activity may not be effective in controlling unknown or unmanaged risks or losses, which could harm our business, financial condition, results of operations and our ability to meet our financial obligations.

The interests of the ESOP Trust may not be aligned with the interests of participants in the ESOP component of the KSOP.

The ESOP Trust owns 100% of our outstanding shares of common stock. Consequently, the ESOP Trust can control the election of a majority of our directors and the outcome of all matters submitted to a vote of stockholders, and has the ability to change our management. The interests of the ESOP Trust may not be fully aligned with the interests of participants in the ESOP component of the KSOP and this could lead to a strategy that is not in the best interests of those participants.

Environmental laws and regulations and our use of hazardous materials may subject us to significant liabilities.

Our operations are subject to U.S. federal, state and local environmental laws and regulations, as well as environmental laws and regulations in the various countries in which we operate. In addition, our operations are subject to environmental laws and regulations relating to the discharge, storage, treatment, handling, disposal and remediation of regulated substances and waste products, such as radioactive, biochemical or other hazardous materials and explosives. The following may require us to incur substantial costs in the future:


	•	modifications to current laws and regulations;

	•	new laws and regulations;

	•	violations of environmental laws or the permits required for our operations;

	•	new guidance or new interpretation of existing laws and regulations; or

	•	the discovery of previously unknown contamination.

Risks Related to Our Industry

We are dependent on U.S. government contracts for substantially all of our revenue, and changes in the contracting policies or fiscal policies of the U.S. government could adversely affect our business, financial condition or results of operations.

Approximately 93%, 95% and 96% of our revenue, respectively, was derived from contracts with agencies of the U.S. government for the years ended September 30, 2007, 2006 and 2005. In the years ended September 30, 2007, 2006 and 2005, contracts with the DoD accounted for approximately 89%, 89% and 88% of our total revenue,

respectively, while contracts with other government agencies accounted for approximately 4%, 6% and 8% of our total revenue, respectively. We expect that U.S. government contracts are likely to continue to account for a significant portion of our revenue in the future. Accordingly, changes in U.S. government contracting policies could directly affect our financial performance. Among the factors that could materially adversely affect our U.S. government contracting business are:


	•	budgetary constraints affecting U.S. government spending generally, or specific departments or agencies in particular, and changes in fiscal policies or available funding;

	•	changes in U.S. government programs or requirements;

	•	curtailment of the U.S. government’s use of technology services firms;

	•	the adoption of new laws or regulations;

	•	technological developments;

	•	U.S. government shutdowns (such as that which occurred during the U.S. government’s 1996 fiscal year);

	•	competition and consolidation in the information technology industry; and

	•	general economic conditions.

These or other factors could cause U.S. governmental agencies to reduce their purchases under contracts, to exercise their right to terminate contracts or not to exercise options to renew contracts, any of which could have a material adverse effect on our business, financial condition, results of operations and our ability to meet our financial obligations.

Many of our U.S. government customers are subject to increasing constraints. We have substantial contracts in place with many U.S. government departments and agencies, and our continued performance under these contracts, or award of additional contracts from these agencies, could be materially adversely affected by spending reductions or budget cutbacks at these agencies. Such reductions or cutbacks could have a material adverse effect on our business, financial condition, results of operations and our ability to meet our financial obligations.

The failure by the Congress to approve budgets timely for the U.S. federal agencies we support could delay or reduce spending and cause us to lose revenue.

On an annual basis, the Congress must approve budgets that govern spending by each of the U.S. government agencies we support. When the Congress is unable to agree on budget priorities, and thus is unable to pass the annual budget on a timely basis, then the Congress typically enacts a continuing resolution. A continuing resolution allows U.S. government agencies to operate at spending levels approved in the previous budget cycle. When U.S. government agencies must operate on the basis of a continuing resolution it may delay funding we expect to receive from clients on work we are already performing and will likely result in any new initiatives being delayed, and in some cases being cancelled, both of which may adversely affect our business, financial condition, results of operations and our ability to meet our financial obligations.

We may not receive the full amount of our backlog, which could lower future revenue.

The maximum contract value specified under a U.S. government contract is not necessarily indicative of revenue that we will realize under that contract. The Congress normally appropriates funds for a given program on a fiscal year basis, even though actual contract performance may take many years. As a result, U.S. government contracts ordinarily are only partially funded at the time of award, and normally the procuring agency commits additional monies to the contract only as the Congress makes appropriations in subsequent fiscal years. Estimates of future revenue attributed to backlog are not necessarily precise, and the receipt and timing of any of this revenue is subject to various contingencies such as changed U.S. government spending priorities and government decisions not to exercise options on existing contracts. Many of these contingencies are beyond our control. The backlog on a given contract may not ultimately be funded or may only be partially funded, which may cause our revenue to be lower than anticipated, and may adversely affect our business, financial condition, results of operations and our ability to meet our financial obligations.

Many of our U.S. government customers spend their procurement budgets through Indefinite Delivery/Indefinite Quantity (ID/IQ) contracts, GSA Schedule contracts and Government Wide Acquisition Contracts (GWAC) under which we are required to compete for post-award orders.

Budgetary pressures and reforms in the procurement process have caused many U.S. government customers to purchase goods and services through ID/IQ, GSA Schedule contracts and other multiple award and/or GWAC contract vehicles. These contract vehicles have resulted in increased competition and pricing pressure requiring that we make sustained post-award efforts to realize revenue under the relevant contracts. There can be no assurance that we will increase revenue or otherwise sell successfully under these contract vehicles. Our failure to compete effectively in this procurement environment could harm our business, financial condition, results of operations and our ability to meet our financial obligations.

U.S. government contracts contain termination provisions that are unfavorable to us.

Generally, U.S. government agencies can terminate contracts with their suppliers at any time without cause. If a U.S. government agency does terminate one of its contracts with us without cause, we will likely be entitled to receive compensation for the services provided or costs incurred up to the date of termination as well as a negotiated amount of the fee on the contract and termination-related costs we incur. However, if a U.S. government contract is terminated because we defaulted under the terms of the contract, we may be liable for excess costs the U.S. government incurs in procuring the undelivered portion of the contract from another source. Termination of any of our large U.S. government contracts may negatively impact our revenue and may adversely affect our business, financial condition, results of operations and our ability to meet our financial obligations.

If we do not accurately estimate the expenses, time and resources necessary to satisfy our contractual obligations, our profit will be lower than expected.

The total price on a cost-reimbursement contract is based primarily on allowable costs incurred, but generally is subject to a maximum contract funding limit. U.S. government regulations require us to notify our customers of any cost overruns or underruns on a cost-reimbursement contract. If we incur costs in excess of the funding limitation specified in the contract, we may not be able to recover those cost overruns. As a result, on a cost-reimbursement contract we may not earn the full amount of the anticipated fee.

In a fixed-price contract, we estimate the costs of the project and agree to deliver the project for a definite, predetermined price regardless of our actual costs to be incurred over the life of the project. We must fully absorb cost overruns. Our failure to anticipate technical problems, estimate costs accurately or control costs during performance of a fixed-price contract may reduce the fee margin of a fixed-price contract or cause a loss. The provisions in our financial statements for estimated losses on our fixed-price contracts may not be adequate to cover all actual future losses.

Our operating margins and operating results may suffer if cost-reimbursement contracts increase in proportion to our total contract mix.

In general, cost-reimbursement contracts are the least profitable of our contract types. Our U.S. government customers typically determine what type of contract will be awarded to us. To the extent that we enter into more or larger cost-reimbursement contracts in proportion to our total contract mix in the future, our operating margins and operating results may suffer.

If the volume of services we provide under fixed-price contracts decreases in total or as a proportion of our total business, or if profit rates on these contracts decline, our operating margins and operating results may suffer.

We have historically earned higher relative profits on our fixed-price contracts. If the volume of services we deliver under fixed-price contracts decreases, or shifts to other types of contracts, our operating margins and operating results may suffer. Furthermore, we cannot assure you that we will be able to maintain our historic levels of profitability on fixed-price contracts in general.

Our subcontractors’ failure to perform contractual obligations could damage our reputation as a prime contractor and thereby our ability to obtain future business.

As a prime contractor, we often rely significantly upon other companies as subcontractors to perform work we are obligated to deliver to our customers. A failure by one or more of our subcontractors to satisfactorily perform services on a timely basis may cause us to be unable to perform our duties as a prime contractor. We have limited involvement in the work our subcontractors perform, and as a result, we may have exposure to problems our subcontractors cause. Performance deficiencies on the part of our subcontractors could result in a government customer terminating our contract for default. A default termination could expose us to liability for the customer’s costs of reprocurement, damage our reputation, and hurt our ability to compete for future contracts.

Because U.S. government contracts are subject to government audits, contract payments are subject to adjustment and repayment which may result in revenue attributed to a contract being lower than expected.

U.S. government contract payments received that are in excess of allowable costs are subject to adjustment and repayment after government audit of the contract payments. All of our federal government contract indirect costs have been audited through fiscal year 2004. Indirect rates have been negotiated and settled through 2003. We submitted our fiscal year 2005 and 2006 indirect expense rates to the federal government in March 2006 and 2007, respectively, and expect to submit our fiscal year 2007 indirect expense rates to the federal government in March 2008. If the estimated reserves in our financial statements for excess billings and contract losses are not adequate, revenue attributed to our U.S. government contracts may be lower than expected.

If we fail to recover at-risk contract costs, it may result in reduced fees or in losses.

Any costs we incur before the execution of a contract or contract renewal are incurred at our risk, and it is possible that the customer will not reimburse us for these costs. At September 30, 2007, we had at-risk costs of $17.7 million. While such costs were associated with specific anticipated contracts, we cannot be certain that contracts or contract renewals will be executed or that we will recover the related at-risk costs.

Actual or perceived conflicts of interest may prevent us from being able to bid on or perform contracts.

U.S. government agencies have conflict of interest policies that may prevent us from bidding on or performing certain contracts. When dealing with U.S. government agencies that have conflict of interest policies, we must decide, at times with insufficient information, whether to participate in the design process and lose the chance of performing the contract or to turn down the opportunity to assist in the design process for the chance of performing on the contract. We have, on occasion, declined to bid on particular projects because of actual or perceived conflicts of interest, and we are likely to continue encountering such conflicts of interest in the future, particularly if we acquire other U.S. government contractors. Future conflicts of interest could cause us to be unable to secure key contracts with U.S. government customers.

As a U.S. government contractor, we must comply with complex procurement laws and regulations and our failure to do so could have a negative impact upon our business.

We must comply with and are affected by laws and regulations relating to the formation, administration and performance of U.S. government contracts, which may impose added costs on our business. If a government review or investigation uncovers improper or illegal activities, we may be subject to civil and/or criminal penalties and administrative sanctions, including termination of contracts, forfeiture of fees, suspension of payments, fines and suspension or debarment from doing business with U.S. government agencies, which may impair our ability to conduct our business.

We derive significant revenue from U.S. government contracts awarded through a competitive bidding process which is an inherently unpredictable process.

We obtain most of our U.S. government contracts through a competitive bidding process that subjects us to risks associated with:


	•	the frequent need to bid on programs in advance of the completion of their design, which may result in unforeseen technological difficulties and/or cost overruns;

	•	the substantial time and effort, including design, development and promotional activities, required to prepare bids and proposals for contracts that may not be awarded to us; and

	•	the design complexity and rapid rate of technological advancement of most of our research offerings.

Upon expiration, U.S. government contracts may be subject to a competitive re-bidding process. We may not be successful in winning contract awards or renewals in the future. Our failure to win contract awards, or to renew or replace existing contracts when they expire, would negatively impact our business, financial condition, results of operations and our ability to meet our financial obligations.

Our failure to obtain and maintain necessary security clearances may limit our ability to carry out confidential work for U.S. government customers, which could cause our revenue to decline.

As of September 30, 2007, we had approximately 356 DoD contracts that require us to maintain facility security clearances at our 32 sites, and approximately 2,600 of our employees held security clearances to enable performance on these U.S. government contracts. Each cleared facility has a Facility Security Officer and Key Management Personnel whom the U.S. Department of Defense — Defense Security Service requires to be cleared to the level of the facility security clearance. In addition to these clearances, individual employees are selected to be cleared, based on the task requirement of the specific classified contract, for their technical, administrative or management expertise. Once the security clearance is granted, the employee is allowed access to the classified information on the contract based on the clearance and “need to know” for the information within the contract. Protection of classified information with regard to a classified U.S. government contract is paramount. Loss of a facility clearance or an employee’s inability to obtain and/or maintain a security clearance could result in a U.S. government customer terminating an existing contract or choosing not to renew a contract upon its expiration. If we cannot maintain or obtain the required security clearances for our facilities or our employees, or if these clearances are not obtained in a timely manner, we may be unable to perform on U.S. government contracts. Lack of required clearances could also impede our ability to bid on or win new U.S. government contracts, which may result in the termination of current research activities. Termination of current research activities may damage our reputation and our revenue would likely decline, which would adversely affect our business, financial results of operations and our ability to meet our financial obligations.


Item 1B.	*Unresolved Staff Comments*

None.


Item 2.	*Properties*

Our principal operating facilities are located in McLean, Virginia and Chicago, Illinois, and consist of 23,823 square feet and 44,767 square feet of office space, respectively, held under leases. We also lease approximately 80 additional office facilities totaling 821,572 square feet. Of these, our largest offices are located in Washington, DC; Fairfax, Alexandria, Vienna, Arlington, Norfolk, Suffolk, and Newport News, Virginia; Swissvale and West Conshohocken, Pennsylvania; Huntsville, Alabama; Mystic, Connecticut; Annapolis and Lanham, Maryland; Orlando, Florida; Rome, New York; Iselin, New Jersey; Pascagoula, Mississippi; Fairborn, Ohio; Mt. Clements, Michigan; Boulder, Colorado; Durham, North Carolina; Bath, Maine; San Diego, California; Albuquerque and Los Alamos, New Mexico; and Warrenville, Illinois. We lease 26 laboratory facilities totaling 98,034 square feet, for research functions in connection with the performance of our contracts. Of these, our largest laboratories are located in Durham, North Carolina; Chicago and Geneva, Illinois; Annapolis Junction and Lanham,

Maryland; West Conshohocken, Pennsylvania; and Louisville, Colorado. The lease terms vary from one to ten years, and are generally at market rates.

Aggregate average monthly base rental expense for fiscal years 2007 and 2006 was $1,908,217 and $1,849,940, respectively.

We periodically enter into other lease agreements that are, in most cases, directly chargeable to current contracts. These obligations are usually either covered by currently available contract funds or cancelable upon termination of the related contracts.

All leased space is considered to be adequate for the operation of our business, and no difficulties are foreseen in meeting any future space requirements.


Item 3.	*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.

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

Our 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 us in connection with these lawsuits under our 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, our management does not believe that the lawsuits will have a materially adverse effect upon us, our operations, cash flows or financial condition. We have notified our excess insurance carrier, American International Group, regarding these lawsuits.

Other than the foregoing action, we are not involved in any legal proceeding other than routine legal proceedings occurring in the ordinary course of business. We believe that these routine legal proceedings, in the aggregate, are not material to our financial condition, results of operations, and cash flows.

As a government contractor, we may be subject from time to time to federal government inquiries relating to our 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. Given the Company’s dependence on federal government contracts, suspension or debarment could have a material adverse

effect on our business, financial condition, results of operations, and ability to meet our financial obligations. The Company is not aware of any such pending federal government claims or investigations.


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

No matters were submitted to the vote of security holders for the fourth quarter of the fiscal year ended September 30, 2007.

PART II


Item 5.	*Market for Registrant’s Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities*

There is no established public trading market for Alion’s common stock. As of September 30, 2007, the ESOP Trust was the only holder of our common stock.

There have been no sales of securities other than sales of securities already reported by the Company in current reports on Form 8-K.

Dividend Policy

Unlike regular C corporations, S corporations do not pay “dividends.” Rather, S corporations make “distributions.” Use of the term “distributions” in this context is unrelated to the term when used in the context of our repurchase obligations under the KSOP. To avoid confusion, when referring to a distribution that would constitute a dividend in a C corporation, we will use the term distribution/dividend. We do not expect to pay any distributions/dividends. We currently intend to retain future earnings, if any, for use in the operation of our business. Any determination to pay cash distributions/dividends in the future will be at the discretion of our Board of Directors and will be dependent on our results of operations, financial condition, contractual restrictions and other factors our Board of Directors determines to be relevant, as well as applicable law. The terms of the Senior Unsecured Notes, Term B Senior Credit Facility, and the junior subordinated note prohibit us from paying distributions/dividends without the consent of the respective lenders.


Item 6.	*Selected Financial Data*

The following table presents selected historical consolidated financial data for Alion or the Selected Operations of IITRI for each of the fiscal years in the five-year period ended September 30, 2007. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical consolidated financial statements and notes to those statements included elsewhere in this annual report. The consolidated operating data for the years ended September 30, 2007, 2006 and 2005 and the consolidated balance sheet data as of September 30, 2007 and 2006 are derived from the consolidated financial statements of Alion included elsewhere in this annual report. The consolidated operating data for the year ended September 30, 2004 and the consolidated balance sheet data as of September 30, 2005 and 2004 are derived from the consolidated financial statements of Alion not included in this annual report.

The consolidated operating data for the year ended September 30, 2003 and the consolidated balance sheet data as of September 30, 2003 are derived from the consolidated financial statements of Selected Operations of IITRI. The historical consolidated financial information of Selected Operations of IITRI has been carved out from the consolidated financial statements of IITRI using the historical results of operations and bases of assets and liabilities of the portion of IITRI’s business that was sold and gives effect to allocations of expenses from IITRI. The consolidated operating data and the consolidated balance sheet data for the Selected Operations of IITRI are derived from the consolidated financial statements of IITRI not included in this annual report.

Our historical consolidated financial information may not be indicative of our future performance and does not necessarily reflect what our financial position and results of operations would have been had we operated as a separate, stand-alone entity during the periods presented.

Selected Financial Data of Alion Science and Technology Corporation
For Years Ended September 30,


	2007(1)			2006(2)			2005(3)			2004 (4)			2003(5)
	(restated)			(restated)			(restated)			(restated)			(restated)
				(In thousands, except share and per share data)

Consolidated Operating Data:
Contract revenue	$	737,587		$	508,628		$	369,231		$	269,940		$	165,917
Direct contract expenses		562,139			381,467			267,241			196,388			120,559
Operating expenses(6)		161,283			129,466			104,081			73,703			46,273

Operating income (loss)		14,165			(2,305	)		(2,091	)		(151	)		(915	)
Other expense(7)		(56,945	)		(28,784	)		(38,081	)		(14,943	)		(11,701	)
Income tax (expense) benefit		10			(26	)		(66	)		(17	)		—

Net loss	$	(42,770	)	$	(31,115	)	$	(40,238	)	$	(15,111	)	$	(12,616	)

Basic and diluted loss per share	$	(8.35	)	$	(6.19	)	$	(9.50	)	$	(4.91	)	$	(6.05	)
Basic and diluted weighted-average common shares outstanding		5,121,033			5,029,670			4,235,947			3,074,709			2,085,274
Consolidated Balance Sheet Data at End of Period:
Net accounts receivable	$	186,660		$	150,412		$	80,898		$	68,949		$	42,775
Total assets		683,970			650,969			334,249			188,461			144,754
Current portion of long-term debt		14,541			2,816			1,404			468			5,000
Long-term debt, excluding current portion(8)		533,152			463,743			180,833			99,631			74,719
Redeemable common stock warrants		33,610			35,234			44,590			20,777			14,762
Redeemable common stock(9)		200,768			213,719			184,828			67,321			43,745
Accumulated deficit(9)		(260,147	)		(221,009	)		(164,354	)		(57,573	)		(25,845	)
Other Data:
Depreciation and amortization	$	21,824		$	16,566		$	17,771		$	13,447		$	9,553
Capital expenditures		10,687			5,227			2,233			3,678			1,329
Cash flows provided by (used in):
Operating activities(9)	$	(5,008	)	$	(15,678	)	$	35,140		$	5,675		$	14,264
Investing activities		(25,438	)		(284,423	)		(78,017	)		(23,625	)		(61,428	)
Financing activities(9)		39,375			265,078			75,938			22,173			47,652
Funded contract backlog(10)		360,000			386,000			193,000			161,000			107,000
Unfunded contract backlog(11)		4,669,000			3,861,000			2,581,000			1,793,000			1,435,000
Number of employees		3,402			3,575			2,508			1,880			1,604


(1)		During fiscal year 2007, the Company completed one acquisition as described below. The results of operations for the company acquired is included in Alion’s operations from the date of the acquisition. We acquired LogConGroup, Inc. on July 20, 2007. The Company acquired substantially all the assets of LogConGroup, Inc, a provider of logistics technology and total asset visibility management, for $1.7 million plus additional contingent earn-out obligations over a six year period which cannot exceed $0.9 million. As of September 30, 2007, the Company has recorded approximately $1.6 million in goodwill relating to this acquisition.

(2)		During fiscal year 2006, the Company completed four acquisitions as described below. The results of operations for the companies acquired are included in Alion’s operations from the dates of the acquisitions. On February 10, 2006, Alion purchased 100% of the outstanding stock of BMH Associates, Inc. (BMH), a provider of advanced software, systems engineering and distributed interactive simulations for military training and experimentation, for approximately $20.0 million (less a $1.5 million hold back) plus additional


		contingent earn-out obligations over a two year period which can not exceed $6.0 million. As of September 30, 2007, the Company has recorded approximately $19.2 million in goodwill relating to this acquisition.

		On February 24, 2006, the Company acquired 100% of the issued and outstanding stock of Washington Consulting, Inc. (WCI), a provider of enterprise IT and management consulting solutions and services to commercial and government customers, for $18.0 million (less a $1.5 million hold back) plus additional contingent earn-out obligations over a two year period which can not exceed $2.6 million. As of September 30, 2007, the Company has recorded approximately $18.5 million in goodwill relating to this acquisition.

		On May 19, 2006, the Company acquired 100% of the issued and outstanding stock of Micro Analysis and Design, Inc. (MA&D), a provider of human factors engineering, modeling and simulation and software development for approximately $16.9 million (less a $2.0 million hold back) plus additional contingent earn-out obligations over a two year period which can not exceed approximately $4.1 million. As of September 30, 2007, the Company has recorded approximately $14.5 million in goodwill relating to this acquisition.

		On June 30, 2006, the Company acquired from Anteon a group of assets consisting primarily of customer contracts for approximately $221.4 million. As of September 30, 2007, the Company has recorded approximately $34.7 million for purchased contracts and approximately $177.8 million in goodwill relating to this acquisition.

(3)		During fiscal year 2005, the Company completed four acquisitions and made one strategic investment as described below. The results of operations for the companies acquired are included in Alion’s operations from the dates of the acquisitions. On October 28, 2004, Alion purchased substantially all of the assets of Countermeasures Inc. (Countermeasures) for approximately $2.4 million. Countermeasures had two employees and was located in Hollywood, Maryland. As of September 30, 2007, the Company has recorded approximately $1.4 million in goodwill relating to this acquisition.

		On February 11, 2005, Alion acquired 100% of the outstanding stock of METI Corporation (METI), an environmental and life sciences research and development company for approximately $7.0 million in cash. METI had approximately 110 employees and was headquartered in Research Triangle Park, North Carolina. As of September 30, 2007, the Company has recorded $5.6 million in goodwill related to this acquisition.

		On February 25, 2005, Alion acquired 100% of the outstanding stock of Carmel Applied Technologies, Inc. (CATI), a flight training software and simulator development company, for approximately $7.3 million in cash. CATI had approximately 55 employees and was headquartered in Seaside, California. The transaction is subject to an earn-out provision not-to-exceed a cumulative amount of $8.3 million based on attaining certain cumulative revenue goals for fiscal years 2005, 2006, and 2007, and a second earn-out provision not-to-exceed $1.5 million for attaining certain revenue goals in the commercial aviation industry. As of September 30, 2007, the Company has recorded approximately $13.9 million in goodwill related to this acquisition.

		On April 1, 2005, the Company acquired 100% of the issued and outstanding stock of JJMA Corporation (JJMA). The Company paid the equity holders of JJMA approximately $52.9 million, issued 1,347,197 shares of Alion common stock to the JJMA Trust valued at approximately $37.3 million, and agreed to make $8.3 million in future payments. Including acquisition costs of $1.3 million, the aggregate purchase price was $99.8 million. As of September 30, 2007, the Company has recorded approximately $57.8 million in goodwill related to the JJMA acquisition.

		On March 22, 2005, Alion acquired approximately 12.5 percent of the class A ordinary shares in VectorCommand Ltd. for $1.5 million, which investment is accounted for at cost.

(4)		During fiscal year 2004, the Company completed two acquisitions as described below. Operating results for these businesses are included in our consolidated totals from the respective dates of acquisitions. On October 31, 2003, Alion acquired 100% of the outstanding stock of Innovative Technology Solutions Corporation (ITSC), for $4.0 million. The transaction is subject to an earn-out provision not-to-exceed $1.5 million. ITSC is a New Mexico corporation with approximately 53 employees, the majority of whom are located in New Mexico. As of September 30, 2007, the Company has recorded approximately $5.0 million of goodwill relating to this acquisition.

		On February 13, 2004, Alion acquired 100% of the outstanding stock of Identix Public Sector, Inc. (IPS, now known as Alion-IPS Corporation) for $8.0 million in cash. IPS, formerly ANADAC, was a wholly-owned


		subsidiary of Identix Incorporated. Following the closing, the Company paid Identix approximately $4.3 million for intercompany payables. As of September 30, 2007, the Company has recorded approximately $6.1 million of goodwill relating to this acquisition.


(5)		For fiscal year 2003 (October 1, 2002 to September 30, 2003), the operations data presented reflects approximately nine months of Alion operations since the Transaction occurred on December 20, 2002, which was at the end of IITRI’s first quarter of operations for fiscal 2003. During the period October 1, 2002 to December 20, 2002, Alion was organizationally a business shell, operationally inactive until the Transaction occurred.

(6)		Operating expenses include (i) transaction expenses of approximately $6.7 million for the year ended September 30, 2003, and (ii) conversion and roll-out expenses of approximately $1.5 million for the year ended September 30, 2003.

(7)		For the years ended September 30, 2007, 2006 and 2005, other income (expense) includes approximately $51.2 million, $29.7 million, and $38.7 million, respectively, in interest-related expense associated with the debt financing (which includes the related change in warrant valuation associated with the change in the share price of Alion stock) resulting from the acquisitions which were completed in fiscal years 2006 and 2005, as described above. Other income (expense) for the year ended September 30, 2004 includes a gain of approximately $2.1 million on the sale of the Company’s minority interest in Matrics Incorporated.

(8)		Long term debt as of September 30, 2007 includes subordinated debt, consistent with the presentation for prior years.

(9)		The redeemable common stock and accumulated deficit have been added to the Selected Financial Data. In addition, cash flows used in operating activities and financing activities for the year ended 2007 has been revised based upon the restatement, which is further described in footnote 21.

(10)		Funded backlog represents the total amount of contracts that have been awarded and whose funding has been authorized minus the amount of revenue booked under the contracts from their inception to date.

(11)		Unfunded backlog refers to the estimated total value of contracts which have been awarded but whose funding has not yet been authorized for expenditure.


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

The Management’s Discussion and Analysis has been revised to reflect the restatement of a) the consolidated balance sheet to classify its common stock in accordance with Section 210.5-02(28) of Regulation S-X and b) the statement of cash flows to classify certain stock redemptions that occurred in late July and early August 2007. The reclassifications have no impact on the Company’s results of operations for all periods presented or compliance with covenants related to any credit facilities for the fiscal years presented. See Note 21 to the Consolidated Financial Statements.

The following discussion of Alion’s financial condition and results of operations should be read together with the consolidated financial statements and the notes to those statements included elsewhere in this annual report. This discussion contains forward-looking statements about our business and operations that involve risks and uncertainties. Our actual results may differ materially from those we currently anticipate as a result of the “Risk Factors” described beginning on page 18, and elsewhere in this annual report.

About This Management’s Discussion and Analysis

The discussion and analysis that follows is organized to:


	•	provide an overview of our business;

	•	explain the year-over-year trends in our results of operations;

	•	describe our liquidity and capital resources;

	•	explain our critical accounting policies;


	•	explain certain of our other obligations; and

	•	disclose market and other risks.

Overview

We provide scientific, engineering and information technology solutions for problems relating to national defense, homeland security and energy and environmental analysis. We provide these services primarily to U.S. government agencies, in particular DoD, state and foreign governments, and other commercial customers. Our revenues increased 45.0%, 37.8%, and 36.8% for the years ended September 30, 2007, 2006, and 2005, respectively, through a combination of internal growth and acquisitions. The following table reflects, for each fiscal year indicated, summary results of operations and contract backlog data:


	For the Years Ended September 30,
	(In millions)
	2007			2006			2005

Revenue	$	737.6		$	508.6		$	369.2

Net loss	$	(42.8	)	$	(31.1	)	$	(40.2	)

Contract Backlog:
Funded		360.0			386.0			193.0
Unfunded		4,669.0			3,861.0			2,581.0

Total	$	5,029.0		$	4,247.0		$	2,774.0

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 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 reflects, for each fiscal year indicated, the percentage of the Company’s revenue derived from each of its major types of customers:


	2007				2006				2005
	(In millions)

U.S. Department of Defense (DoD)	$	655.9	88.9	%	$	451.8	88.8	%	$	324.1	87.8	%
Other Federal Civilian Agencies		32.3	4.4	%		30.1	5.9	%		30.3	8.2	%
Commercial and International		49.4	6.7	%		26.7	5.3	%		14.8	4.0	%

Total	$	737.6	100.0	%	$	508.6	100.0	%	$	369.2	100.0	%

We intend to continue to expand our research offerings in commercial and international markets; however, the expansion, if any, will be incremental. Revenues from commercial and international markets together amounted to approximately 7%, 5% and 4% of total revenues in fiscal year 2007, 2006 and 2005, respectively. We derive our international revenue primarily from naval architecture and marine engineering services as well as spectrum management research and software tools.

Most of our revenue is generated based on services provided either by our employees or subcontractors. Thus, once we win new business, the key to delivering the revenue is through hiring new employees to meet customer requirements, retaining our employees, and ensuring that we deploy them on direct-billable jobs. Therefore, we closely monitor hiring success, attrition trends, and direct labor utilization. A key challenge in growing our business is to hire enough employees with appropriate security clearances. Since we earn higher profits from the labor services that our employees provide compared with subcontracted efforts and other reimbursable items such as hardware and software purchases for customers, we seek to optimize our labor content on the contracts we win.

The table below provides a summary of annual revenues by significant contracts performed by the Company.


					FY07					FY06					FY05
					Percent of					Percent of					Percent of
			FY07		Total			FY06		Total			FY05		Total
			Annual		Annual			Annual		Annual			Annual		Annual
Sponsor/Government		Primary Core	Revenue		Revenue			Revenue		Revenue			Revenue		Revenue
Agency	Title	Business Area*	Amount		Amount			Amount		Amount			Amount		Amount
			(In millions)					(In millions)					(In millions)


Department of Defense — Navy	SeaPort Multiple Award Contract	Naval Architecture and Marine Engineering	$	132.1		17.9	%	$	19.3		3.8	%		—		—

Department of Defense — Air Force	Technical and Analytical Support	Systems Engineering	$	64.1		8.7	%	$	16.4		3.2	%		—		—

Department of Defense — Navy	Engineering, Financial and Program Management Services to the Virtual SYSCOM program	Naval Architecture and Marine Engineering	$	49.6		6.7	%	$	46.6		9.2	%	$	18.5		5.0	%

Department of Defense — Defense Modeling and Simulation Information Systems Agency	Information Analysis Center	Modeling and Simulation	$	43.7		5.9	%	$	63.4		12.5	%	$	69.4		18.8	%

Department of Defense — Army	U.S. Army Night Vision Lab HighTech Omnibus contract	Defense Operations	$	32.0		4.3	%	$	21.1		4.2	%	$	18.9		5.1	%


Subtotal			$	321.5		43.5	%	$	166.8		32.9	%	$	106.8		28.9	%

Other

Sponsors/Agencies			$	416.1		56.5	%	$	341.8		67.1	%	$	262.4		71.1	%


Total Revenues			$	737.6		100.0	%	$	508.6		100.0	%	$	369.2		100.0	%


*		The total annual revenue identified with a sponsor/government agency may include revenue within multiple business areas. The primary core business area is the single largest business area with the sponsor/government agency.

In December 2006, we ended our performance under the Joint Spectrum Center (JSC) contract. During the year ended September 30, 2006, the JSC contract underwent a full and open competition for the follow-on support contract that was to commence beginning October 2005. In August 2005, we were notified that we were not the successful bidder for these services.

Our revenues and our operating margins are affected by, among other things, our mix of contract types (e.g., cost-reimbursement, fixed-price, and time-and-material). Significant portions of our revenues are generated by services performed on cost-reimbursement contracts under which we are reimbursed for approved costs, plus a fee, which reflects our profit on the work performed. We recognize revenue on cost-reimbursement contracts based on actual costs incurred plus a proportionate share of the fees earned. We also have a number of fixed-price government contracts. We use the percentage-of-completion method to recognize revenue on fixed-price contracts. These contracts involve higher financial risks, and in some cases higher margins, because we must deliver the contracted services for a predetermined price regardless of our actual costs incurred in the project. Our failure to anticipate technical problems, estimate costs accurately or control costs during performance of a fixed-price contract may reduce the overall fee on the contract or cause a loss. Under time-and-material contracts, labor and related costs are reimbursed at negotiated, fixed hourly rates. Revenue on time-and-material contracts is recognized at contractually

billable rates as labor hours and direct expenses are incurred. The following table summarizes the percentage of revenues attributable to each contract type for the periods indicated.


	For the Year Ended September 30,
Contract Type	2007				2006 *				2005 *
	(Amounts in millions)

Cost-reimbursement	$	514.4	69.7	%	$	335.0	65.9	%	$	225.1	61.0	%
Fixed-price		70.0	9.5	%		61.6	12.1	%	$	51.4	13.9	%
Time-and-material		153.2	20.8	%		112.0	22.0	%	$	92.7	25.1	%

Total	$	737.6	100.0	%	$	508.6	100.0	%	$	369.2	100.0	%


*		The 2006 and 2005 amounts were revised to conform to the current presentation for the reallocation of the ID/IQ contracts.

Our objective is to continue to grow our revenue both organically and through strategic acquisitions by capitalizing on our skilled work force and our sophisticated solutions competence. From 1998 through September 30, 2007, the Company and its predecessor, IITRI, have completed fifteen acquisitions. For the year ended September 30, 2007, we acquired LogConGroup on July 20, 2007. The Company acquired substantially all the assets of LogConGroup, Inc, a provider of logistics technology and total asset visibility management, for $1.7 million plus additional contingent earn-out obligations over a six year period which cannot exceed $0.9 million.

We have integrated LogConGroup into our technology base and capabilities, enabling us to expand our research offerings for our government and commercial customers. Management believes that this synergistic acquisition provides several potential benefits to our organization in that it:


	•	helps us expand our research base to include increasingly large and complex programs;

	•	increases our opportunities to exploit the synergies between different research fields in which we work to broaden our offerings to our existing customers;

	•	brings new strengths to our technical capabilities through cross-utilization of research technology and engineering skills; and

	•	increases the overall depth and experience of our management.

Results of Operations

During the year ended September 2007, Alion completed the acquisition of LogConGroup, Inc. in July 2007 and during the year ended September 30, 2006, Alion completed the acquisitions of BMH and WCI in February 2006, MA&D in May 2006 and the Anteon Contracts in June 2006. For the year ended September 30, 2007, the Company’s operating results include the operating results for the acquisitions of BMH, WCI, MA&D, and the Anteon contracts for the entire fiscal year; however, they include operating results for only 10 weeks of LogConGroup. For the year ended September 30, 2006, the operating results include the operating results for only 33 weeks of BMH, 31 weeks of WCI, 19 weeks of MA&D, and 13 weeks of operating results generated in support of the contracts acquired from Anteon. Operating results for the year ended September 30, 2006, do not include operating results for the LogConGroup acquisition. Significant differences in the Company’s results of operations for the periods presented arise from the effects of these acquisitions.

Year ended September 30, 2007 Compared to Year ended September 30, 2006

For purposes of comparability, the table below reflects the relative financial impact of the LogConGroup, BMH, WCI, MA&D, and Anteon Contracts acquisitions, which we refer to as the “acquired operations” of Alion, as they relate to the financial performance of Alion for the year ended September 30, 2007 compared to the financial performance for the year ended September 30, 2006. Significant differences in the results of Alion’s operations for the years September 30, 2007 and 2006, arise from the effects of these acquisitions. The following discussion and analysis include references to selected financial information in the table below in conjunction with the Company’s consolidated financial statements provided elsewhere in this annual report on Form 10-K/A.


	Year Ended September 30, 2007						Year Ended September 30, 2006
					Consolidated							Consolidated
					Operations of							Operations of
	Consolidated				Alion Less		Consolidated					Alion Less
	Operations of		Acquired		the Acquired		Operations of			Acquired		the Acquired
Financial information	Alion		Operations		Operations		Alion			Operations		Operations
	(In millions)

Total revenue	$	737.6	$	330.3	$	407.3	$	508.6		$	95.4	$	413.2
Material and subcontract revenue		306.8		158.7		148.1		172.2			40.4		131.8
Total direct contract expenses		562.1		258.9		303.2		381.5			71.9		309.6
Major components of direct contract expense:
Direct labor expense		245.8		99.4		146.4		202.6			31.8		170.8
Material and subcontract expense		295.1		153.9		141.2		162.3			38.6		123.7
Other direct expense		21.2		5.6		15.6		16.5			1.5		15.0
Gross profit		175.4		71.5		103.9		127.2			23.5		103.7
Total operating expense		161.3		62.6		98.7		129.5			19.6		109.9
Major components of operating expense:
Indirect personnel and facilities		76.4		32.0		44.4		52.1			9.2		42.9
General and administrative (excluding stock-based compensation)		50.5		19.5		31.0		47.4			6.9		40.5
Stock-based compensation		8.3		—		8.3		10.7			—		10.7
Depreciation and amortization		21.8		11.1		10.7		16.6			3.4		13.2
Operating income (loss)	$	14.1	$	8.8	$	5.3	$	(2.3	)	$	3.9	$	(6.2	)

Contract Revenues. Revenues for the year ended September 30, 2007 increased $229.0 million or 45.0% over the year ended September 30, 2006. The acquired operations generated $234.9 million of the increased revenue. The non-acquired operations generated a net decrease in revenue of $5.9 million, which was attributable to the following: 1) unsuccessful bid for the follow-on support of the Joint Spectrum Center contract, which accounted for a revenue reduction of $25.9 million; the Company’s performance under the JSC contract ended in December 2006; and 2) reduced level of funding under the Department of Defense Modeling and Simulation Information Analysis Contract (MSIAC), which accounted for a revenue reduction of $19.7 million. On the balance of our contracts, revenue generated by the non-acquired operations increased $39.7 million, which represents an approximate 9.6% increase of the fiscal year 2006 revenue.

As a component of revenue, Material and Subcontract (M&S) revenue for the year ended September 2007 increased $134.6 million or 78.2% over the year ended September 30, 2006. The acquired operations generated approximately $118.3 million of the revenue increase, while the non-acquired operations generated the remaining $16.3 million of the revenue increase. The increase in M&S revenue 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 year ended September 30, 2007 increased $180.6 million or 47.3% over the year ended September 30, 2006. As a percentage of revenue, direct contract expense was 76.2% and 75.0% for the years ended September 30, 2007 and 2006, respectively, due primarily to the growth of the Secretary of the Air Force Technical and Analytical Support (SAFTAS) contract in 2007, which had a high content of M&S direct contract expenses, as a percentage of revenue. The changes in the major components of direct contract expenses were:


	•	Direct labor expense for the year ended September 30, 2007 increased $43.2 million or 21.3% over the year ended September 30, 2006. As a percentage of revenue, direct labor expense was 33.3% and 39.8% for the years ended September 30, 2007 and 2006, respectively, primarily as a result of decreased content of direct labor related expense from acquired operations primarily related to WCI and for work provided in support of the Anteon contracts.


	•	M&S expense for the year ended September 30, 2007 increased $132.8 million or 81.8% over the year ended September 30, 2006. As a percentage of revenue, M&S expense was 40.0% and 31.9% for the years ended September 30, 2007 and 2006, respectively, primarily as a result of larger purchases of equipment and materials directly for contracts and increased use of subcontractors in support of our contracts. M&S expense, as a percentage of M&S revenue, was approximately 96.2% and 94.3% for the years ended September 30, 2007 and 2006, respectively, primarily as a result of lower profit margins on M&S work from acquired operations.

Gross Profit. Gross profit for the year ended September 30, 2007 increased $48.2 million or 37.9% over the year ended September 30, 2006. As a percentage of revenue, gross profit was 23.8% and 25.0% for the years ended September 30, 2007 and 2006, respectively. Our M&S work, which typically generates lower profit margins than contract direct labor work, 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.

Operating Expenses. Operating expenses for the year ended September 30, 2007 increased $31.8 million or 24.6% over the year ended September 30, 2006. Acquired operations generated $43.0 million of increased operating expenses while non-acquired operations generated a decrease in operating expenses of approximately $11.2 million. Operating expense was 21.9% and 25.5% of revenue for the years ended September 30, 2007 and 2006, respectively. The changes in the major components of operating expenses were:


	•	Indirect personnel and rental and occupancy expenses for the year ended September 30, 2007 increased approximately $24.3 million or 46.6% over the year ended September 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. Operating expenses for indirect personnel and facilities were 10.4% and 10.2% of revenue for the years ended September 30, 2007 and 2006, respectively.

	•	General and administrative (G&A) expense, excluding stock-based compensation, for the year ended September 30, 2007 increased approximately $3.1 million or 6.5% over the year ended September 30, 2006. G&A expenses were 6.8% and 9.3% of revenue for the years ended September 30, 2007 and 2006, respectively. The increase primarily consists of $2.6 million of additional third party legal and accounting fees related to issuing the senior unsecured notes, $3.4 million for various infrastructure costs associated with supporting the growth of the Company, and $0.4 million for third-party legal and accounting fees associated with the acquisition of LogConGroup. These increases were offset by a postretirement benefits curtailment gain of $3.3 million, which resulted from an amendment to the postretirement benefits plan as of September 30, 2007.

	•	Stock-based compensation (a separate element in G&A) expense relates primarily to the expense associated with the stock appreciation rights and phantom stock plans. As a percentage of revenue, stock-based compensation was 1.1% and 2.1% for the years ended September 30, 2007 and 2006, respectively. This expense decreased approximately $2.4 million or 22.4% from the year ended September 30, 2006, which resulted from the relative change in price of a share of Alion common stock in the year ended September 30, 2007 and, to a lesser extent, the decrease in awards granted.

	•	Depreciation and amortization for the year ended September 30, 2007 expense increased approximately $5.2 million or 31.3% over the year ended September 30, 2006 due to the acquisitions. Depreciation expense primarily arises from fixed assets while amortization expense derives primarily from purchased contracts. Depreciation and amortization expense was 3.0% and 3.3% of revenue for the years ended September 30, 2007 and 2006, respectively.

Operating Income (Loss). For the year ended September 30, 2007, income from operations was $14.1 million compared with $2.3 million operating loss for the year ended September 30, 2006. The $16.4 million increase in income is associated with factors discussed above.

Other Expense. Other expense for the year ended September 30, 2007 increased $28.2 million or 97.8% over the year ended September 30, 2006 and relates to the following:

Interest Expense increased $21.5 million or 72.4% over the year ended September 30, 2006, which was attributable to the following:


	Year Ended September 30,
	2007			2006
	(In millions)

Term B - Revolving facility	$	2.2		$	1.0
Term B - Senior term loan		19.8			13.5
- amortization of debt issuance costs		2.2			1.7
Bridge loan		6.8			4.8
Senior unsecured note		16.6			—
- amortization of debt issuance costs		0.6			—
Subordinated note - PIK interest		2.5			2.4
- long-term deferred interest		0.9			0.8
- amortization of debt issuance costs		1.0			0.9
(Reduction) Accretion of warrants(a)		(1.6	)		4.3
Other		0.3			0.3

Total	$	51.2		$	29.7


(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 on 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 year ended September 30, 2007.

The remaining increase of approximately $0.5 million is attributable to miscellaneous expenses including bank fees and charitable donations.

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. The Company’s Canadian subsidiary, Alion Science and Technology (Canada) Corporation, accrues a tax liability, as required. The Company recorded $10,000 income tax benefit and $26,000 income tax expense for the years ended September 30, 2007 and 2006, respectively.

Net Loss. The net loss for the year ended September 30, 2007 increased over the net loss for the year ended September 30, 2006 due to the factors discussed above.

Year ended September 30, 2006 Compared to Year ended September 30, 2005

For purposes of comparability, the table below reflects the relative financial impact of the BMH, WCI, MA&D, Anteon Contracts, METI, CATI and JJMA acquisitions, which we refer to as the “acquired operations” of Alion, as they relate to the financial performance of Alion for the year ended September 30, 2006 compared to the financial performance for the year ended September 30, 2005. Significant differences in the results of Alion’s operations for the years September 30, 2006 and 2005, arise from the effects of these acquisitions. The following discussion and analysis include references to selected financial information in the table below in conjunction with the Company’s consolidated financial statements provided elsewhere in this annual report on Form 10-K/A.


	Year Ended September 30, 2006								Year Ended September 30, 2005
						Consolidated								Consolidated
						Operations of								Operations of
	Consolidated					Alion Less			Consolidated					Alion Less
	Operations of			Acquired		the Acquired			Operations of			Acquired		the Acquired
Financial information	Alion			Operations		Operations			Alion			Operations		Operations
	(In millions)

Total revenue	$	508.6		$	222.2	$	286.4		$	369.2		$	65.3	$	303.9
Material and subcontract revenue		172.2			83.1		89.1			102.7			16.9		85.8
Total direct contract expenses		381.5			166.5		214.9			267.2			46.1		221.1
Major components of direct contract expense:
Direct labor expense		202.6			83.6		119.0			152.5			26.6		125.9
Material and subcontract expense		162.3			79.0		83.3			101.0			16.6		84.4
Other direct expense		16.5			3.9		12.6			13.7			2.9		10.8
Gross profit		127.2			55.7		71.5			102.0			19.2		82.8
Total operating expense		129.5			53.1		76.4			104.1			13.1		91.0
Major components of operating expense:
Indirect personnel and facilities		52.1			24.7		27.4			41.6			6.9		34.7
General and administrative (excluding stock-based compensation)		47.4			20.6		26.8			33.0			2.9		30.1
Stock-based compensation		10.7			—		10.7			10.6			—		10.6
Depreciation and amortization		16.6			7.8		8.8			17.8			3.2		14.6
Operating (loss) income	$	(2.3	)	$	2.6	$	(4.9	)	$	(2.1	)	$	6.1	$	(8.2	)


*		For the years ended September 30, 2006 and 2005, the operations of the acquired entities and the operating results generated in support of the Anteon contracts have been fully integrated within Alion on a consolidated basis. The selected financial information provided in the table is management’s approximations of actual results for the acquired and non-acquired operations.

Contract Revenues. Revenues increased $139.4 million to $508.6 million for the year ended September 30, 2006, or 37.8%, from $369.2 million for the year ended September 30, 2005. The acquired operations generated approximately $156.9 million of the approximate $139.4 million in increased revenue. The non-acquired operations generated a net decrease in revenue of $17.5 million. The $17.5 million net decrease in revenue generated by the non-acquired operations was attributable to the following: 1) a decrease of approximately $12.3 million in naval architecture and ship design work due to delays in receipt of new tasking related to new and existing U.S. Navy ship programs, 2) our unsuccessful bid for the follow-on support contract to the U.S. Navy for Guam Ordnance Services accounted for a decrease of approximately $7.0 million, 3) a reduced level of funding under the Department of Defense Modeling and Simulation Information Analysis Contract (MSIAC) accounted for a revenue reduction of approximately $6.0 million, 4) a reduction of approximately $2.9 million as a result of the completion of our analysis work coincident with the completion of the initial phase of the U.S. Government’s most recent Base Realignment and Closure Act (BRAC) process, and 5) a reduction of approximately $2.1 million in support of Defense Spectrum Office. On the balance of our contracts, revenue generated by the non-acquired operations increased approximately $12.8 million.

As a component of revenue, Material and Subcontract (M&S) revenue increased approximately $69.5 million to $172.2 million for the year ended September 30, 2006, or 67.7%, from $102.7 million for the year ended September 30, 2005. The acquired operations generated approximately $66.2 million of the $69.5 million M&S revenue increase. The non-acquired operations generated approximately $3.3 million of the M&S revenue increase. As a percentage of revenue, M&S revenue increased approximately 6.1% to 33.9% for the year ended September 30, 2006, from 27.8% for the year ended September 30, 2005. The percentage increase in M&S revenue was partially

due to 1) the increase in content of M&S revenue to total revenue generated by the acquired operations and 2) a result of the decrease in total contract revenue generated by the non-acquired operations (related to the issues described above).

Direct Contract Expenses. Direct contract expenses increased approximately $114.3 million to $381.5 million, or 42.8%, for the year ended September 30, 2006, from $267.2 million for the year ended September 30, 2005. Acquired operations generated an increase of approximately $120.4 million direct contract expenses and the non-acquired operations generated a decrease of approximately $6.2 million attributable to the decrease in contract revenue generated by the non-acquired operations described above. Direct contract expenses were 75.0% of revenue for the year ended September 30, 2006, as compared to 72.4% for the year ended September 30, 2005. The changes in specific components of direct contract expenses are:


	•	Direct labor expense for the year ended September 30, 2006 increased by $50.1 million, or 32.9%, to $202.6 million from $152.5 million for the year ended September 30, 2005. Direct labor expense decreased to 39.9% of revenue for the year ended September 30, 2006, from 41.3% of revenue in the year ended September 30, 2005, due to a shift from direct labor to M&S expense. The percentage decrease in direct labor expense is primarily due to the lower content of direct labor expense to total direct contract expense of the acquired operations. The content of direct labor expense generated by the JSC and Guam Ordnance Services contracts was higher in the year ended September 30, 2006 than in the year ended September 30, 2005.

	•	M&S expense increased approximately $61.3 million, or 60.7%, to $162.3 million for the year ended September 30, 2006, compared to $101.0 million for the year ended September 30, 2005. M&S expense was 31.9% and 27.4% of revenue for the years ended September 30, 2006 and 2005, respectively. The percentage increase in M&S expense was primarily due to the higher content of M&S expense to total direct contract expense of the acquired operations. M&S expense, as a percentage of M&S revenue, was approximately 94.3% and 98.3% for the years ended September 30, 2006 and 2005, respectively, primarily as a result of increased profit margins on M&S work by acquired operations.

Gross Profit. Gross profit increased $25.2 million, or 24.7%, to $127.2 million for the year ended September 30, 2006, from $102.0 million for the year ended September 30, 2005. Gross profit was 25.0% and 27.6% of revenue for the years ended September 30, 2006 and 2005, respectively. Our M&S work 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 trend is expected to continue for at least the next two years or until backlog on these contracts is expended. M&S effort typically generates lower profit margins than contract direct labor work.

Operating Expenses. Operating expenses increased $25.4 million, or 24.3% to $129.5 million for the year ended September 30, 2006, from $104.1 million for the year ended September 30, 2005. Acquired operations generated $40.0 million of increased operating expenses while non-acquired operations generated a decrease in operating expenses of approximately $14.6 million. Operating expense was 25.5% and 28.2% of revenue for the years ended September 30, 2006 and 2005, respectively. The changes in some of the specific components of operating expenses were:


	•	Indirect personnel and rental and occupancy expenses increased approximately $10.5 million, or 25.2%, to $52.1 million for the year ended September 30, 2006, from $41.6 million for the year ended September 30, 2005. The increase is partially attributable to expense associated with integrating the BMH and WCI acquisitions in the second quarter of fiscal year 2006, the MA&D acquisition in the third quarter of fiscal year 2006 and the Anteon Contracts acquisition in the fourth quarter of fiscal year 2006. Additionally, due to the delays in approving the 2006 Federal budget, contract funding was delayed, which results in increased indirect labor expense required in order to sustain our engineers and technical labor base. Operating expenses for indirect personnel and facilities were 10.2% and 11.3% of revenue for the years ended September 30, 2006 and 2005, respectively.

	•	General and administrative (G&A) expense, excluding stock-based compensation, increased approximately $14.4 million, or 43.6%, to $47.4 million for the year ended September 30, 2006, compared to $33.0 million


		for the year ended September 30, 2005. G&A expenses were 9.3% and 8.9% of revenue for the years ended September 30, 2006 and 2005, respectively. The increase consists of $8.4 million of additional third-party legal and accounting fees and approximately $4.9 million of additional employee fringe benefit expense, which is an element of G&A expense. These additional expenses represent approximately 2.6% of revenue.


	•	Stock-based compensation (a separate element in G&A) expense, relates primarily to the expense associated with the stock appreciation rights and phantom stock plans. Stock-based compensation was approximately 2.1% and 2.9% of revenue for the years ended September 30, 2006 and 2005, respectively. This expense increased approximately $0.1 million, or 1.0%, to $10.7 million for the fiscal year ended September 30, 2006, compared to approximately $10.6 million for the year ended September 30, 2005. The increase in stock-based compensation expense results from the relative change in price of a share of Alion common stock in the year ended September 30, 2006 and, to a lesser extent, the increase in awards granted.

	•	Depreciation and amortization expense decreased approximately $1.2 million, or 6.7%, to $16.6 million for the year ended September 30, 2006, compared to $17.8 million for the year ended September 30, 2005. Depreciation expense primarily arises from fixed assets while amortization expense derives primarily from purchased contracts. Depreciation and amortization expense was 3.3% and 4.8% of revenue for the years ended September 30, 2006 and 2005, respectively.

Operating Loss. For the year ended September 30, 2006, the loss from operations was $2.3 million compared with $2.1 million operating loss for the year ended September 30, 2005. The $0.2 million increase in loss is associated with factors discussed above.

Other Expense. Other expense decreased approximately $9.3 million to approximately $28.8 million, or 24.4%, for the year ended September 30, 2006, from $38.1 million for the year ended September 30, 2005. As a component of other expense, interest expense decreased approximately $9.0 million, or 23.2%, to $29.7 million for the year ended September 30, 2006 from $38.7 million for the year ended September 30, 2005 primarily from a $19.2 million reduction in the accretion of warrants offset by a $8.3 million increase in senior term loan interest. The components of interest expense are summarized in the following table:


	Year Ended September 30,
	2006		2005
	(In millions)

Term B - Revolving facility	$	1.0	$	0.2
Term B - Senior term loan		15.2		6.9
Bridge loan		4.8		—
Mezzanine Note - cash-pay interest		—		1.8
- amortization of debt issuance costs		—		2.2
Subordinated note - PIK interest		2.4		2.3
- accretion of long-term deferred interest		0.8		0.6
- amortization of debt issuance costs		0.9		0.9
Accretion of warrants(a)		4.3		23.5
Other		0.3		0.3

Total	$	29.7	$	38.7


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

The remaining decrease of approximately $0.3 million is attributable to miscellaneous expenses including bank fees and charitable donations.

Income Tax Expense. The Company has filed qualified subchapter-S elections for all of its 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. The Company recorded $0.03 million and $0.07 million in state income tax expense for the years ended September 30, 2006 and 2005, respectively.

Net Loss. The net loss decreased approximately $9.1 million, or 22.6%, to $31.1 million for the year ended September 30, 2006 as compared to $40.2 million for the year ended September 30, 2005. The $9.1 million decrease is associated with factors discussed above.

Liquidity and Capital Resources

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

Cash Flows.

The following discussion relates to the cash flow of Alion for the years ended September 30, 2007 and 2006.

Net cash used in operating activities was approximately $5.0 million and $15.7 million for the years ended September 30, 2007 and 2006, respectively. The $10.7 million decrease in use of cash was primarily attributable to the approximate $23.9 million decrease in use of cash to fund growth in accounts receivable, offset by $11.7 million increase in net loss and $3.6 million increase in payments of accounts payable, accrued liabilities, interest payable and other liabilities.

Net cash used in investing activities (principally for strategic acquisitions) was approximately $25.4 million and $284.4 million for the years ended September 30, 2007 and 2006, respectively. During the year ended September 30, 2007, the Company used cash of approximately $14.8 million in acquisition related obligations (LogConGroup acquisition and earn-out payments for JJMA, WCI, and BMH). The Company spent approximately $10.7 for capital expenditures unrelated to acquisitions. During the year ended September 30, 2006, the Company used cash of approximately $279.2 million to acquire BMH, WCI, MA&D and the Anteon Contracts and spent approximately $5.2 million for capital expenditures unrelated to acquisitions.

Net cash provided by financing activities was approximately $39.4 million for the year ended September 30, 2007, compared to net cash provided by financing activities of approximately $265.1 million for the year ended September 30, 2006. The most significant components of the Company’s financing activities are: 1) net proceeds from (or repayment of) short term borrowings and 2) net proceeds from (or repayment of) long term debt securities. During the year ended September 30, 2007, Alion borrowed $250.0 million in Private Senior Unsecured Notes, of which $170.0 million was used to repay the Bridge Loan, $53.5 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 $5.0 million debt issue costs were paid from working capital. During the year ended September 30, 2007, the Company also borrowed $40.0 million under the revolving credit facility for working capital needs and received $16.0 million from the issuance of common stock under the ESOP. During the year ended September 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 ($279.2 million), to pay certain debt issuance costs of approximately $7.8 million and to repay approximately $1.9 million of principal under the senior term loan. During the year ended September 30, 2006, the Company received $7.1 million from the issuance of common stock under the ESOP, used cash of approximately $13.6 million to redeem the mezzanine warrants held by IIT and Dr. Atefi, and repurchased approximately $19.0 million in common stock in order to satisfy redemption obligations under the KSOP to former employees.

Discussion of Debt Structure

The discussion below describes the Term B Senior Credit Facility, as modified 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.

Term B Senior Credit Facility

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


	•	a senior term loan in the approximate amount of $245.5 million;

	•	a $50.0 million senior revolving credit facility under which approximately $9.3 million was outstanding as of September 30, 2007, and approximately $3.9 million of which was allocated for letters of credit and as such is not available to be borrowed; and

	•	a $110.0 million uncommitted incremental term loan “accordion” facility.

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, 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 February 6, 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.

Under the senior revolving credit facility, the Company may request up to $40.0 million in letters of credit and may borrow up to $5.0 million in swing line loans for short-term borrowing needs. The Company must pay all principal obligations under the senior revolving credit facility in full no later than August 2, 2009.

The Company may prepay all or any portion of its Term B debt in minimum increments of $1 million, generally without penalty or premium, except for customary breakage costs associated with pre-payment of Eurodollar-based loans. If the Company issues certain permitted debt, or sells, transfers or disposes of certain assets, it must use all net proceeds to repay any Term B loan amounts outstanding. If the Company has excess cash flow for any fiscal year, it must use 50% of the net proceeds or excess cash flow to repay Term B loan amounts outstanding. If

the Company’s leverage ratio is less than 2 to 1, it must use only 25% of net proceeds or excess cash flow to repay Term B loan amounts outstanding.

If the Company borrows any additional term loan, including under the uncommitted incremental term loan facility, and certain terms of such loan are more favorable to the new lenders than existing terms under the Term B Senior Credit Facility, the applicable interest rate spread on the senior term loans can increase. As a result, additional term loans could increase the Company’s interest expense under its existing term loans. Certain of the Company’s subsidiaries (HFA, CATI, METI, JJMA, BMH, WCI and MA&D) guaranteed the Company’s obligations under the Company’s Term B Senior Credit Facility.

Use of Proceeds. On August 2, 2004, the Company borrowed $50.0 million through the senior term loan under the Term B Senior Credit Facility and used approximately $47.2 million to retire its then outstanding senior term loan and revolving credit facility administered by LaSalle Bank including principal and accrued unpaid interest and paid approximately $2.8 million in transaction fees. In October 2004, the Company borrowed approximately $22.0 million of the senior term loan to retire its existing $19.6 million mezzanine note and to pay approximately $2.4 million in accrued unpaid interest and prepayment premium. On April 1, 2005, the Company borrowed $72.0 million in an incremental term loan under the Term B Senior Credit Facility. The Company used approximately $58.7 million of the incremental term loan proceeds to pay a portion of the JJMA acquisition price, and approximately $1.3 million to pay transaction fees associated with the incremental term loan. The Company used approximately $12.0 million to pay a portion of the BMH acquisition price. On March 24, 2006, the Company entered into Amendment Two which made available to the Company $68.0 million in additional incremental term loans. The Company used approximately $16.5 million of these incremental term loan proceeds to pay a portion of the WCI acquisition price, and approximately $13.6 million to redeem the mezzanine warrants held by IIT and the Company’s Chief Executive Officer. On May 15, 2006, the Company borrowed $15.0 million of incremental term loans available under Amendment Two to pay a portion of the MA&D acquisition price. On June 30, 2006, the Company borrowed $21.0 million of incremental term loans under Amendment Two and $50.0 million in incremental term loans under Amendment Three to pay a portion of the acquisition price for the Anteon Contracts. 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.

The Term B Senior Credit Facility permits the Company to use the remainder of its senior revolving credit facility for working capital needs, other general corporate purposes, and to finance permitted acquisitions. The Term B Senior Credit Facility permits the Company to use any proceeds from the uncommitted incremental term loan facility to finance permitted acquisitions and for any other purpose permitted by any future incremental term loan.

Security. The Term B Senior Credit Facility is secured by a security interest in all of the Company’s current and future tangible and intangible property, as well as all of the current and future tangible and intangible property of the Company’s subsidiaries, HFA, CATI, METI, JJMA, BMH, WCI, and MA&D.

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.

* Senior Term Loan. 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 175 basis point spread or 2) the Eurodollar rate plus a 275 basis point spread. As of February 6, 2007, the spread associated with the alternate base interest rate charged by Credit Suisse from time to time was lowered to 150 basis points, and the spread associated with the Eurodollar rate in effect from time to time was lowered to 250 basis points.

* Senior Revolving Credit Facility. 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 February 6, 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.


			Federal Funds ABR		Prime Rate ABR
	Eurodollar Spread		Spread		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 September 30, 2007, the Eurodollar rate on the senior term loan was 7.73 percent (5.23 percent plus 2.50 percent Eurodollar spread) and the ABR rate was 9.25 percent (7.75 percent plus 1.50 percent spread).

Interest Rate Cap Agreements. The Term B Senior Credit Facility required us to maintain interest rate hedge agreements acceptable to Credit Suisse to cap interest expense on at least 40% of our long-term senior debt for a period of at least two years from the date the first such agreement was put into place. This covenant expired on August 16, 2006. We have three interest rate cap agreements in place with our senior lenders, all of which expired on September 30, 2007.

The interest rate cap agreements capped the floating component of the total interest rate we pay, but did not affect spreads based on leverage ratio. The actual effective rate of interest that we paid on principal subject to each cap agreement was equal to the capped rate plus the applicable spread. The following table summarizes the interest rate cap agreements that were in place through September 30, 2007.

Interest

Notional

rate cap

Date

Cost

Cap rate

principal

Period

First Cap

Aug 2004

319,000

6.64% (3.89% floating rate cap plus 2.75% spread)

$36.9M

Sep 2004 — Sep 2005

Aug 2004

7.41% (4.66% floating rate cap plus 2.75% spread)

$34.5M

Sep 2005 — Sep 2007

Amendment #1

Apr 2005

6.91% (4.66% floating rate cap plus 2.25% spread)

Amendment #2

Mar 2006

7.16% (4.66% floating rate cap plus 2.50% spread)

Amendment #3

Jun 2006

7.41% (4.66% floating rate cap plus 2.75% spread)

Amendment #4

Feb 2007

7.16% (4.66% floating rate cap plus 2.50% spread)

Second Cap

Apr 2005

117,000

7.25% (5.00% floating rate cap plus 2.25% spread)

$28.0M

Through Sep 2007

Amendment #2

Mar 2006

7.50% (5.00% floating rate cap plus 2.50% spread)

Amendment #3

Jun 2006

7.75% (5.00% floating rate cap plus 2.75% spread)

Amendment #4

Feb 2007

7.50% (5.00% floating rate cap plus 2.50% spread)

Third Cap

Apr 2006

43,600

8.00% (5.50% floating rate cap plus 2.50% spread)

$30.0M

Through Sep 2007

Amendment #3

Jun 2006

8.25% (5.50% floating rate cap plus 2.75% spread)

Amendment #4

Feb 2007

8.00% (5.50% floating rate cap plus 2.50% 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 September 30, 2007, there was approximately $9.3 million outstanding on the revolving credit facility and

approximately $3.9 million was allocated for letters of credit; and the senior term loan was fully utilized. For the year ended September 30, 2007, the Company paid a commitment fee of approximately $125,000 for the revolving credit facility and no commitment fee for the senior term loan.

In addition to issuance and administrative fees, the Company is required to pay a fronting fee not to exceed 25 basis points for each letter of credit issued under the revolving credit facility. Each quarter the Company is required to pay interest in arrears at the revolving credit facility rate for all outstanding letters of credit. In addition to other fees and expenses under the Term B Senior Credit Facility, the Company is required to pay an annual agent’s fee.

Financial Covenants. The Term B Senior Credit Facility requires the Company to meet certain financial performance covenants over the life of the facility. For the years ended September 30, 2007 and 2006, the Company was in compliance with the financial covenants set forth in the Term B Senior Credit Facility.

The Term B Senior Credit Facility includes other covenants which, among other things, restrict the Company’s ability to do the following without the prior consent of syndicate bank members that have extended more than 50 percent or more of the aggregate amount of all loans then outstanding under the Term B Senior Credit Facility:


	•	incur additional indebtedness other than permitted additional indebtedness after satisfying a senior secured leverage based incurrence test;

	•	consolidate, merge or sell all or substantially all of the Company’s assets;

	•	make certain loans and investments including acquisitions of businesses, other than permitted acquisitions;

	•	pay dividends or distributions other than distributions needed for the ESOP to satisfy its repurchase obligations and for certain payments required under the Company’s equity based incentive plans;

	•	enter into certain transactions with the Company’s shareholders and affiliates;

	•	enter into certain transactions not permitted under ERISA;

	•	grant certain liens and security interests;

	•	enter into sale and leaseback transactions;

	•	change lines of business;

	•	repay subordinated indebtedness before it is due and redeem or repurchase certain equity;

	•	pay certain earn-outs in connection with permitted acquisitions; or

	•	use the proceeds of the Company’s borrowings other than as permitted by the Term B Senior Credit Facility.

Events of Default. The Term B Senior Credit Facility contains customary events of default including, without limitation:


	•	payment default;

	•	breach of representations and warranties;

	•	uncured covenant breaches;

	•	default under certain other debt exceeding an agreed amount;

	•	bankruptcy and insolvency events;

	•	notice of debarment, suspension or termination under a material government contract;

	•	certain ERISA violations;

	•	unstayed judgments in excess of an agreed amount;

	•	failure of the subordinated note to be subordinated to the Term B Senior Credit Facility;

	•	failure of any guarantee of the Term B Senior Credit Facility to be in effect;


	•	failure of the security interests to be valid, perfected first priority security interests in the collateral;

	•	failure of the Company to remain an S-corporation;

	•	imposition on the ESOP Trust of certain taxes in excess of an agreed amount;

	•	final determination that the ESOP is not a qualified plan;

	•	incurrence of a civil or criminal liability in excess of $5 million of the Company or any subsidiary arising from a government investigation;

	•	the actual termination of a material contract due to alleged fraud, willful misconduct, negligence, default or any other wrongdoing; or

	•	change of control (as defined below).

For purposes of the Term B Senior Credit Facility, a change of control generally occurs when, before the Company lists its common stock to trade on a national securities exchange and the Company obtains net proceeds from an underwritten public offering of at least $30.0 million, the ESOP Trust fails to own at least 51 percent of the Company’s outstanding equity interests, or, after the Company has such a qualified public offering, any person or group other than IIT or the ESOP Trust owns more than 37.5 percent of the Company’s outstanding equity interests. A change of control may also occur if a majority of the seats (other than vacant seats) on the Company’s Board of Directors shall at any time be occupied by persons who were neither nominated by the Company’s board nor were appointed by directors so nominated. A change of control may also occur if a change of control occurs under any of the Company’s material indebtedness including the Company’s subordinated note and the warrants issued with the Company’s subordinated note.

Bridge Loan Agreement

On June 30, 2006, the Company entered into a Bridge Loan Agreement with Credit Suisse and borrowed $170 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 Senior Unsecured Notes to repay all amounts outstanding under the Bridge Loan Agreement.

Subordinated Note — Redeemable Common Stock Warrants

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.

The Company issued 1,080,437 detachable redeemable common stock warrants (the Warrants) to IITRI in connection with the Subordinated Note. 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 20, 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 $7.1 million estimated fair value of the Warrants as a discount to the face value of the Subordinated Note and as a liability. The outstanding Warrants had an estimated fair value of $33.6 million as of September 30, 2007. The Company recognizes interest expense for changes in the estimated fair value of the Warrants.

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 (Senior Unsecured Notes) to Credit Suisse, which has informed the Company that it resold most of the Senior Unsecured Notes to qualified institutional buyers.

Use of Proceeds. The proceeds of the 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.

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.

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 of the Company, 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 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.

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

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 next six fiscal years, at a minimum, the Company expects that it will have to make the estimated interest and principal payments set forth below.


	6-Fiscal Year Period ($ In thousands)
	2008		2009		2010		2011		2012		2013		Thereafter

Bank revolving credit facility
- Interest(1)	$	250	$	250	$	250	$	250	$	250	$	250	$	500
Senior Term Loan
- Interest(2)		16,448		16,910		17,592		17,983		18,441		6,671		—
- Principal(3)		2,474		2,474		2,474		2,474		2,474		233,134		—
Senior Unsecured Notes
- Interest		25,625		25,625		25,625		25,625		25,625		25,625		38,438
- Principal		—		—		—		—		—		—		250,000
Subordinated Note
- Interest		—		6,384		3,192		—		—		—		—
- Principal		—		27,352		27,352		—		—		—		—

Total cash - Pay interest		42,323		49,169		46,659		43,858		44,316		32,546		38,938
Total cash - Pay principal		2,474		29,826		29,826		2,474		2,474		233,134		250,000

Total	$	44,797	$	78,995	$	76,485	$	46,332	$	46,790	$	265,680	$	288,938


(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. Interest expense value includes an estimate for the unused balance fee on the $50.0 million revolving credit facility and management’s estimate for interest payment on its revolving credit facility and any successor revolving credit facility the Company may access.

(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: $244.3 million, $241.8 million, $239.3 million, $236.8 million, and $234.4 million 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 fiscal years ending September 30, 2008 through 2012 is estimated to be approximately 6.7%, 7.0%, 7.4%, 7.6%, and 7.9%, respectively. 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 2008 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 $245.5 million as of September 30, 2007, resulting in expected aggregate annual principal payments of 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 September 30, 2007, no mandatory prepayments are due.

Contingent Obligations

Earn-outs and Hold-backs

The Company has earn-out and hold-back commitments related to the following acquisitions:

Amount

Acquisition

Hold-

Maximum

Expiration

Basis of

paid in

to be paid in

Date

Business Unit

back

Earn-out

Date

Earn-outs

FY2007

FY2008 *

2/25/05

CATI

—

8.25M

9/30/07

Revenue for fiscal
years 2005-2007

—

1.50M

9/30/07

Revenue in
commercial
aviation
industry

—

2/10/06

BMH

1.50M

6.00M

12/31/07

Revenue of
business unit

$3.00M
(earn-out)

$1.50M
(hold-back)

—

2/24/06

WCI

1.50M

2.60M

9/30/07

Revenue of
business unit

$1.25M
(earn-out)

$0.5M
(hold-back)

$0.98M
(earn-out)
$1.08
(hold-back)

5/19/06

MA&D

2.00M

4.10M

9/30/07

Revenue of
business unit

$0.3M
(hold-back)

$2.00M
(hold-back)

7/20/07

LogConGroup

—

0.90M

9/30/13

Revenue of
business unit

—


*		Amounts accrued as of September 30, 2007.

Other Contingent obligations which will impact the Company’s cash

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


	•	obligations relating to deferred compensation programs for senior managers;

	•	obligations related to the holder’s put rights associated with the Subordinated Note warrants;

	•	obligations relating to the Company’s stock based compensation plans; and

	•	repurchase obligations under the KSOP.

As of September 30, 2007, the Company has spent a cumulative total of $58.3 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


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

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		1,747		$	37.06		64
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	)
July 2007		276,877		$	43.37		12,008
August 2007		251,248		$	43.37		10,897
September 2007		15		$	43.37		1

Total						$	58,342

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, and in order to satisfy the Company’s repurchase obligations.

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 expects it will need to refinance the Term B Senior term loan 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.

Contractual Obligations

The following table summarizes the Company’s contractual and other forecasted long-term debt obligations. For contractual obligations, the Company included payments that it has a legal obligation to make.


	Payments Due by Fiscal Year
									2014 and
	Total		2008		2009-2011		2012-2013		After
	(In thousands)

Contractual Obligations:
Long-term debt(1)	$	848,017	$	44,797	$	201,812	$	312,470	$	288,938
Lease Obligations		121,285		26,597		56,507		21,656		16,525

Total contractual obligations	$	969,302	$	71,394	$	258,319	$	334,126		305,463


(1)		Includes interest payments and forecasted debt obligations.

Off-Balance Sheet Financing Arrangements

The Company accounts for operating leases entered into in the routine course of business in accordance with Statement of Financial Accounting Standards 13, Leases. The Company has no off-balance sheet financing arrangements other than its operating leases. The Company has no relationship with any unconsolidated or special purpose entity, nor has it issued any guarantees.

Summary of Critical Accounting Policies

Revenue Recognition

The Company’s revenue results 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 probable.

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 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 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. Settlement had no material adverse effect on the Company’s results of operations or cash flows. The Company submitted its fiscal year 2005 and 2006 indirect expense rates to the government in March 2006 and 2007, respectively, and expects to submit its fiscal year 2007 indirect expense rates to the government in March 2008. The Company has recorded revenue on federal government contracts in amounts it expects to realize.

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 reliably estimate 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.

Goodwill and Intangible Assets

The purchase price that we pay to acquire the stock or assets of an entity must be assigned to the net assets acquired based on the estimated fair value of those net assets. The purchase price in excess of the estimated fair value of the tangible net assets and separately identified intangible assets acquired represents goodwill. The purchase price allocation related to acquisitions involves significant estimates and management judgments that may be adjusted during the purchase price allocation period.

The Company accounts for goodwill and other intangible assets in accordance with the provisions of SFAS No. 142, which requires, among other things, the discontinuance of goodwill amortization. In addition, goodwill is to be reviewed at least annually for impairment or more frequently if events and circumstances indicate that the asset might be impaired. The Company has elected to perform this review annually at the end of each fiscal year. An impairment loss would be recognized to the extent that the carrying amount exceeds the asset’s fair value. The process of evaluating any impairment to goodwill involves significant management estimates. These annual reviews have resulted in no adjustments. The Company’s review consists of two steps. First, the Company estimates its fair value using an estimate of the fair value of its common stock based upon a valuation performed by an independent, third-party firm and compares it to its carrying amount. Second, if the carrying amount exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value in a manner similar to a purchase price allocation, in accordance with FASB Statement No. 141, Business Combinations. The residual fair value after this allocation is the implied fair value of the goodwill.

As of September 30, 2007, the Company has goodwill of approximately $395.9 million, subject to annual impairment review. As of September 30, 2007, the Company has a recorded net intangible asset balance of approximately $55.7 million, comprised primarily of purchased contracts acquired in connection with the JJMA, BMH, WCI, MA&D and the Anteon Contract acquisitions. The intangible assets have an estimated useful life of one to thirteen years and are amortized as the economic benefits are consumed.

Recently Issued Accounting Pronouncements

In June 2006, the FASB issued Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The interpretation is effective for fiscal years beginning after December 15, 2006. 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 its financial position or results of operations.

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 Securities Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (SAB 108), Financial Statements — Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 requires companies to quantify the impact of all correcting misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. This pronouncement was effective for the Company in fiscal 2007. SAB 108 did not have a material effect on the financial statements and related disclosures.

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.


Item 7A.	*Quantitative and Qualitative Disclosures About Market Risk*

Interest rate risk

The Company’s exposure to interest rate risk is primarily due to the debt it incurred to finance the Transaction and 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, February 2007, and July 2007. The balance drawn under the $50.0 million senior revolving credit facility bears interest at variable rates currently based on Credit Suisse’s (CS) prime rate plus a maximum spread of 225 basis points. The balance on the Senior Secured Term B Loan bears interest at variable rates currently tied to the Eurodollar rate. Such variable rates increase the risk that interest charges will increase materially if market interest rates increase.

The approximate impact of a 1% increase in the interest rate, as applied to principal balances drawn under the Senior Secured Term B Credit Facility would be $2.5 million, $2.5 million, $2.4 million, $2.4 million, and $2.4 million for 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

Because 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 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, among other things, obligations related to the holder’s put rights associated with the Subordinated Note warrants.

The value of those obligations would increase by approximately $4.3 million if the price of the Company’s stock were to increase by 10% and would decrease by approximately $4.3 million if the price of the Company’s stock were to decrease by 10%. Such changes would be reflected as a component of interest expense in the Company’s consolidated statements of operations.

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. These factors include, but are not limited to, the number of Alion employees who might seek to redeem shares of Alion stock for cash following termination of employment, and the number of employees who might exercise their rights under the stock appreciation and phantom stock programs during any particular time period.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Alion Science and Technology Corporation

McLean, Virginia:

We have audited the accompanying consolidated balance sheets of Alion Science and Technology Corporation and subsidiaries (the “Company”) as of September 30, 2007 and 2006, and the related consolidated statements of operations, redeemable common stock and accumulated deficit, and cash flows for each of the two years ended September 30, 2007. Our audits also included the financial statement schedule for the years ended September 30, 2007 and 2006 listed in the Index at Item 15(b). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Alion Science and Technology Corporation and subsidiaries as of September 30, 2007 and 2006, and the results of their operations and their cash flows for each of the two years ended September 30, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 21, the accompanying 2007 and 2006 financial statements have been restated.

/s/ DELOITTE & TOUCHE LLP

McLean, Virginia

December 21, 2007
(March 11, 2008 as to the effects of the restatement discussed in Note 21)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Alion Science and Technology Corporation:

We have audited the accompanying consolidated statements of operations, redeemable common stock and accumulated deficit and cash flows of Alion Science and Technology Corporation and subsidiaries (the Company) for the year ended September 30, 2005. In connection with our audit of the consolidated financial statements, we also have audited the consolidated financial statement schedule for the year ended September 30, 2005. These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Alion Science and Technology Corporation and subsidiaries for the year ended September 30, 2005, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 21 to the consolidated financial statements, the Company has restated the accompanying consolidated financial statements for the year ended September 30, 2005.

/s/ KPMG LLP

Chicago, Illinois

January 31, 2006 except as to Note 21,

which is as of March 12, 2008

ALION SCIENCE AND TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS


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

Current assets:
Cash and cash equivalents	$	11,684		$	2,755
Accounts receivable, net		186,660			150,412
Stock subscriptions receivable		3,378			8,990
Prepaid expenses and other current assets		3,634			4,501

Total current assets		205,356			166,658
Property, plant and equipment, net		19,552			14,644
Intangible assets, net		55,659			75,403
Goodwill		395,926			387,927
Other assets		7,477			6,337

Total assets		683,970			650,969

Current liabilities:
Interest payable		12,111			240
Current portion, Term B Senior Credit Facility note payable		2,430			2,576
Current portion, acquisition obligations		4,832			11,457
Trade accounts payable		46,104			36,142
Accrued liabilities		33,238			26,661
Accrued payroll and related liabilities		43,702			35,135
Billings in excess of costs and estimated earnings on uncompleted contracts		2,059			2,163

Total current liabilities		144,476			114,374
Acquisition obligations, excluding current portion		—			3,568
Notes payable to bank		9,250			12,300
Term B Senior Credit Facility note payable, excluding current portion		238,356			252,100
Senior Unsecured Notes		243,483			—
Bridge loan payable		—			164,680
Subordinated note payable		51,313			46,963
Accrued compensation, excluding current portion		15,483			21,026
Accrued postretirement benefit obligations		1,175			3,722
Non-current portion of lease obligations		6,203			4,292
Redeemable common stock warrants		33,610			35,234
Redeemable common stock, $0.01 par value, 8,000,000 shares authorized, 5,012,934 and 5,210,126 shares issued and outstanding at September 30, 2007 and September 30, 2006		200,768			213,719
Accumulated deficit		(260,147	)		(221,009	)

Total liabilities, redeemable common stock and accumulated deficit	$	683,970		$	650,969

See accompanying notes to consolidated financial statements.

ALION SCIENCE AND TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS


	Year Ended September 30,
	2007			2006			2005
	(In thousands, except share and
	per share information)

Contract revenue	$	737,587		$	508,628		$	369,231
Direct contract expense		562,139			381,467			267,241

Gross profit		175,448			127,161			101,990

Operating expenses:
Indirect contract expense		43,972			29,907			29,017
Research and development		2,379			2,025			498
General and administrative		58,886			58,093			43,602
Rental and occupancy expense		32,410			22,208			12,542
Depreciation and amortization		21,824			16,566			17,771
Bad debt expense		1,812			667			651

Total operating expenses		161,283			129,466			104,081

Operating income (loss)		14,165			(2,305	)		(2,091	)
Other income (expense):
Interest income		319			590			475
Interest expense		(51,226	)		(29,691	)		(38,696	)
Loss on extinguishment on debt		(6,170	)		—			—
Other		132			317			140

Total other expenses		(56,945	)		(28,784	)		(38,081	)
Loss before income taxes		(42,780	)		(31,089	)		(40,172	)
Income tax benefit (expense)		10			(26	)		(66	)

Net loss	$	(42,770	)	$	(31,115	)	$	(40,238	)

Basic and diluted loss per share	$	(8.35	)	$	(6.19	)	$	(9.50	)

Basic and diluted weighted average common shares outstanding		5,121,033			5,029,670			4,235,947

See accompanying notes to consolidated financial statements.

ALION SCIENCE AND TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF REDEEMABLE
COMMON STOCK AND ACCUMULTED DEFICIT


	Redeemable Common Stock						Treasury			Treasury			Accumulated
	Shares			Amount			Shares			Stock			Deficit

Balances at October 1, 2004, as previously reported		3,376,197		$	37,566			—		$	—		$	(27,818	)
Adjustment related to restatement (Note 21)		—			29,755			—			—			(29,755	)

Balances at October 1, 2004, restated		3,376,197		$	67,321			—		$	—		$	(57,573	)
Purchase of common stock from ESOP Trust		(52,507	)		—			52,507			(1,047	)		—
Release of treasury shares to ESOP Trust		52,507			—			(52,507	)		1,047			—
Issuance of redeemable common stock		1,944,300			56,729			—			—			—
Retirement of redeemable common stock		(170,657	)		(5,765	)		—			—			—
Increase in common stock redemption value		—			66,543			—			—			(66,543	)
Net loss for year ended September 30, 2005		—			—			—			—			(40,238	)

Balances at September 30, 2005, restated		5,149,840		$	184,828			—		$	—		$	(164,354	)
Issuance of redeemable common stock		579,739			22,354			—			—			—
Retirement of redeemable common stock		(519,453	)		(19,003	)		—			—			—
Increase in common stock redemption value		—			25,540			—			—			(25,540	)
Net loss for year ended September 30, 2006		—			—			—			—			(31,115	)

Balances at September 30, 2006, restated		5,210,126		$	213,719			—		$	—		$	(221,009	)
Issuance of redeemable common stock		493,740			20,265			—			—			—
Retirement of redeemable common stock		(690,932	)		(29,584	)		—			—			—
Reduction in common stock redemption value		—			(3,632	)		—			—			3,632
Net loss for year ended September 30, 2007		—			—			—			—			(42,770	)

Balances at September 30, 2007, restated		5,012,934		$	200,768			—		$	—		$	(260,147	)

See accompanying notes to consolidated financial statements.

ALION SCIENCE AND TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Year Ended September 30,
	2007
	Restated			2006			2005
	(In thousands)

Cash flows from operating activities:
Net loss	$	(42,770	)	$	(31,115	)	$	(40,238	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		21,824			16,566			17,771
Accretion of debt to face value		969			922			3,056
Amortization of debt issuance costs		2,768			1,669			840
Loss on extinguishment of debt		6,170			—			—
Postretirement benefits curtailment gain		(3,320	)		—			—
Decrease (Increase) in value of interest rate cap agreement		413			(94	)		(118	)
Change in fair value of redeemable common stock warrants		(1,624	)		4,287			23,730
Stock-based compensation		8,340			10,738			10,628
Other		(28	)		(33	)		(45	)
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable, net		(35,771	)		(59,687	)		12,078
Other assets		(773	)		(1,316	)		1,036
Trade accounts payable		10,229			22,192			1,438
Accrued liabilities		10,734			16,917			5,148
Interest payable		11,871			183			(386	)
Other liabilities		5,960			3,093			202

Net cash (used in) provided by operating activities		(5,008	)		(15,678	)		35,140
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired		(14,751	)		(279,196	)		(74,591	)
Capital expenditures		(10,687	)		(5,227	)		(2,233	)
Purchase of investment securities		—			—			(1,193	)

Net cash used in investing activities		(25,438	)		(284,423	)		(78,017	)
Cash flows from financing activities:
Proceeds from Term B Senior Credit Facility note payable		40,000			118,000			94,000
Proceeds from Senior Unsecured Notes		250,000			—			—
(Repayment) proceeds of Bridge loan		(170,000	)		170,000			—
Payment of debt issuance costs		(10,796	)		(7,758	)		(1,307	)
Repayment of Term B Credit Facility note payable		(53,513	)		(1,905	)		(1,080	)
Repayment of mezzanine note payable		—			—			(20,201	)
Repayment of mezzanine warrants		—			(13,643	)		—
Repayment of agreements with officers		—			—			(1,823	)
(Payments) borrowings under revolving credit facility		(3,050	)		12,300			—
Proceeds from interest rate cap agreement		360			—			—
Purchase of interest rate cap agreement		—			(44	)		—
Purchase of redeemable common stock from ESOP Trust		(29,584	)		(19,003	)		(8,160	)
Cash received from issuance of redeemable common stock to Trust		15,958			7,131			14,509

Net cash provided by financing activities		39,375			265,078			75,938
Net increase (decrease) in cash and cash equivalents		8,929			(35,023	)		33,061
Cash and cash equivalents at beginning of year		2,755			37,778			4,717

Cash and cash equivalents at end of year	$	11,684		$	2,755		$	37,778

Supplemental disclosure of cash flow information:
Cash paid for interest		33,695			19,349			9,328
Cash paid for taxes		68			157			65
Non-cash financing activities:
Common stock issued to ESOP Trust in satisfaction of employer contribution liability		9,920			7,871			5,707
Common stock issued for acquisitions		—			—			37,250

See accompanying notes to consolidated financial statements.

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(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 and developmental 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 IITRI, a not-for-profit membership corporation affiliated with and 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 audited consolidated financial statements include the accounts of Alion Science and Technology Corporation and its subsidiaries (collectively, the “Company” or “Alion”) and have been prepared in accordance with U.S. generally accepted accounting principles. The consolidated financial statements are prepared on the accrual basis of accounting and include the accounts of Alion and its wholly-owned subsidiaries from date of formation or acquisition. 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

	•	Washington Consulting Government Services, Inc. — established July 2007

Fiscal, Quarter and Interim Periods

The Company’s fiscal year ends on September 30. The Company operates based on a three-month quarter, four-quarter fiscal year with quarters ending December 31, March 31, June 30, and September 30.

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 the reported amounts of operating results during the reported 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 2006 and 2005 financial statements have been reclassified to conform to the current presentation.

Revenue Recognition

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 2005 and 2006 indirect expense rates to the government in March 2006 and 2007, respectively, and expects to submit its fiscal year 2007 indirect expense rates to the government in March 2008. The Company has recorded revenue on federal government contracts in amounts it expects to realize.

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

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 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-related 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 the assets’ 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.

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 indicates potential impairment. The

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Company must recognize an impairment loss if, and to the extent that, goodwill exceeds fair value. The Company completed the fiscal year 2007 annual goodwill impairment analysis in the fourth quarter of fiscal year 2007. Based on this analysis, the Company concluded that no goodwill impairment exists as of September 30, 2007. Intangible assets are amortized as the economic benefits are consumed over their estimated useful lives, as follows:


Purchased contracts			1 — 13 years
Internal use software and engineering designs			2 — 3 years
Non-compete agreements			5 — 6 years

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 and SFAS No. 158 Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. SFAS 106 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. 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. SFAS 158 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. The Company curtailed the postretirement benefits plan at the end of fiscal year 2007. See footnote 5 for further discussion.

Redeemable Common Stock

The Company’s outstanding shares of common stock are considered redeemable equity securities because eventual redemption of shares of Alion common stock is deemed to be outside the Company’s control. Alion is required to increase or decrease the reported value of its outstanding common stock to reflect the estimated redemption value at each reporting date based on management’s estimated fair value price per share. The Company records changes in the reported value of Alion’s outstanding common stock through an offsetting charge or credit to accumulated deficit. The Company reduced redeemable common stock by approximately $3.6 million for the year ended September 30, 2007, based on the change in the estimated fair value of a share of Alion common stock and the total shares outstanding at September 30, 2007. The aggregate fair value adjustment recorded in accumulated deficit at September 30, 2007 was $118.2 million. Management used a valuation prepared by an independent, third party appraiser selected by State Street Bank & Trust Company, the ESOP Trustee, to estimate the fair value price per share of Alion common stock to determine that outstanding redeemable common stock had an aggregate fair value of approximately $200.8 million as of September 30, 2007.

Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of each class of financial instruments 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 each 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.

Senior Long-term debt. The carrying amount of the Company’s senior debt approximates fair value which is estimated on current rates offered to the Company for debt of the same remaining 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 CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Redeemable Alion Common Stock. The estimated fair value price per share is determined based upon management’s estimate, which is supported by a valuation performed by an independent, third-party firm.

Recently Issued Accounting Pronouncements

In September 2006, the Securities Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (SAB 108), Financial Statements — Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 requires companies to quantify the impact of all correcting misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. This pronouncement was effective for the Company in fiscal 2007. SAB 108 did not have a material effect on the Company’s financial statements and related disclosures.

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 for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently analyzing the impact of adopting this statement on its financial statements, but currently does not believe its adoption will have a significant impact on its financial position or results of operations.


(3)	Business Combinations

Fiscal Year 2007 Acquisitions

Acquisition of LogConGroup, Inc. 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. As of September 30, 2007, the Company has recorded approximately $1.6 million in goodwill relating to this acquisition. Pursuant to the requirements of SFAS No. 141, Business Combinations, the effect of the acquisition did not meet the criteria of a material and significant acquisition, and therefore, pro forma disclosures are not presented in these consolidated financial statements.

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal Year 2006 Acquisitions

Acquisition of BMH Associates, Inc. On February 10, 2006, the Company acquired 100 percent of the issued and outstanding stock of BMH, a provider of advanced software, systems engineering and distributed interactive simulations for military training and experimentation, for $20.0 million (less a $1.5 million hold back) plus additional contingent earn-out obligations over a two year period which can not exceed $6.0 million. As of September 30, 2007, the Company has recorded approximately $19.2 million in goodwill relating to this acquisition.

Acquisition of Washington Consulting, Inc. On February 24, 2006, the Company acquired 100 percent of the issued and outstanding stock of WCI, a provider of enterprise IT and management consulting solutions and services to commercial and government customers, for $18.0 million (less a $1.5 million hold back) plus additional contingent earn-out obligations over a two year period which can not exceed $2.6 million. As of September 30, 2007, the Company has recorded approximately $18.5 million in goodwill relating to this acquisition.

Acquisition of Micro Analysis and Design, Inc. On May 19, 2006, the Company acquired 100 percent of the issued and outstanding stock of MA&D, a provider of human factors engineering, modeling and simulation and software development for approximately $16.9 million (less a $2.0 million hold back) plus additional contingent earn-out obligations over a two year period which can not exceed approximately $4.1 million. As of September 30, 2007, the Company has recorded approximately $14.5 million in goodwill relating to this acquisition.

Acquisition of certain assets of Anteon Corporation. On June 30, 2006, the Company acquired from Anteon a group of assets consisting primarily of customer contracts for approximately $221.4 million. As of September 30, 2007, the Company has recorded approximately $34.7 million for purchased contracts and approximately $177.8 million in goodwill relating to this acquisition.

The pro forma information disclosed below for Anteon includes historical operating results and pro forma adjustments to reflect the effects of Alion’s acquisition of Anteon as if it occurred on October 1, 2004. The pro forma information does not purport to be indicative of the results of operations that would have actually been achieved if the transaction had occurred on the date indicated or the results of operations that will be reported in the future.


	Twelve Months Ended September 30, 2006									Twelve Months Ended September 30, 2005
				Anteon Pro			Alion Pro						Anteon			Alion Pro
	Alion			Forma			Forma			Alion			Pro Forma			Forma
	(In thousands, except share and per share information)

Pro Forma Revenue	$	508,628		$	191,362		$	699,990		$	369,231		$	206,786		$	576,017
Pro Forma Loss	$	(31,115	)	$	(8,861	)	$	(39,976	)	$	(40,238	)	$	(15,952	)	$	(56,190	)
Weighted Average Shares Outstanding		5,029,670			—			5,029,670			4,235,947			—			4,235,947
Loss Per Share	$	(6.19	)	$	—		$	(7.95	)	$	(9.50	)	$	—		$	(13.27	)

The acquired identifiable intangibles assets in these transactions were as follows:

Estimated

Residual

Weighted Average Remaining

Amounts in Millions

Fair Value

Value

Amortization Period

Purchased contracts

54.7

—

4 years

Fiscal Year 2005 Acquisitions

Acquisition of Assets of Countermeasures, Inc. On October 28, 2004, Alion purchased substantially all of the assets of Countermeasures, Inc. for approximately $2.4 million. At the time of acquisition, Countermeasures, Inc.

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

had two employees and was located in Hollywood, Maryland. As of September 30, 2007, the Company has recorded approximately $1.4 million in goodwill relating to this acquisition.

Acquisition of ManTech Environmental Technology, Inc. On February 11, 2005, Alion acquired 100 percent of the outstanding stock of METI, an environmental and life sciences research and development company for approximately $7.0 million in cash. METI was headquartered in Research Triangle Park, NC. As of September 30, 2007, the Company has recorded $5.6 million in goodwill related to this acquisition.

Acquisition of Carmel Applied Technologies, Inc. On February 25, 2005 Alion acquired 100 percent of the outstanding stock of CATI, a flight training software and simulator development company, for approximately $7.3 million in cash. The transaction is subject to an earn-out provision not-to-exceed a cumulative amount of $8.25 million based on attaining certain cumulative revenue goals for fiscal years 2005, 2006, and 2007, and a second earn-out provision not-to-exceed $1.5 million for attaining certain revenue goals in the commercial aviation industry. As of September 30, 2007, the Company has recorded $13.9 million in goodwill related to this acquisition.

Investment in VectorCommand Ltd. On March 22, 2005, Alion acquired approximately 12.5 percent of the A ordinary shares in VectorCommand Ltd. for $1.5 million which investment is accounted for at cost.

Acquisition of John J. McMullen Associates, Inc. and Pro Forma Information. On April 1, 2005, the Company acquired 100 percent of the issued and outstanding stock of JJMA pursuant to a Stock Purchase Agreement by and among Alion, JJMA, Marshall & Ilsley Trust Company N.A. as trustee of the JJMA Employee Stock Ownership Trust, and holders of JJMA stock options and JJMA stock appreciation rights. The Company paid the equity holders of JJMA approximately $52.9 million, issued 1,347,197 shares of Alion common stock to the JJMA Trust valued at approximately $37.3 million, and agreed to make $8.3 million in future payments. The Company valued its common stock issued to the JJMA Trust at $27.65 per share, which price was determined based on management’s estimate, which was supported by an independent valuation. The acquisition was accounted for using the purchase method. The estimated total purchase price is as follows.


	Fair Value
Form of Consideration	(In millions)

Cash paid, net of cash acquired	$	52.9
Stock issued		37.3
Future payments		8.3
Acquisition costs		1.3

Total consideration	$	99.8

The Company has allocated the purchase price of JJMA to the estimated fair value of the assets acquired and liabilities assumed in the purchase. The purchase price allocation is final as the Company completed its determination of the fair values of the assets acquired and liabilities assumed and is as follows (in millions):


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

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The table below sets out the pro forma effects of the JJMA acquisition on the Company’s revenue, net income and earnings per share as though the JJMA acquisition had taken place on the first day of each fiscal year presented. The pro forma information disclosed below for JJMA includes historical operating results and pro forma adjustments to reflect the effects of Alion’s acquisition of JJMA. The JJMA pro forma results for the year ended September 30, 2005, includes approximately $10.1 million of stock-based compensation expensed and recorded by JJMA due to accelerated vesting directly associated with this acquisition. The pro forma information does not purport to be indicative of the results of operations that would have actually been achieved if the transaction had occurred on the date indicated or the results of operations that will be reported in the future.


	Twelve Months Ended September 30, 2005
				JJMA Pro			Alion Pro
	Alion			Forma			Forma
	(In thousands, except share and per share
	information)

Pro Forma Revenue	$	369,231		$	51,103		$	420,334
Pro Forma Loss	$	(40,238	)	$	(17,524	)	$	(57,762	)
Weighted Average Shares Outstanding		4,235,947			671,753			4,907,700
Loss Per Share	$	(9.50	)	$	—		$	(11.77	)

The acquired identifiable intangibles assets in these fiscal year 2005 transactions were as follows:


					Weighted Average
	Estimated		Residual		Remaining
	Fair Value		Value		Amortization Period
	Amounts in Millions

Purchased contracts	$	28.0	$	—		11 years
Internal use software
and designs		0.9		—		3 years
Not to Compete Agreements		0.7		—		0 years

Total	$	29.6	$	—		11 years


(4)	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 Alion Science and Technology Corporation Employee Ownership, Savings and Investment Trust (the ESOP 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 issued a determination letter that the ESOP Trust and the Plan, as amended through the Ninth Amendment, qualify under Sections 401(a) and 501(a) of the Internal Revenue Code of 1986 (the IRC) , as amended. The Company believes that the Plan and ESOP Trust have been designed and are currently being operated in compliance with the applicable requirements of the IRC.


(5)	Postretirement Benefits

The Company sponsors a medical benefits plan providing certain medical, dental, and vision coverage to eligible employees and former employees. The Company is self-insured with a stop-loss limit under an insurance agreement. The Company 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 the health care premium. The estimated contribution to premiums from

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

retirees is an aggregate of $125,000 for fiscal year 2008. There were no plan assets as of September 30, 2007 and 2006. The Company uses a September 30 measurement date.

Curtailment. The plan was effectively amended as of September 30, 2007. The amendment eliminates future benefits for those retiring after December 31, 2007. It also requires pre-65 retirees to pay the full expected cost of benefits starting January 1, 2009. No changes were made to the grandfathered group with liftetime coverage. Under paragraph 96 of SFAS 106, the plan amendment qualifies as a curtailment. The financial recognition of a curtailment occurs in two steps. First, the balance of the Unrecognized Prior Service Cost is recognized as a loss. Second, the excess of the decrease in Accumulated Postretirement Benefit Obligation over the balance of Unrecognized Actuarial Loss is recognized as a curtailment gain. The impact of the two components resulted in a net curtailment gain of approximately $3.3 million for the year ended September 30, 2007, which is included in general and administrative expense.

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, which requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position. Under SFAS 158, actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations that have not been recognized under previous accounting standards must be recognized as Accumulated Other Comprehensive Income (Loss), net of tax effects, until they are amortized as a component of net periodic benefit cost. As of September 30, 2007, no Accumulated Other Comprehensive Income (Loss) was recognized.

The following tables show the benefit obligation, funded status of the Company’s Plan, amounts recognized in the financial statements, and the principal weighted-average assumptions used:


	2007		2006
	(In thousands)

Accumulated postretirement benefit obligation as of September 30:
Retirees	$	1,053	$	2,364
Fully eligible active plan participants		122		1,833
Other active plan participants		—		4,837

	$	1,175	$	9,034


	2007			2006
	(In thousands)

Reconciliation of beginning and ending benefit obligation:
Benefit obligation at beginning of year	$	9,034		$	3,583
Service cost		454			246
Interest cost		531			239
Actuarial (gain) loss		(321	)		4,312
Plan amendment		(7,840	)		1,014
Benefits paid		(683	)		(360	)

Benefit obligation at end of year	$	1,175		$	9,034

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	2007			2006
	(In thousands)

Funded status of the plan:
Obligation at September 30	$	(1,175	)	$	(9,034	)
Unrecognized prior service cost		—			1,014
Unrecognized net actuarial loss		—			4,298

Accrued postretirement benefits included in the consolidated balance sheet	$	(1,175	)	$	(3,722	)

Amounts recognized in the statement of financial position consist of:
Current assets	$	—		$	—
Noncurrent assets		—			—
Current liabilities		—			—
Noncurrent liabilities		1,175			3,722

	$	1,175		$	3,722


	2007			2006
	(In thousands)

Components of net periodic postretirement benefit cost:
Service cost	$	454		$	246
Interest cost		531			239
Amortization of unrecognized prior service cost		140			—
Amortization of unrecognized net actuarial loss		331			40
Net curtailment gain		(3,320	)		—

Net periodic postretirement benefit cost	$	(1,864	)	$	525

Amounts recognized as changes in Accumulated Other Comprehensive Income (Loss) arising from a defined benefit plan but not yet included in net periodic postretirement benefit cost:


	2007		2006
	(In thousands)

Net loss (gain)	$	—		N/A
Prior service cost (credit)		—		N/A
Transition obligation		—		N/A

	$	—		N/A

Estimated amounts of net loss and transition obligation to be recognized into net periodic postretirement benefit cost over the next fiscal year are $0 and $0, respectively.

The weighted-average assumptions in the following table represent the rates used to develop the actuarial present value of the projected benefit obligation for the year listed and also the net periodic benefit costs.


	2007			2006

Accumulated post retirement benefit obligation at September 30		6.15	%		5.75	%
Service and interest cost portions of net periodic postretirement benefit cost		5.75	%		5.25	%

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table displays the assumed health care trends used to determine the accumulated postretirement benefit obligation:


	2007			2006

Health care cost trend rate assumed for next year		10.0	%		11.0	%
Rate to which the cost trend rate is assumed to decline (ultimate trend rates)		6.0	%		5.0	%
Year the rate reaches the ultimate trend rate		2016			2018

A one-percentage-point change in assumed health care cost trend rates would have the following effect:


	One-Percentage-		One-Percentage-
	Point Increase		Point Decrease
	(In thousands)

Effect on total service and interest cost	$	97	$	85
Effect on accumulated postretirement benefit obligation	$	32	$	30

Estimated future benefit payments-fiscal years ending September 30:


	(In thousands)

2008	$	667
2009		59
2010		60
2011		61
2012		61
2013-2017		273

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. The Act introduced a prescription drug benefit under Medicare Part D and a federal subsidy to sponsors of retirement health care plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The Company has elected to defer the recognition of the effect, if any, of the Act until such time when the authoritative guidance is issued. Any measures of the accumulated postretirement benefit obligation or net periodic postretirement benefit cost in the Company’s financial statements do not reflect the effect of the Act. The Company has a small, closed group of retirees covered for medical after age 65, thus the effect of the Act is not expected to be material.


(6)	Loss Per Share

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


(7)	Redeemable common stock owned by ESOP Trust

The ESOP Trust owns all of the Company’s common stock, for the benefit of current and former employee participants in the Alion KSOP. Participants or beneficiaries are entitled to a distribution of the fair value of their vested ESOP account balance upon death, disability, retirement or termination of employment. The ESOP permits distributions to be paid over a five year period commencing the year after a participant’s retirement at age 65, death or disability. The Company can delay distributions to other terminating participants for five years before commencing payment over a subsequent five year period.

The Company can choose whether to make a distribution in cash or shares of Alion common stock. The IRC and ERISA require that if the Company distributes common stock to a participant or beneficiary, the Company must provide a put option to permit the recipient to sell the stock back to the Company at the estimated fair value price per

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

share, which was $40.05, $41.02 and $35.89 at September 30, 2007, 2006 and 2005, respectively. The Company uses a valuation performed by an independent, third-party firm to determine the estimated fair value price per share. Certain participants who beneficially acquired shares of Alion common stock on December 22, 2002, have the right to sell such shares distributed from their accounts at the greater of the then current estimated fair value per share or the original purchase price ($10.00).

Although the Company and the ESOP retain the right to delay distributions consistent with the terms of the plan and to control the circumstances of future distributions, eventual redemption of shares of Alion common stock is deemed to be outside the Company’s control. Participants who have been allocated shares of Alion common stock owned by the ESOP Trust are ultimately entitled to receive payment for the fair value of the shares allocated to their accounts.


(8)	Accounts Receivable

Accounts receivable at September 30 consisted of the following:


	2007			2006
	(In thousands)

Billed receivables	$	126,430		$	106,310
Unbilled receivables:
Amounts currently billable		40,539			36,548
Revenues recorded in excess of milestone billings on fixed price contracts		2,059			5,591
Revenues recorded in excess of estimated contract value or funding		17,661			3,354
Retainages and other amounts billable upon contract completion		5,243			2,570
Less: Allowance for doubtful accounts		(5,272	)		(3,961	)

Total Accounts Receivable	$	186,660		$	150,412

Revenues recorded in excess of milestone billings 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 $65.5 million as of September 30, 2007 and included approximately $17.7 million for customer-requested work for which the Company had not received contracts or contract modifications. In keeping with industry practice, the Company classifies all contract-related accounts receivable as current assets based on contractual operating cycles which frequently exceed one year. Unbilled receivables are expected to be billed and collected within one year except for $5.2 million at September 30, 2007.

(9) Property, Plant and Equipment

Property, Plant and Equipment at September 30 consisted of the following:


	2007		2006
	(In thousands)

Leasehold improvements	$	7,212	$	2,709
Equipment and software		31,388		25,188

Total cost		38,600		27,897
Less-accumulated depreciation and amortization		19,048		13,253

Net Property, Plant and Equipment	$	19,552	$	14,644

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Depreciation and leasehold amortization expense for fixed assets was approximately $5.7 million, $5.8 million and $4.4 million for years ended September 30, 2007, 2006, and 2005 respectively.


(10)	Goodwill and Intangible Assets

The Company accounts for goodwill and other intangible assets in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and other Intangible Assets, which requires that goodwill be reviewed at least annually for impairment. The Company performs this review at the end of each fiscal year.

Changes in the carrying amount of goodwill during the years ended September 30, 2007 and 2006, in the aggregate, are summarized in the following table:


	Total
	(In thousands)

Balance as of October 1, 2005	$	163,419
Goodwill acquired during the year		223,412
Adjustment to initial allocation (includes earn out obligations)		1,096

Balance as of September 30, 2006	$	387,927
Goodwill acquired during the year		1,594
Adjustment to initial allocation (includes earn out obligations)		6,405

Balance as of September 30, 2007		395,926

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). The components of intangible assets as of September 30, 2007 and 2006 are as follows:


	September 30, 2007							September 30, 2006
			Accumulated							Accumulated
	Gross		Amortization			Net		Gross		Amortization			Net
	(In thousands)

Purchased contracts	$	111,519	$	(57,296	)	$	54,223	$	115,246	$	(41,912	)	$	73,334
Internal use software and engineering designs		2,155		(790	)		1,365		2,155		(401	)		1,754
Non-compete agreements		725		(654	)		71		650		(335	)		315

Total	$	114,399	$	(58,740	)	$	55,659	$	118,051	$	(42,648	)	$	75,403

The weighted-average remaining amortization period of intangible assets was approximately seven years at September 30, 2007. Amortization expense was approximately $16.1 million, $10.8 million, and $13.4 million for

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the years ended September 30, 2007, 2006, and 2005 respectively. Estimated aggregate amortization expense for the next five years and thereafter is as follows:


	(In thousands)

For the year ended September 30:
2008	$	14,490
2009		12,487
2010		10,985
2011		6,843
2012		5,767
Thereafter		5,087

	$	55,659


(11)	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 the IIT Research Institute (IITRI), which was controlled by Illinois Institute of Technology (IIT). 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 following amendments were made to 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.

	•	On July 17, 2007, the fifth increment to the Term B Senior Credit Facility (Increment Five) added $25.0 million in term loans to the Company’s Term B Senior Credit Facility.

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Term B Senior Credit Facility consists of:


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


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

Senior term loan	$	245,502		$	259,015
Less: Unamortized debt issuance costs		(4,716	)		(4,339	)

Term B Senior Credit Facility Note Payable	$	240,786		$	254,676
Less: current maturities, net of unamortized debt issue costs		(2,430	)		(2,576	)

Term B Senior Credit Facility Note Payable, less current maturities	$	238,356		$	252,100


	•	a $50.0 million senior revolving credit facility under which approximately $9.3 million was outstanding as of September 30, 2007, and approximately $3.9 million of which was allocated for letters of credit and as such is not available to be borrowed; and

	•	a $110.0 million uncommitted incremental term loan “accordion” 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. 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 $232.5 million.

The Company may prepay all or any portion of its senior term loan in minimum increments of $1.0 million, generally without penalty or premium, except for customary breakage costs associated with pre-payment of Eurodollar-based loans. If the Company issues certain permitted debt, or sells, transfers or disposes of certain assets, it must use all net proceeds to repay any Term B loan amounts outstanding. If the Company has excess cash flow for any fiscal year, it must use 50% of the net proceeds or excess cash flow to repay Term B loan amounts outstanding. If the Company’s leverage ratio is less than 2 to 1, it must use only 25% of net proceeds or excess cash flow to repay Term B loan amounts outstanding.

If the Company enters into an additional term loan, including under the uncommitted incremental term loan facility, and certain terms of such loan are more favorable to the new lenders than existing terms under the Term B Senior Credit Facility, the applicable interest rate spread on the senior term loans could increase. As a result, additional term loans could increase the Company’s interest expense under its existing term loans. The Company’s significant subsidiaries (HFA, CATI, METI, JJMA, BMH, WCI and MA&D) have guaranteed the Company’s obligations under the Company’s Term B Senior Credit Facility.

Use of Proceeds. In March 2006, the Company borrowed $32.0 million, used approximately $16.5 million to pay part of the WCI acquisition price, and paid approximately $13.6 million to redeem the mezzanine warrants held by IIT and the Company’s Chief Executive Officer. In May 2006, the Company borrowed $15.0 million to pay part of the MA&D acquisition price. On June 30, 2006, the Company borrowed $71.0 million to pay part of the Anteon Contracts acquisition price. On January 4, 2007, the Company borrowed $15.0 million in additional term loans to pay down a portion of the outstanding balance on the senior revolving credit facility. On July 17, 2007, the Company

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

borrowed $25.0 million of incremental term loans under Increment Five to pay down a portion of the outstanding balance on the senior revolving credit facility.

Security. The Term B Senior Credit Facility is secured by a security interest in all of the Company’s current and future tangible and intangible property, as well as all of the current and future tangible and intangible property of many of the Company’s subsidiaries.

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.

* Senior Revolving Credit Facility. 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. As of September 30, 2007, the Eurodollar rate on the senior term loan was 7.73 percent (5.23 percent plus 2.50 percent Eurodollar spread) and the ABR rate was 9.25 percent (7.75 percent plus 1.50 percent spread).

Interest Rate Cap Agreements. The Company has three interest rate cap agreements in place with its senior lenders. The interest rate cap agreements limit the floating component of the Company’s total interest rate but do not affect leverage ratio based spreads. The Company’s effective interest rate on notional principal in each cap agreement is the sum of the limited floating component plus the applicable spread, which is determined by the Term B Senior Credit Facility. The three interest rate cap agreements expired on September 30, 2007.

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 September 30, 2007, the Company had approximately $9.3 million outstanding on the revolving credit facility and approximately $3.9 million was allocated for letters of credit; and the senior term loan was fully utilized. For the year ended September 30, 2007, the Company paid approximately $125,000 in commitment fees for the revolving credit facility and no commitment fee for the senior term loan.

The Company is also required to pay an annual agent’s fee and a fronting fee not to exceed 25 basis points for each letter of credit issued under the revolving credit facility. Interest is due quarterly in arrears at the applicable revolving credit facility rate for all outstanding letters of credit.

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

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

loans. As of September 30, 2007, the Company was in compliance with the Term B Senior Credit Facility covenants.

Senior Unsecured Notes

Use of Proceeds. The proceeds of the 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.

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.

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.


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.

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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 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 year ended September 30, 2007.

Interest Payable

Interest Payable consisted of the following balances:


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

Senior Unsecured Notes	$	4,271	$	—
Term B Senior Credit Facility Note Payable		7,840		137
Bridge loan payable		—		103

Total	$	12,111	$	240

Subordinated Note

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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


	2008		2009		2010		2011		2012		2013		Thereafter		Total
	(In thousands)

Senior Secured Term B Loan(1)	$	2,474	$	2,474	$	2,474	$	2,474	$	2,474	$	233,134	$	—	$	245,504
Senior Unsecured Notes(2)		—		—		—		—		—		—		250,000		250,000
Subordinated Seller Note(3)		—		19,950		19,950		—		—		—		—		39,900
Subordinated Paid in Kind Note(4)		—		7,402		7,402		—		—		—		—		14,804

Total Principal Payments	$	2,474	$	29,826	$	29,826	$	2,474	$	2,474	$	233,134	$	250,000	$	550,208


(1)		The table does not reflect any prepayments of the Term B Senior Credit Facility based on excess cash flow or other conditions as the timing and amount of any such payments are uncertain. The approximate $240.8 million on the face of the balance sheet (current and long-term portion) includes, as of September 30, 2007, approximately $4.7 million of unamortized debt issue costs (which initially totaled approximately $12.3 million). The Company expects that it will need to refinance the Term B Senior term loan before the end of fiscal year 2012.

(2)		The table reflects the issuance of $250.0 million of Senior Unsecured Notes on February 8, 2007. The principal amount of $250.0 million is due and payable on February 1, 2015.

(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 September 30, 2007, approximately $2.9 million of unamortized debt discount assigned to fair value of the detachable warrants. On December 20, 2002, approximately $7.1 million was assigned as the fair value of the warrants in accordance with Emerging Issues Task Force Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially settled in, a Company’s Own Stock.

(4)		During the eight-year term of the Subordinated Note, approximately $14.8 million of principal accretes to the note and is included in the principal payments in fiscal years 2009 and 2010. The principal, together with the outstanding balance of the PIK notes will be due and payable in equal amounts at the end of fiscal years 2009 and 2010.


(12)	Redeemable Common Stock Warrants

In connection with the issuance of the Subordinated Note described in Note 11, 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 Subordinate Note Warrants have an exercise price of $10 per share and are exercisable until December 20, 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 $33.6 million as of September 30, 2007. The Company recognizes interest expense for changes in the estimated fair value of the Warrants.

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


(13)	Leases

Future minimum lease payments under non-cancelable operating leases for buildings, equipment and automobiles at September 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; which is being amortized over the lease terms. The remaining unamortized accrued loss related to these acquisitions was $1.5 million at September 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 September 30, 2007.


Lease Payments for Fiscal Years Ending	(In thousands)

2008	$	25,108
2009		21,855
2010		17,224
2011		15,098
2012		10,994
And thereafter		27,187

Gross lease payments		117,466
Less: non-cancelable subtenant receipts		(5,806	)

Net lease payments	$	111,660

Composition of Total Rent Expense
(In thousands)


	September 30,
	2007			2006			2005

Minimum rentals	$	25,574		$	18,045		$	11,555
Less: Sublease rental income		(2,687	)		(2,624	)		(2,461	)

Total rent expense, net	$	22,887		$	15,421		$	9,094


(14)	Stock Appreciation Rights

2002 SAR Plan

In November 2002, the Board of Directors adopted the Alion Science and Technology Corporation 2002 Stock Appreciation Rights (SAR) Plan (the 2002 SAR Plan).

Amendment #1. In November 2004, the Board of Directors amended the 2002 SAR Plan to provide that, on or after October 3, 2004, there would be no further grants under the 2002 SAR Plan.

Vesting. Grants made prior to October 3, 2004 remain in force. Outstanding SAR awards cannot exceed the equivalent of 10% of the Company’s outstanding shares of common stock on a fully diluted basis. A grantee has the right to receive payment for vested SARs equal to the difference between the appraised value of a share of Alion common stock as of the grant date and the appraised value of a share of Alion common stock as of the exercise date based on the most recent valuation of common stock held by the ESOP Trust. Grants to employees vest at 20% per

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

year; grants to members of the Company’s Board of Directors vest ratably over each member’s then-current term of office.

Amendment #2. In November 2005, the Board of Directors amended the 2002 SAR plan to eliminate the timely exercise requirement for an employee to receive payment for vested SARs and to permit employees to make two separate one-time elections, 1) to receive payment for SARs as they vest each year or when fully vested and 2) to receive payment for SARs already vested.

As of September 30, 2007, the Company has granted 236,400 SARs under the 2002 SAR Plan.

2004 SAR Plan

On January 13, 2005, the Company’s Board of Directors adopted a second SAR plan, the Alion Science and Technology Corporation 2004 Stock Appreciation Rights Plan (the 2004 SAR Plan), to comply with the deferred compensation provisions of the American Jobs Creation Act of 2004. The 2004 SAR Plan has a 10-year term and permits grants to Alion directors, officers, employees and consultants. Under the 2004 SAR Plan, the chief executive officer has the authority to award SARs, as he deems appropriate; however, awards to executive officers are subject to the approval of the administrative committee of the 2004 SAR Plan. Outstanding SAR awards cannot exceed the equivalent of 12% of the Company’s outstanding shares of common stock on a fully diluted basis. Awards to employees vest ratably over four years and awards to directors vest ratably over each director’s term of service. The 2004 SAR Plan contains a provision for accelerated vesting in the event of death, disability or a change in control of the Company.

Vesting. A grantee has the right to receive payment for vested SARs equal to the difference between the appraised value of a share of Alion common stock as of the grant date and the appraised value of a share of Alion common stock as of the exercise date per the most recent valuation of the common stock held by the ESOP Trust. For SARs granted under the 2004 SAR Plan before November 9, 2005 and outstanding when a change in control of the Company occurs, payment is based on the number of SARs multiplied by the share price at the date of the change in control (or earlier valuation, if higher).

Amendment. In November 2005, the Board of Directors amended the 2004 SAR Plan to permit employees to make a one-time election to receive payment for SARs as they vest each year or when fully vested and to eliminate the timely exercise requirement for an employee to receive payment for vested SARs. As of September 30, 2007, the Company has granted under the 2004 SAR Plan, 809,515 SARs, of which 673,288 SARs remain outstanding.

For the years ended September 30, 2007, 2006, and 2005 the Company recognized approximately $1.2 million, $3.0 million, and $3.7 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 September 30, 2007. For grants issued prior to October 1, 2006, the Company uses the intrinsic value method to recognize compensation expense. 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 CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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


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

December 2002		64,250		—		64,250	$	10.00		47,785		38,505		1,985		7,295		—		30,100		15,350
December 2002		—		29,400		29,400	$	10.00		—		—		—		—		—		—		—
May 2003		300		—		300	$	11.13		240		90		60		90		—		90		90
June 2003		300		—		300	$	11.13		300		—		120		180		—		—		—
November 2003		129,550		—		129,550	$	14.71		100,466		81,721		5,508		13,237		—		45,191		13,123
November 2003		—		12,600		12,600	$	14.71		2,800		—		—		2,800		—		—		—
November 2004		—		12,600		12,600	$	19.94		12,600		8,400		—		4,200		—		4,200		4,200
February 2005		164,750		—		164,750	$	19.94		135,588		109,800		11,525		14,263				49,100		—
March 2005		2,000		—		2,000	$	19.94		2,000		2,000		—		—		—		1,000		—
April 2005		33,000		—		33,000	$	29.81		27,500		24,000		1,000		2,500		—		10,000		—
June 2005		2,000		—		2,000	$	29.81		2,000		2,000		—		—		—		1,000		—
December 2005		276,675		—		276,675	$	35.89		257,900		229,288		24,024		4,588		—		58,588		—
February 2006		13,000		—		13,000	$	35.89		10,250		10,250		—		—		—		2,563		—
February 2006		7,500		—		7,500	$	35.89		7,500		5,000		1,875		625		—		1,250		—
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		—		—		—		3,750		—
August 2006		1,250		—		1,250	$	37.06		1,250		1,250		—		—		—		313		—
December 2006		239,290		—		239,290	$	41.02		—		225,600		13,190		500		—		—		—
February 2007		33,450		—		33,450	$	41.02		—		31,700		1,750		—		—		—		—
September 2007		2,000		—		2,000	$	43.37		—		2,000		—		—		—		—		—

Total		989,315		54,600		1,045,915				630,179		793,604		61,037		50,278		—		208,895		32,763

Wtd Avg Exercise Price	$	29.99	$	13.38	$	29.12			$	26.39	$	31.55	$	31.21	$	19.14	$	—	$	23.13	$	13.16

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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


							Remaining
	Risk Free				Expected		Life
Date of Grant	Interest Rate	Volatility			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
September 2007	4.54%-4.54%		35	%		4 yrs		47.1

Wtd Avg Remaining Life (months)								26.0


(15)	Phantom Stock Plans

Phantom stock refers to hypothetical shares of Alion common stock. Recipients, upon vesting, are generally entitled to receive cash equal to the product of the number of hypothetical shares vested and the then-current value of Alion common stock, based on the most recent valuation of the shares of common stock held by the ESOP Trust. The Compensation Committee of the Board of Directors administers the Company’s phantom stock plans and is authorized to grant phantom stock to key management employees and outside directors. Grants of phantom stock do not confer voting or any other rights associated with common stock ownership. References to shares of common stock under the plan are for accounting and valuation purposes only. The Company is authorized to issue up to 2.0 million shares of phantom stock in total for all Phantom Stock plans.

Initial Phantom Stock Plan

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Vesting. The Initial Phantom Stock Plan contains provisions for acceleration of vesting and payouts in connection with an employee’s death, disability, involuntary termination of employment without cause or a change in control of the Company. As of September 30, 2007, under the Initial Phantom Stock Plan, the Company had granted 223,685 shares of phantom stock. The phantom stock awards vest according to the following:


	The Vested Amount for Grant in
Anniversary from Grant Date	February 2003			November 2003

1^st		—			20	%
2^nd		—			20	%
3^rd		50	%		20	%
4^th		25	%		20	%
5^th		25	%		20	%

Second Phantom Stock Plan

On November 9, 2004, the Company’s Compensation Committee approved, and the full board adopted, the Alion Science and Technology Corporation Performance Shares and Retention Phantom Stock Plan (the Second Phantom Stock Plan) to comply with the requirements of the American Jobs Creation Act. The Second Phantom Stock Plan permits awards of retention and performance share phantom stock. A retention award is for a fixed number of shares determined at the date of grant. A performance award is for an initial number of shares subject to change at the vesting date. Performance phantom shares are subject to forfeiture for failure to achieve a specified threshold value for a share of the Company’s common stock as of the vesting date. If the value of a share of the Company’s common stock equals the threshold value but does not exceed the target value, the number of performance shares in a given grant may be decreased by a specified percentage (generally up to 50%). If the value of a share of the Company’s common stock exceeds a pre-established target price on the vesting date, the number of performance shares in a given grant may be increased by a specified percentage (generally up to 20%).

Vesting. Performance share awards vest three years from date of grant (unless otherwise provided in an individual award agreement) and retention share awards vest as specified in each individual award agreement, provided the grantee is still employed by the Company. Under limited circumstances, a grantee may defer an award payout beyond the original date. The Second Phantom Stock Plan contains provisions for acceleration of vesting and payouts in connection with an employee’s death, disability, involuntary termination of employment without cause or a change in control of the Company. In November 2005, the Board of Directors amended both the Initial Phantom Stock Plan and the Second Phantom Stock Plan to permit employees to make a one-time election for either or both plans to receive payment for phantom shares as they vest each year or when fully vested. As of September 30, 2007, the Company has granted 294,148 shares of retention phantom stock and 213,215 shares of performance phantom stock under the Second Phantom Stock Plan.

Director Phantom Stock Plan

On November 9, 2005, the Company’s Compensation Committee approved, and the full board adopted, the Alion Science and Technology Corporation Board of Directors Phantom Stock Plan (Director Phantom Stock Plan). The Director Phantom Stock Plan provides for annual awards of shares of phantom stock to non-employee directors of the Company. The number of shares of phantom stock granted each year to each non-employee director is equal to the quotient obtained by dividing $35,000 by the fair market value of one share of the Company’s stock as of the date of the award rounded up to the next highest whole number. Fair market value is determined by the Administrative Committee in its sole discretion using the most recent valuation of the Company’s common stock made by an independent appraisal that meets the requirements of IRC Section 401(a)(28)(C), as of a date that is no more than 12 months before the date of the award.

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Vesting. Grants under the Director Phantom Stock Plan vest in one-third increments each year for three years from the date of the award. Vesting of an award accelerates upon a grantee’s death or disability or upon a change of control of the Company. Before each award is granted (or within 30 days of the grant date for individuals who become a director on the grant date), a director may elect whether to receive payment for phantom shares as they vest, or when the award is fully vested. A director who elects to receive payment when an award has fully vested may elect to defer the proceeds of the award into the Alion Science and Technology Director Deferred Compensation Plan provided the election is made no later than one year before the award fully vests. All payments made under the awards are required to be in cash. As of September 30, 2007, the Company had granted 13,786 shares of phantom stock under the Director Phantom Stock Plan.

For the years ended September 30, 2007, 2006, and 2005, the Company recognized approximately $7.1 million, $7.8 million, and $6.6 million, respectively, in compensation expense associated with all three phantom stock plans.

The table below sets out the disclosures required by SFAS No. 123 and the assumptions used to value a share of Alion common stock and the Company’s grants of phantom stock as of September 30, 2007 and September 30, 2006. The Company uses the intrinsic value method to recognize stock-based compensation expense. There is no established public trading market for Alion’s common stock. The ESOP 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 senior credit facility and the Subordinated Note prohibit paying dividends without the consent of the respective lenders. The Company intends to retain future earnings, if any, for use in the business.

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


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

February 2003		171,000		—		171,000	$	10.00		85,000		26,000		1,100		57,900		—		—		—
November 2003		52,685		—		52,685	$	14.71		32,971		19,715		770		12,486		—		4,079		4,079
February 2005		213,215		—		213,215	$	19.94		207,778		188,140		5,015		20,060		—		—		—
February 2005		98,399		—		98,399	$	19.94		98,399		98,399		—		—		—		—		—
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		—		—		—		1,974		—
November 2005		66,592		—		66,592	$	35.89		66,592		62,413		—		4,179		—		—		—
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		—		60,580		—		4,876		—		—		—

Total		731,049		13,786		744,835				561,274		531,108		6,885		100,152		—		10,186		5,705

Wtd Avg Grant Date Fair Value Price per Share	$	21.85	$	38.11	$	22.15			$	21.87	$	25.71	$	17.77	$	15.34	$	—	$	23.07	$	20.75

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Alion Science and Technology Corporation

Stock-based Compensation Disclosures per FAS 123 and FAS 123R
Phantom Stock
as of September 30, 2007


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

February 2003	4.06%-4.49%		60	%		5 yrs		3.6
November 2003	4.06%-4.49%		60	%		5 yrs		12.7
February 2005	3.10%-3.60%		45	%		3 yrs		3.6
February 2005	3.10%-3.60%		45	%		3 yrs		3.6
February 2005	3.10%-3.60%		45	%		4 yrs		15.6
August 2005	3.72%-3.77%		45	%		3 yrs		9.8
November 2005	4.20%-4.20%		40	%		3 yrs		13.0
November 2005	4.20%-4.20%		40	%		3 yrs		13.0
November 2005	4.20%-4.20%		40	%		5 yrs		37.0
November 2006	4.54%-4.58%		35	%		3 yrs		25.3
November 2006	4.54%-4.58%		35	%		3 yrs		25.3

Wtd Avg Remaining Life (months)								11.5


(16)	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, public health and safety, and nuclear safety and 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 $173.4 million, or 90.3%, of accounts receivable at September 30, 2007 and $143.8 million, or 93.1%, of accounts receivable at September 30, 2006. Contract revenues from agencies of the federal government represented approximately 93.3%, 94.7% and 96.0% of total contract revenues during the years ended September 30, 2007, 2006 and 2005, respectively. As a percentage of consolidated revenues, customers comprising 10% or more of consolidated revenues during the years 2007, 2006 or 2005 were as follows:


		For The Years Ended September 30,
Government Agency	Contract	2007			2006			2005

Department of Defense Navy	SeaPort Multiple Award Contract		17.9	%		3.8	%		—
Defense Modeling and Simulation Information	Information Analysis Center		5.9	%		12.5	%		18.8	%
Joint Spectrum Center	Engineering Support Services		1.0	%		7.0	%		12.4	%

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Balance Sheet Information at September 30, 2007


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

Current assets:
Cash and cash equivalents	$	11,718		$	(33	)	$	(1	)	$	—		$	11,684
Accounts receivable		180,431			6,224			5			—			186,660
Stock subscriptions receivable		3,378			—			—			—			3,378
Prepaid expenses and other current assets		3,569			64			1			—			3,634

Total current assets		199,096			6,255			5			—			205,356
Property, plant and equipment, net		19,350			202			—			—			19,552
Intangible assets, net		55,659			—			—			—			55,659
Goodwill		395,926			—			—			—			395,926
Investment in subsidiaries		7,679			—			—			(7,679	)		—
Intercompany receivables		—			5,996			—			(5,996	)		—
Other assets		7,461			16			—			—			7,477

Total assets		685,171			12,469			5			(13,675	)		683,970

Current liabilities:
Interest payable		12,111			—			—			—			12,111
Current portion, Term B Senior Credit Facility note payable		2,430			—			—			—			2,430
Current portion, acquisition obligations		4,832			—			—			—			4,832
Trade accounts payable		45,124			980			—			—			46,104
Accrued liabilities		31,638			1,594			6			—			33,238
Accrued payroll and related liabilities		42,582			968			152			—			43,702
Billings in excess of costs and estimated earnings on uncompleted contracts		2,059			—			—			—			2,059

Total current liabilities		140,776			3,542			158			0			144,476
Intercompany payables		5,760			—			236			(5,996	)		—
Notes payable to bank		9,250			—			—			—			9,250
Term B Senior Credit Facility note payable, excluding current portion		238,356			—			—			—			238,356
Senior Unsecured Notes		243,483			—			—			—			243,483
Subordinated note payable		51,313			—			—			—			51,313
Accrued compensation, excluding current portion		14,733			750			—			—			15,483
Accrued postretirement benefit obligations		1,175			—			—			—			1,175
Non-current portion of lease obligations		6,094			109			—			—			6,203
Redeemable common stock warrants		33,610			—			—			—			33,610
Common stock of subsidiaries		—			2,799			—			(2,799	)		—
Redeemable common stock		200,768			—			—			—			200,768
Accumulated surplus (deficit)		(260,147	)		4,947			(389	)		(4,558	)		(260,147	)

Total liabilities, redeemable common stock and accumulated deficit	$	685,171		$	12,147		$	5		$	(13,353	)	$	683,970

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (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
Prepaid expenses and other current assets		4,358			134			9			—			4,501

Total current assets		160,827			5,759			72			—			166,658
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		6,324			13			—			—			6,337

Total assets		652,489			14,381			388			(16,289	)		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		34,656			1,482			4			—			36,142
Accrued liabilities		24,518			2,143			—			—			26,661
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
Common stock of subsidiaries		—			2,799			—			(2,799	)		—
Redeemable common stock		213,719			—			—			—			213,719
Accumulated surplus (deficit)		(221,009	)		5,078			(295	)		(4,783	)		(221,009	)

Total liabilities, redeemable common stock and accumulated deficit	$	652,489		$	14,381		$	388		$	(16,289	)	$	650,969

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Operations for the Year Ended September 30, 2007
(In thousands)


							Non-
				Guarantor			Guarantor
	Parent			Companies			Companies			Eliminations		Consolidated

Contract revenue	$	709,980		$	27,375		$	232		$	—		737,587
Direct contract expense		542,085			19904			150			—		562,139

Gross profit		167,895			7,471			82			—		175,448

Operating expenses:
Indirect contract expense		39,206			4,629			137			—		43,972
Research and development		2,158			8			213			—		2,379
General and administrative		57,567			1,445			(126	)		—		58,886
Rental and occupancy expense		32,098			273			39			—		32,410
Depreciation and amortization		21,689			135			—			—		21,824
Bad debt expense		1,761			51			—			—		1,812

Total operating expenses		154,479			6,541			263			—		161,283

Operating income (loss)		13,416			930			(181	)		—		14,165
Other income (expense):
Interest income		319			—			—			—		319
Interest expense		(51,226	)		—			—			—		(51,226	)
Loss on extinguishment of debt		(6,170	)		—			—			—		(6,170	)
Other		1,191			(1,146	)		87			—		132
Equity in operations of subsidiaries		(300	)		—			—			300		—

Total other income (expenses)		(58,186	)		(1,146	)		87			300		(56,945	)
Income (loss) before income taxes		(42,770	)		(216	)		(94	)		300		(42,780	)
Income tax benefit		—			10			—			—		10

Net income (loss)	$	(42,770	)	$	(206	)	$	(94	)	$	300	$	(42,770	)

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Operations for the Year Ended September 30, 2006
(In thousands)


							Non-
				Guarantor			Guarantor
	Parent			Companies			Companies			Eliminations			Consolidated

Contract revenue	$	489,013		$	19,146		$	469		$	—		$	508,628
Direct contract expense		367,585			13,590			292			—			381,467

Gross profit		121,428			5,556			177			—			127,161

Operating expenses:
Indirect contract expense		27,491			2,312			104			—			29,907
Research and development		1,884			—			141			—			2,025
General and administrative		56,931			894			268			—			58,093
Rental and occupancy expense		22,166			6			36			—			22,208
Depreciation and amortization		16,491			75			—			—			16,566
Bad debt expense		667			—			—			—			667

Total operating expenses		125,630			3,287			549			—			129,466

Operating income (loss)		(4,202	)		2,269			(372	)		—			(2,305	)
Other income (expense):
Interest income		590			—			—			—			590
Interest expense		(26,691	)		—			—			—			(29,691	)
Equity in operations of subsidiaries		766			—			—			(766	)		—
Other		1,448			(1,033	)		(98	)		—			317

Total other expenses		(23,887	)		(1,033	)		(98	)		(766	)		(28,784	)
Income (loss) before income taxes		(31,089	)		1,236			(470	)		(766	)		(31,089	)
Income tax expense		(26	)		—			—			—			(26	)

Net income (loss)	$	(31,115	)	$	1,236		$	(470	)	$	(766	)	$	(31,115	)

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Operations for the Year Ended September 30, 2005
(In thousands)


							Non-
				Guarantor			Guarantor
	Parent			Companies			Companies			Eliminations			Consolidated

Contract revenue	$	360,130		$	8,133		$	968		$	—		$	369,231
Direct contract expense		262,026			4,622			593			—			267,241

Gross profit		98,104			3,511			375			—			101,990

Operating expenses:
Indirect contract expense		28,367			618			32			—			29,017
Research and development		498			—			—			—			498
General and administrative		42,676			910			16			—			43,602
Rental and occupancy expense		12,475			47			20			—			12,542
Depreciation and amortization		17,763			8			—			—			17,771
Bad debt expense		651			—			—			—			651

Total operating expenses		102,430			1,583			68			—			104,081

Operating income (loss)		(4,326	)		1,928			307			—			(2,091	)
Other income (expense):
Interest income		475			—			—			—			475
Interest expense		(38,696	)		—			—			—			(38,696	)
Equity in operations of subsidiaries		1,124			—			—			(1,124	)		—
Other		1,248			(976	)		(132	)		—			140

Total other expenses		(35,849	)		(976	)		(132	)		(1,124	)		(38,081	)
Income (loss) before income taxes		(40,175	)		952			175			(1,124	)		(40,172	)
Income tax expense		(63	)		(3	)		—			—			(66	)

Net income (loss)	$	(40,238	)	$	949		$	175		$	(1,124	)	$	(40,238	)

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Cash Flows
Year Ended September 30, 2007
(In thousands)


							Non-
				Guarantor			Guarantor
	Parent			Companies			Companies			Consolidated

Net cash provided by (used in) operating activities	$	(4,986	)	$	38		$	(60	)	$	(5,008	)
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired		(14,751	)		—			—			(14,751	)
Capital expenditures		(10,648	)		(39	)		—			(10,687	)

Net cash used in investing activities		(25,399	)		(39	)		—			(25,438	)
Cash flows from financing activities:
Proceeds from Term B Senior Credit Facility note payable		40,000			—			—			40,000
Proceeds from Senior Unsecured Notes		250,000			—			—			250,000
Repayment of Bridge Loan		(170,000	)		—			—			(170,000	)
Payment of debt issuance costs		(10,796	)		—			—			(10,796	)
Repayment of Term B Credit Facility note payable		(53,513	)		—			—			(53,513	)
Payments under revolving credit facility		(3,050	)		—			—			(3,050	)
Proceeds from interest rate cap agreement		360			—			—			360
Purchase of redeemable common stock from ESOP Trust		(29,584	)		—			—			(29,584	)
Cash received from issuance of redeemable common stock to ESOP Trust		15,958			—			—			15,958

Net cash provided by financing activities		39,375			—			—			39,375
Net increase (decrease) in cash and cash equivalents		8,990			(1	)		(60	)		8,929
Cash and cash equivalents at beginning of year		2,728			(32	)		59			2,755

Cash and cash equivalents at end of year	$	11,718		$	(33	)	$	(1	)	$	11,684

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Cash Flows
Year Ended September 30, 2006
(In thousands)


							Non-
				Guarantor			Guarantor
	Parent			Companies			Companies			Consolidated

Net cash provided by (used in) operating activities	$	(15,787	)	$	(256	)	$	366		$	(15,678	)
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired		(279,196	)		—			—			(279,196	)
Capital expenditures		(4,878	)		(37	)		(312	)		(5,227	)

Net cash used in investing activities		(284,074	)		(37	)		(312	)		(284,423	)
Cash flows from financing activities:
Proceeds from Term B Senior Credit Facility note payable		118,000			—			—			118,000
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	)
Repayment of Term B Credit Facility note payable		(1,905	)		—			—			(1,905	)
Borrowings under revolving credit facility		12,300			—			—			12,300
Purchase interest rate cap agreement		(44	)		—			—			(44	)
Purchase of redeemable common stock from ESOP Trust		(19,003	)		—			—			(19,003	)
Cash received from issuance of redeemable common stock to Trust		7,131			—			—			7,131

Net cash provided by financing activities		265,078			—			—			265,078
Net (decrease) increase in cash and cash equivalents		(34,783	)		(293	)		54			(35,023	)
Cash and cash equivalents at beginning of year		37,512			261			5			37,778

Cash and cash equivalents at end of year	$	2,728		$	(32	)	$	59		$	2,755

100

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Cash Flows
Year Ended September 30, 2005
(In thousands)


							Non-Guarantor
	Parent			Guarantor Companies			Companies			Consolidated

Net cash provided by operating activities	$	35,093		$	37		$	10		$	35,140
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired		(74,591	)		—			—			(74,591	)
Capital expenditures		(2,222	)		(6	)		(5	)		(2,233	)
Purchase of investment securities		(1,193	)		—			—			(1,193	)

Net cash used in investing activities		(78,006	)		(6	)		(5	)		(78,017	)
Cash flows from financing activities:
Proceeds from Term B Senior Credit Facility note payable		94,000			—			—			94,000
Repayment of mezzanine note payable		(20,201	)		—			—			(20,201	)
Repayment of mezzanine note warrants		—			—			—			—
Proceeds from bridge loan		—			—			—			—
Payment of debt issuance costs		(1,307	)		—			—			(1,307	)
Repayment of Term B Credit Facility note payable		(1,080	)		—			—			(1,080	)
Repayments of agreements with officers		(1,823	)		—			—			(1,823	)
Borrowings under revolving credit facility		—			—			—			—
Purchase interest rate cap agreement		—			—			—			—
Purchase of redeemable common stock from ESOP Trust		(8,160	)		—			—			(8,160	)
Cash received from issuance of redeemable common stock to Trust		14,509			—			—			14,509

Net cash provided by financing activities		75,938			—			—			75,938
Net increase in cash and cash equivalents		33,025			31			5			33,061
Cash and cash equivalents at beginning of year		4,609			108			—			4,717

Cash and cash equivalents at end of year	$	37,634		$	139		$	5		$	37,778

101

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


(18)	Related Party Transactions

On October 29, 2004, Dr. Atefi elected to redeem the amount due under his Deferred Compensation Agreement with Alion. The Company paid Dr. Atefi approximately $1.1 million including accrued interest of approximately $0.2 million. Dr. Atefi’s related warrants were redeemed on March 28, 2006.


(19)	Commitments and Contingencies

Earn-Out and Hold-Back 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. For the years ended September 30, 2007 and 2006, the Company recognized approximately zero and $2.0 million, respectively, in earn-out obligation related to 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. For the year ended September 30, 2007, the Company recognized and paid $3.0 million in earn-out obligations and $1.5 million in hold-back obligations related to BMH.

WCI — There is an earn-out provision not to exceed a total of $2.5 million based on the revenue of the business units that formerly comprised WCI. The obligation continues until September 2007. For the year ended September 30, 2007, the Company paid approximately $1.3 million in previously recognized earn-out obligation and $0.5 million in hold-back obligations related to WCI.

MA&D — There is an earn-out provision not to exceed a total of $2.5 million based on the revenue of the business units that formerly comprised MA&D. The obligation continues until September 2007. For the year ended September 30, 2007, the Company recognized no earn-out obligation and paid $0.3 million in hold-back obligations related to MA&D.

Legal Proceedings

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

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., respectively. 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.

102

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

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.


(20)	Interim Period Information (Unaudited, in thousands except per share information)


	2007 Quarters
	1st			2nd			3rd			4th

Revenue	$	181,139		$	187,899		$	184,933		$	183,616
Gross profit	$	41,038		$	46,387		$	42,761		$	45,262
Net income (loss)	$	(14,112	)	$	(15,694	)	$	(13,827	)	$	863
Income (loss) per share	$	(2.71	)	$	(3.07	)	$	(2.63	)	$	0.06


	2006 Quarters
	1st			2nd			3rd			4th

Revenue	$	101,289		$	111,189		$	116,830		$	179,320
Gross profit	$	24,984		$	30,142		$	29,638		$	42,397
Net loss	$	(7,780	)	$	(920	)	$	(8,242	)	$	(14,173	)
Loss per share	$	(1.52	)	$	(0.19	)	$	(1.60	)	$	(3.26	)


(21)	Restatement

The Company has restated its consolidated financial statements as of September 30, 2007 and 2006, and for the years ended September 30, 2007, 2006 and 2005. This restatement arose from two issues that management determined during the first quarter of 2008:

1) The Company has restated its consolidated balance sheet to classify and refer to its common stock in accordance with Section 210.5-02(28) of Regulation S-X. The ESOP Trust holds record title to all of Alion’s

103

ALION SCIENCE AND TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

common stock for the benefit of the participants in the Alion ESOP. These shares are subject to a liquidity put option that requires the Company to repurchase its common stock upon the occurrence of certain events that are deemed to be outside the Company’s control. As a result, Alion must present the shares of its common stock held by the ESOP Trust as “Redeemable common stock” and not as permanent capital under “Shareholder’s equity” on the Company’s consolidated balance sheet and must carry such common stock at redemption value. The consolidated balance sheet as restated no longer presents total liabilities and total shareholder’s deficit.

The tables below show the impact of the restatement.

TABLE #1: Selected Consolidated Balance Sheet Data (Restatement of redeemable common stock):


	As Previously
September 30, 2007	Reported			Adjustment			As Restated

Common stock	$	50		$	(50	)	$	—
Additional paid in capital		82,512			(82,512	)		—
Redeemable common stock		—			200,768			200,768
Accumulated deficit		(141,941	)		(118,206	)		(260,147	)


	As Previously
September 30, 2006	Reported			Adjustment			As Restated

Common stock	$	52		$	(52	)	$	—
Additional paid in capital		91,829			(91,829	)		—
Redeemable common stock		—			213,719			213,719
Accumulated deficit		(99,171	)		(121,838	)		(221,009	)


	As Previously
September 30, 2005	Reported			Adjustment			As Restated

Common stock	$	51		$	(51	)	$	—
Additional paid in capital		88,479			(88,479	)		—
Redeemable common stock		—			184,828			184,828
Accumulated deficit		(68,056	)		(96,298	)		(164,354	)

The cumulative adjustment to the reported value of redeemable common stock for the year ended September 30, 2005 consists of $66.5 million related to fiscal year 2005 and $118.3 million related to prior fiscal years.

TABLE #2: Selected Consolidated Statement of Cash Flow Data (Restatement of redeemable common stock purchase):


	As Previously
Year Ended September 30, 2007	Reported			Adjustment			As Restated

Cash flows used in operating activities
Accrued liabilities	$	(12,194	)	$	22,928		$	10,734
Net cash used in operating activities		(27,936	)		22,928			(5,008	)
Cash flows from financing activities
Purchase of redeemable common stock from ESOP Trust		(6,656	)		(22,928	)		(29,584	)
Net cash provided by financing activities		62,303			(22,928	)		39,375

104


Item 9.	*Changes in and Disagreements with Accountants on Accounting and Financial Disclosure*

None.


Item 9A.	*Controls and Procedures*

Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Principal Financial Officer, 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 report. Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it is required to file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified by the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive and Principal Financial Officers, as appropriate to allow timely decisions regarding required disclosures. Based on such evaluation, the Company’s Chief Executive Officer and Principal Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective and timely.

Following additional review of the accounting for common stock issued to the ESOP Trust, the Company decided to reclassify the shares of common stock held by the ESOP Trust as temporary equity pursuant to Section 210.5-02 (28) of Regulation S-X on the basis that the Company is unable to control all possible events of redemption. The ESOP Trust holds record title to all outstanding shares of Alion common stock. Although the ESOP Trust is not required to distribute shares of Alion common stock to participants or beneficiaries, individuals who have been allocated shares of Alion common stock owned by the ESOP Trust are ultimately entitled to receive payment for the fair value of the shares allocated to their accounts. The Company has reflected this change in its restated consolidated financial statements for the year ended September 30, 2007, as presented in this Form 10-K/A. The reclassification had no impact on the Company’s results of operations or compliance with covenants related to any credit facilities for the fiscal year ended September 30, 2007.

In light of the restatement, the Company’s Chief Executive Officer and Principal Financial Officer reassessed the disclosure controls and procedures for this Form 10-K/A and concluded that the Company’s disclosure controls and procedures as of September 30, 2007, were not effective to provide reasonable assurance that the information required to be disclosed by the Company in its Exchange Act reports was recorded, processed, summarized and reported within the time periods specified by the SEC or that information was accumulated and appropriately communicated to management to allow timely decisions regarding required disclosure.

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 fourth quarter ended September 30, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Institution of internal controls in compliance with Section 404 of Sarbanes-Oxley. The Company is currently in the process of instituting an internal controls program that will meet the requirements of Section 404 and the applicable regulations. The Chief Executive Officer and Principal Financial Officer currently believe that the internal controls program will be implemented by the SEC’s extended compliance deadline, which will require the Company to meet the requirements of Section 404 by the end of its 2008 fiscal year. The Company believes, however, that any deficiencies that may be identified by its efforts to comply with Section 404 will not affect the accuracy of our financial statements included in this report.


Item 9A(T).	*Controls and Procedures*

None.


Item 9B.	*Other Information*

None.

105

PART III


Item 10.	*Directors, Executive Officers and Corporate Governance*

Information Regarding the Directors of the Registrant

The names, ages and positions of our directors, as of September 30, 2007, are set forth below:


				Term		Director
Name	Age		Position	Expires		Since

Bahman Atefi		54	President, Chief Executive Officer and Chairman		2008		2001
Edward C. (Pete) Aldridge, Jr.		69	Director		2009		2003
Leslie L. Armitage		39	Director		2010		2002
Lewis Collens		69	Director		2010		2002
Admiral (Ret.) Harold W. Gehman, Jr.		64	Director		2010		2002
Donald E. Goss		76	Director		2009		2002
General (Ret.) George A. Joulwan		67	Director		2008		2002
General (Ret.) Michael E. Ryan		65	Director		2008		2002

The Company’s directors are divided into three classes. The first class of directors consists of two directors — Donald E. Goss and Edward C. Aldridge, Jr. Their term expires on the date of the annual meeting of Alion’s shareholder(s) in 2009. The second class of directors consists of three directors — Leslie Armitage, Lewis Collens and Admiral Harold W. Gehman, Jr. Their term expires on the date of the annual meeting of Alion’s shareholder(s) in 2010. The third class of directors consists of three directors — Bahman Atefi, General George A. Joulwan and General Michael E. Ryan. The term of the third class of directors expires on the date of the annual meeting of Alion’s shareholder(s) in 2008. As the holder of the subordinated note and warrants, Illinois Institute of Technology is entitled to nominate two representatives whom the ESOP Trust is required to elect to Alion’s Board of Directors. Messrs. Collens and Goss are Illinois Institute of Technology’s board representatives.

The following sets forth the business experience, principal occupations and employment of each of the directors.

Bahman Atefi was appointed president and chief executive officer of Alion in December 2001. He is also chairman of Alion’s Board of Directors. Dr. Atefi also serves as chairman of the ESOP committee. Dr. Atefi served as president of IITRI from August 1997, and as its chief executive officer from October 2000 until December 20, 2002, the closing date of the Transaction. Dr. Atefi has also been chairman of the board of directors of Human Factors Applications, Inc. since February 1999. From June 1994 to August 1997, Dr. Atefi served as manager of the energy and environmental group at Science Applications International Corporation. In this capacity, he was responsible for operation of a 600-person business unit, with annual revenues in 1997 of approximately $80 million, which provided scientific and engineering support to the U.S. Department of Energy, Nuclear Regulatory Commission, Environmental Protection Agency, DoD, as well as commercial and international customers. Dr. Atefi is a member of the board of trustees of Illinois Institute of Technology. Dr. Atefi received a BS in Electrical Engineering from Cornell University, a master’s degree in nuclear engineering and a doctor of science in nuclear engineering from the Massachusetts Institute of Technology.

Edward C. (Pete) Aldridge, Jr. has served as a director of Alion since November 2003. Mr. Aldridge retired from government service in May 2003 as the Under Secretary of Defense for Acquisition, Technology, and Logistics, a position he held since May 2001. In this position, Mr. Aldridge was responsible for all matters relating to DoD acquisition, research and development, advanced technology, international programs, and the industrial base. From March 1992 to May 2001, Mr. Aldridge also served as president and CEO of the Aerospace Corporation, president of McDonnell Douglas Electronic Systems, Secretary of the Air Force, and numerous other positions within the DoD. He is currently a director of Lockheed Martin Corporation and Global Crossing, Ltd.

Leslie L. Armitage has served as a director of Alion since May 2002. Ms. Armitage currently serves as a Senior Managing Director of Relativity Capital, LLC, a position she has held since January 2006. Ms. Armitage served as a

106

Partner of The Carlyle Group from January 1999 until May 2005. After leaving The Carlyle Group in May 2005, Ms. Armitage co-founded Relativity Capital, LLC, a Virginia-based private equity firm. In June 1997, Ms. Armitage became a founding member of Carlyle Europe. Ms. Armitage also served on the Board of Directors of Vought Aircraft Industries, Inc., Honsel International Technologies, and United Components, Inc.

Lewis Collens has served as a director of Alion since May 2002. From 1990 to 2007, Mr. Collens served as president of IIT. He is currently President Emeritus and Professor of Law at IIT, Kent College of Law, a position he has held since August 2007. Mr. Collens also served as chief executive officer of IITRI from 1990 to October 2000. Mr. Collens also serves as director for Dean Foods Company, Amsted Industries and Colson Group. Mr. Collens is one of IIT’s two representatives on the Company’s Board of Directors.

Admiral (Ret.) Harold W. Gehman, Jr. has served as a director of Alion since September 2002. Admiral Gehman retired from over 35 years of active duty in the U.S. Navy in October 2000. While in the U.S. Navy, Admiral Gehman served as NATO’s Supreme Allied Commander, Atlantic and as the Commander in Chief of the U.S. Joint Forces Command from September 1997 to September 2000. Since his retirement in November 2000, Admiral Gehman has served as an independent consultant to the U.S. Government from October 2000 to present. Admiral Gehman currently serves on the Board of Directors of Maersk Lines, Ltd. and Transystems Corp. He also currently serves as a member of the board of advisors for Anser Institute for Homeland Security, Old Dominion University Research Foundation, and Old Dominion University College of Engineering. In addition, Admiral Gehman is a senior fellow at the National Defense University and was the chairman of the Governor of Virginia’s Advisory Commission for Veterans Affairs. Since retirement Admiral Gehman has served as co-chairman of the DoD’s investigation into the October 2000 attack on the U.S.S. Cole in Aden Harbor, Yemen, as chairman of the Space Shuttle Columbia Accident Investigation Board, and as the Commissioner of the 2005 National Base Realignment and Closure Act.

Donald E. Goss has served as a director of Alion since May 2002. Mr. Goss has served as trustee and chairman or member of the audit committee for IIT since 1982, as well as the chairman of the audit committee and a member of the board of governors for IITRI since 1985. Mr. Goss has also served on the Finance Council and as chair or member of the audit committee for the Catholic Archdiocese of Chicago, Illinois since 1985. Mr. Goss has also served as a member of the board of governors for the Chicago Zoological Society at Brookfield Zoo since 1998. Mr. Goss retired from Ernst & Young as partner, after 37 years of service, in March 1990, and he has remained retired since that date. Mr. Goss is one of Illinois Institute of Technology’s two representatives on the Company’s Board of Directors.

General (Ret.) George A. Joulwan has served as a director of Alion since May 2002. General Joulwan retired from 36 years of service in the military in September 1997. While in the military, General Joulwan served as commander in chief for the U.S. Army, for U.S. Southern Command in Panama from 1990-1993 and served as commander in chief of the U.S. European Command and NATO Supreme Allied Command from 1993-1997. From 1998 to 2000, General Joulwan served as an Olin Professor at the U.S. Military Academy at West Point. General Joulwan has also served as an adjunct professor at the National Defense University from 2001 to 2002. Since 1998, General Joulwan has served as president of One Team, Inc., a strategic consulting company. General Joulwan also currently serves as a director for General Dynamics Corporation, Accenture NSS, TRS-LLC, IAP Worldwide Services, Remington Arms Company, Inc., and Bushmaster Firearms International, LLC, Inc.

General (Ret.) Michael E. Ryan has served as a director of Alion since May 2002. General Ryan retired from the military in 2001 after 36 years of service. He served his last four years as the 16th Chief of Staff of the Air Force, responsible for organizing, training and equipping over 700,000 active duty, reserve and civilian members. He is currently president of the consulting firm, Ryan Associates, focusing on national defense issues, a position he has held since January 2001. He is chairman of the board of CAE USA, Inc. and the Air Force Village Charitable Foundation. He serves on the Board of Directors of United Services Automobile Association, Circadence Corporation, VT Services, Inc., and Selex Sensor Airborne Systems (US) Inc. He is a senior trustee of the Air Force Academy Falcon Foundation.

107

Establishment of Committees

The Board of Directors has established three committees, an Audit and Finance Committee, a Compensation Committee, and a Governance and Compliance Committee. As of September 30, 2007, each committee was comprised of the following members:


Committee	Chairperson	Members

Audit and Finance Committee	Donald Goss	Leslie Armitage, Harold Gehman, Michael Ryan
Compensation Committee	Harold Gehman	Pete Aldridge, Leslie Armitage, Lewis Collens, George Joulwan
Governance and Compliance Committee	Michael Ryan	Bahman Atefi, George Joulwan, Harold Gehman

The Board of Directors has determined that Mr. Donald E. Goss qualifies as “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K, and that he is “independent” as independence for audit committee members is defined in the listing standards of the American Stock Exchange or AMEX.

Audit and Finance Committee

The responsibilities of the Audit and Finance Committee are set forth in its charter and include periodically reviewing and making recommendations to the Board of Directors and management of the Company concerning:


	•	professional services provided by our independent registered public accounting firm;

	•	independence of our independent registered public accounting firm from our management;

	•	our quarterly and annual financial statements and our system of internal control over financial reporting;

	•	our capital structure, including the issuance of equity and debt securities, the incurrence of indebtedness, and related matters;

	•	general financial planning, including cash flow and working capital management, capital budgeting and expenditures, tax planning and compliance and related matters;

	•	mergers, acquisitions and strategic transactions;

	•	investment policies, financial performance and funding of our employee benefit plans; and

	•	any other transactions or financial issues that the Board of Directors or management would like the committee to review.

The Audit and Finance Committee met five times during fiscal year 2007.

Compensation Committee

The responsibilities of the Compensation Committee are set forth in its charter and include:


	•	determining the compensation of our Chief Executive Officer and reviewing and approving the compensation of our other executive officers;

	•	exercising all rights, authority and functions under our KSOP, retirement and other compensation plans;

	•	approving and making recommendations to the Board regarding non-employee director compensation;

	•	preparing an annual report on executive compensation for inclusion in our annual report on Form 10-K in accordance with the rules and regulations of the Securities and Exchange Commission;

	•	establishing, implementing and monitoring adherence with the Company’s compensation philosophy; and

	•	evaluating both performance and compensation to ensure that the Company maintains its ability to attract and retain superior employees in key positions and that compensation provided to key employees remains competitive relative to the compensation paid to similarly situated executives of other companies.

108

The Compensation Committee met three times during fiscal year 2007.

Corporate Governance and Compliance Committee

The Corporate Governance and Compliance Committee oversees and reviews nominations for our Board of Directors and evaluates and recommends corporate governance policies and procedures applicable to Alion. In addition, the Corporate Governance and Compliance Committee is charged with the task of assessing the performance of the Board of Directors on an annual basis and overseeing the annual self-assessments carried out by each of the committees of the Board of Directors, including the Corporate Governance and Compliance Committee itself. The purpose of each of these assessments is to monitor the effectiveness of the Board of Directors and each of the committees, gather information regarding the ability of the Board and each of the committees to fulfill their mandates and responsibilities, and provide a basis for further evaluation and improvement of the policies of the Board and each of the committees.

The Corporate Governance and Compliance Committee met four times during fiscal year 2007.

Information Regarding the Executive Officers of the Registrant

The names, ages and positions of the Company’s executive officers as of September 30, 2007, and the dates from which these positions have been held are set forth below.


Name	Age		Office	Position Since

Bahman Atefi		54	President, Chief Executive Officer and Chairman of the Board of Directors(1)	December 2001
Stacy Mendler		44	Chief Operating Officer and Executive Vice President(1)	September 2006
John (Jack) Hughes		55	Executive Vice President, Chief Financial Officer and Treasurer(1)	September 2005
Rob Goff		61	Sector Senior Vice President - Defense Operations Integration Sector(1)	February 2004
Scott Fry		58	Sector Senior Vice President — Engineering and Integration Solutions Sector	October 2005
Walter (Buck) Buchanan		57	Sector Senior Vice President — Engineering and Information Technology Sector	June 2007
James Fontana		49	Senior Vice President, General Counsel and Secretary	January 2004


(1)		Member of the ESOP committee

The following sets forth the business experience, principal occupations and employment of each of the current executive officers who do not serve on the Board of Directors. Please read “Information Regarding the Directors of the Registrant” above for the information with respect to Dr. Atefi.

Stacy Mendler has served as Chief Operating Officer and Executive Vice President of Alion since September 2006. She served as Executive Vice President and Chief Administrative Officer of Alion from September 2005 until

109

September 2006, and as Senior Vice President and Chief Administrative Officer of Alion from May 2002 until September 2005. She is also a member of Alion’s ESOP committee. Ms. Mendler served IITRI as Senior Vice President and Director of Administration from October 1997 until December 20, 2002, the closing date of the Transaction. As of May 2002, Ms. Mendler was IITRI’s Chief Administrative Officer, as well as Senior Vice President. She also served as IITRI’s Assistant Corporate Secretary from November 1998 through completion of the Transaction and has been a member of the Board of Directors of Human Factors Applications, Inc. since February 1999. From February 1995 to October 1997, Ms. Mendler was Vice President and Group Contracts Manager for the Energy and Environment Group at Science Applications International Corporation where she managed strategy, proposals, contracts, procurements, subcontracts and accounts receivable. Ms. Mendler received a BBA in Marketing from James Madison University and a MS in Contracts and Acquisition Management from Florida Institute of Technology.

John (Jack) Hughes has served as Executive Vice President, Chief Financial Officer and Treasurer of Alion since September 2005. He served as Senior Vice President, Chief Financial Officer and Treasurer from October 2002 until September 2005. Mr. Hughes is also a member of the Company’s ESOP committee. From July 1998 to September 2002, Mr. Hughes served as co-founder and principal of Phoenix Financial & Advisory Services LLC, responsible for providing strategic planning, operations, financing, merger/acquisition, marketing/communications and business development support to small and mid-sized companies in the technology, media and entertainment industries. Mr. Hughes has also served as principal consultant of HKSBS, LLC from July 2002 to September 2002 and currently serves on the HKSBS advisory board. In his position as a principal consultant, Mr. Hughes functioned as the team leader for the financial advisory services division. Mr. Hughes received a BS in Economics and Business from Frostburg State University and has performed graduate coursework in contract formation, government procurement and financial management.

Rob Goff has served as Sector Senior Vice President for Alion’s Defense Operations Integration Sector since February 2004. He has also served as a member of Alion’s ESOP committee since January 2005. Mr. Goff served as Vice President and Operations Manager for IITRI from July 1999 until September 2001. From December 20, 2002 (the closing date of the Transaction) until February 2004, Mr. Goff was Senior Vice President and Group Manager for Alion; he held this same position for IITRI from September 2001 until December 20, 2002. Prior to working for IITRI, Mr. Goff served on active duty for 30 years, retiring at the rank of Major General from the United States Army. Mr. Goff received a BS from the U.S. Army Military Academy at West Point, followed by a Masters degree in Spanish Language and Literature from Middlebury College, and an MBA from Long Island University.

Scott Fry has served as Sector Senior Vice President for Alion’s Engineering and Integration Solutions Sector since September 2006. Mr. Fry served as Senior Vice President and Sector Manager of Alion’s JMS Maritime Sector from October 2005 until September 2006, and as Senior Vice President and Deputy Sector Manager for the JMS Maritime Sector from April 2005 to October 2005. Prior to joining Alion in April 2005, Mr. Fry served in the U.S. Navy for 32 years, retiring at the rank of Vice Admiral. His career included command and staff positions both at sea and ashore with the Navy, NATO, and Joint Chiefs of Staff. In his last active duty assignment he commanded the United States Sixth Fleet during Operation Iraqi Freedom and the Global War on Terrorism. Mr. Fry received a B.S from the United States Naval Academy in Annapolis, Maryland.

Walter Buchanan has served as Sector Senior Vice President for the Engineering and Information Technology Sector since June 2007. Mr. Buchanan served as Deputy Sector Manager for the Engineering and Information Technology Sector from July 2006 to June 2007. Prior to joining Alion in July 2006, Mr. Buchanan served in the United States Air Force for 34 years, retiring at the rank of Lieutenant General. His career included planning and execution of air operations in the Middle East to include those in Iraq and Afghanistan. He served as command pilot and has more than 3800 flight hours primarily in fighter aircraft. His military awards include the Defense Distinguished Service Medal and Defense Superior Service Medal. He is a Distinguished Graduate of the Army Command and General Staff College and graduate of the National War College. Mr. Buchanan received a Master’s Degree in Management from Troy State University and a Bachelor of Science degree in Life Science from the US Air Force Academy, where he also received his commission.

James Fontana has served as Senior Vice President, General Counsel and Secretary of Alion since January 2004. He has 20 years of experience as an attorney specializing in government contracts and technology law, and

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possesses a wide range of legal subject matter expertise. From February 2003 to January 2004, Mr. Fontana was in private practice as the principal of the Law Offices of James C. Fontana, and from April 1997 to January 2003 he served as General Counsel of Getronics Government Solutions, LLC (formerly Wang Federal) and Vinnell Corporation, and was Senior Corporate Counsel to BDM International, Inc., Vinnell’s parent company. Mr. Fontana is a graduate of Temple University School of Law. He received his undergraduate degree from The American University, where he majored in economics.

There is no known family relationship between any director or executive officer.

Code of Ethics

The Company adopted a Code of Ethics, Conduct, and Responsibility (the Code) on December 21, 2001 that applies to all employees, executive officers and directors of the Company. The Code also serves as a code of ethics for the Company’s chief executive officer, chief financial officer, director of finance, controller, or any person performing similar functions. Alion provides access to a telephone hotline so that employees can report suspected instances of improper business practices such as fraud, waste, and violations of the Code.

In 2004, the Company completed an examination of the Code to determine whether it fully met the definitional requirements of a code of ethics as set forth in the rules and regulations of the Securities and Exchange Commission. On September 15, 2004, the Company adopted a revised Code applicable to all Alion employees, including Alion’s CEO and CFO, and meeting such definitional requirements set forth in the rules and regulations of the Securities and Exchange Commission. On November 13, 2007, the Company adopted a newly revised Code. A copy of the Code is filed as an exhibit to this annual report and is also posted for all employees on the Company’s internal website.


Item 11.	*Executive Compensation*

Compensation Discussion and Analysis

Objectives of Executive Compensation Program

Our executive compensation program is designed to create strong financial incentive for our officers to increase revenues, profits, operating efficiency and returns, which we expect to lead to an increase in shareholder value. The primary objective of our compensation program is to attract and retain qualified, energetic employees who are enthusiastic about the Company’s mission. A further objective of our compensation program is to provide incentives and reward employees for their contribution to the Company. In addition, we strive to promote an ownership mentality among key leadership and the Board of Directors. Finally, we endeavor to ensure that our compensation program is perceived as fundamentally fair to all stakeholders.

The Compensation Committee of the Board of Directors (the “Compensation Committee”) evaluates both performance and compensation to ensure that the Company maintains its ability to attract and retain superior employees in key positions and that compensation provided to key employees remains competitive relative to the compensation paid to similarly situated executives of other companies. To that end, the Committee believes compensation packages provided by the Company to its executives, including the named executive officers, should include both cash and stock-based components that reward performance as measured against established goals.

What Our Compensation Program is Designed to Reward

Our compensation program is designed to reward each employee’s contribution to the Company. In measuring the named executive officers’ contribution to the Company, the Compensation Committee considers numerous factors including the Company’s growth and financial performance.

Throughout this Form 10-K/A, the individuals who served as the Company’s Chief Executive Officer and Chief Financial Officer during fiscal year 2007, as well as the other individuals included in the Summary Compensation Table, are referred to as the “named executive officers.”

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Roles and Responsibilities for Our Compensation Program

Role of the Compensation Committee

The Compensation Committee has responsibility for establishing, implementing and monitoring adherence with the Company’s compensation philosophy. The responsibilities of the Compensation Committee are set forth in its charter and discussed in Item 10 under “Establishment of Committees.”

Role of the Chief Executive Officer

Our Chief Executive Officer provides recommendations to the Committee in its evaluation of our executive officers, including recommendations of individual cash and equity compensation levels for executive officers. Dr. Atefi relies on his personal experience serving in the capacity of Chief Executive Officer with respect to evaluating the contribution of our other executive officers as well as publicly available information for comparable compensation guidance as the basis for his recommendations to the Committee. Dr. Atefi was not present during Committee deliberations and voting pertaining to the determination of his own compensation.

Role of the Compensation Consultant

The Compensation Committee periodically retains a consultant to provide independent advice on executive compensation matters and to perform specific project-related work. In fiscal year 2007, we engaged Hewitt Associates LLC to review the compensation of our named executive officers and to provide competitive data and analysis. The consultant performed no other services for the Company.

Elements of Company’s Executive Compensation Plan

Alion’s compensation program consists of several major components. First, Alion pays wages and salaries to attract, retain, and motivate our named executive officers that are competitive with rates paid for similar jobs by other employers and that are non-discriminatory. Next, we offer an extensive incentive program that is designed to encourage exceptional employee performance. In addition, as a 100% ESOP-owned company, we offer our named executive officers the ability to invest in the future of our company. The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan, which we refer to as our KSOP, consists of an employee stock ownership plan, or ESOP, which allows employees to own an interest in the company’s stock, and a cash or deferred arrangement under Section 401(k) of the Internal Revenue Code, which allows employees to have diversified retirement savings in other investments. Our KSOP therefore contains an ESOP component and a non-ESOP component. Investments in the ESOP component result in indirect investments in Alion common stock while investments in the non-ESOP component result in investments in any of a number of mutual funds. Finally, we offer fringe benefit and employee morale and wellness programs designed to attract and retain our named executive officers.

Base Salary

The Company provides the named executive officers with a base salary to compensate them for services rendered during the fiscal year. Base salary is the fixed annual compensation the Company pays to the named executive officer for performing specific job responsibilities. It represents the minimum income the named executive officer may receive in any given year. Base salaries for each of the Company’s executives are determined by the executive’s responsibilities and performance as well as comparative compensation levels for the executive’s peers. The base salary for the Company’s Chief Executive Officer, including periodic changes thereto, is determined by the Compensation Committee. The base salaries for the named executive officers, including periodic changes thereto, are determined by the Committee following recommendations by the Chief Executive Officer.

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The fiscal 2007 base salaries for our named executive officers were as follows:


Named Executive Officer	Fiscal 2007 Base Salary

Bahman Atefi	$	540,000
Stacy Mendler	$	325,000
Jack Hughes	$	310,500
Rob Goff	$	310,000
Scott Fry	$	300,000
Randy Crawford	$	300,000

Each year, the Compensation Committee utilizes salary survey sources for appropriate salary data for its senior positions.

Alion participates in, and utilizes survey data from such sources as:


	•	The Washington Technical Professional Forum (WTPF) (www.marketpay.com). WTPF is an organization comprised of Human Resources Professionals who work for firms in the R&D, technical, or professional services industries in the Washington, DC metropolitan area. WTPF’s membership includes more than 1,000 professionals and more than 250 companies.

	•	Western Management Group (WMG) (www.wmgnet.com). WMG is a global leader in the design, development and conduct of compensation surveys. WMG’s objective is to provide timely, valid and accurate market data to compensation professionals through the use of state-of-the-art tools and analyses. WMG has conducted specialized surveys and studies in a wide variety of industries including high technology, electronics, computers, semiconductors, pharmaceuticals, medical, chemicals, aerospace, telecommunications, transportation, banking, legal services, marketing, maritime, printing, clothing, governmental, and research institutions.

	•	Salary.com (www.salary.com). In 2006, Alion purchased the CompAnalyst on-line compensation product from Salary.com. This state-of-the-art tool allows Alion instant access to market-price jobs based on industry, geography, and company size, and provides Alion with the ability to run reports and analyses regarding our current pay practices. Users can access real-time market data by job within job families, and have the capability to benchmark internal Alion jobs to CompAnalyst data.

During its review of base salaries for our named executive officers, the Compensation Committee primarily considers:


	•	market data;

	•	internal review of the executive’s compensation, both individually and relative to other officers;

	•	individual performance of the executive; and

	•	our financial and operating results.

Base salary levels for the named executive officers are typically reviewed annually by the Compensation Committee as part of the Company’s performance review process as well as upon a promotion or other change in job responsibility.

Annual Bonus

The annual bonus component of our compensation program is intended to incent and reward our named executive officers for current, short term performance. The objectives are for annual financial performance and other non-financial performance objectives which may be attained in the annual period. The Compensation Committee has determined that it is important to reward and incent both short-term and long-term performance. The Compensation Committee has the discretion to set goals and objectives that it believes are consistent with creating shareholder value, including financial measures, operating objectives, growth goals and other measures. The Compensation Committee also considers individual achievement.

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Annual bonuses are paid to the named executive officers in cash based upon achievement of performance objectives. The objectives vary depending upon the executive’s responsibilities and include objectives based upon the Company achieving certain earnings targets as well as other financial and business objectives. The objectives are generally weighted with the most significant factor(s) being revenue growth and profitability. The Compensation Committee evaluates achievement of the objectives following the end of each year and makes the annual bonus awards based on this assessment and recommendations from the Chief Executive Officer with respect to other executive officers.

Stock Incentives/Awards

The stock incentives/awards component of our compensation program is intended to incent and reward our named executive officers for long term performance and retention. The stock incentives/awards are issued under our Phantom Stock Plans and Stock Appreciation Rights (SAR) Plans.

Phantom Stock Plans

Phantom stock refers to hypothetical shares of Alion common stock. Each recipient of a phantom stock award receives a grant of a specified number of shares. Recipients, upon vesting, are generally entitled to receive an amount of money equal to the product of the number of hypothetical shares vested and the then current value of the Company’s common stock, based on the most recent valuation of the shares of common stock held by the ESOP Trust. Phantom stock may increase, or decrease, in value over time, resulting in cash payments under the phantom stock awards that may be greater, or less than, the value of the phantom stock at the date of grant. The Compensation Committee of the Board of Directors administers the Company’s phantom stock plans and is authorized to grant phantom stock to the named executive officers.

Stock Appreciation Rights (SAR) Plan

2002 SAR Plan. In November 2002, the Board of Directors adopted the Alion Science and Technology Corporation 2002 Stock Appreciation Rights Plan (the 2002 SAR Plan). The purpose of the 2002 SAR Plan was to attract, retain, reward and motivate employees responsible for the Company’s continued growth and development and its future financial success. The 2002 SAR Plan is administered by the Compensation Committee of our Board of Directors or its delegate (the administrative committee). The 2002 SAR Plan has a 10-year term and permits grants to our directors, officers, employees and consultants.

2004 SAR Plan. On January 13, 2005, the Company’s Board of Directors adopted a second SAR plan, the Alion Science and Technology Corporation 2004 Stock Appreciation Rights Plan (the 2004 SAR Plan), to comply with the deferred compensation provisions of the American Jobs Creation Act of 2004. The 2004 SAR Plan is administered by the Compensation Committee of the Board of Directors or its delegate (the administrative committee). The 2004 SAR Plan has a 10-year term and permits grants to Alion directors, officers, employees and consultants. Under the 2004 SAR Plan, the chief executive officer has the authority to award SARs, as he deems appropriate; however, awards to executive officers are subject to the approval of the administrative committee of the Plan.

Severance/Change in Control

We maintain employment agreements with our named executive officers to help ensure they will perform their roles for an extended period of time. These agreements provide for severance compensation to be paid if the employment of the executives is terminated under certain conditions, such as following a change of control or a termination “without cause” as defined in the agreements, as follows:

Change in Control

As part of our normal course of business, we engage in discussions with other companies about possible collaborations and/or other ways in which the companies may work together to further our respective long-term objectives. In addition, many larger, established companies consider companies at similar stages of development to ours as potential acquisition targets. In certain scenarios, the potential for merger or being acquired may be in the

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best interests of our shareholders. We provide severance compensation if an executive’s employment is terminated following a change in control transaction to promote the ability of our senior executives to act in the best interests of our stockholders even though their employment could be terminated as a result of the transaction.

Termination without Cause

If we terminate the employment of a named executive officer without cause as defined in the employment agreement, we are obligated to continue to pay certain amounts as described below under Other Potential Post-Termination Payments. This provides us with more flexibility to make a change in senior management if such a change is in our and our shareholders’ best interests.

Health and Welfare Benefits

Alion provides all its named executive officers a comprehensive, balanced, and flexible Fringe Benefit Program. Our annual review of industry-wide fringe benefit packaging ensures that the Alion Fringe Benefit Program continues to provide the best value to our named executive officers. These benefits include medical, prescription drug, vision and dental coverage, life insurance, accidental death and dismemberment, short and long-term disability, business travel accident, kidnap and ransom insurance plans, employee assistance program and a flexible spending account for medical expense reimbursement and child care. Our plans do not discriminate in favor of our named executive officers.

Our Flexible Benefit Program’s design plays an important role in attracting new employees and retaining our named executive officers. Alion provides its named executive officers with worker’s compensation insurance and unemployment benefits required by law. We purchase worker’s compensation insurance and are self-insured for unemployment payments. The major portion of Alion’s Fringe Benefit Program is implemented as a core package of standard benefits provided by Alion at no cost to the named executive officers, supplemented by a set of employee-selected optional benefits.

KSOP

We offer an Employee Ownership, Savings and Investment Plan, which we refer to as the KSOP. It is a qualified retirement plan comprised of an ESOP component and a non-ESOP component. 100% of the Company’s outstanding shares of common stock are held in the ESOP component of the KSOP. The Company makes contributions to all employees who are eligible participants in the KSOP. These retirement plan contributions are made to eligible employees’ accounts in both the ESOP and the non-ESOP components of the KSOP. The Company also makes matching contributions on behalf of eligible employees, in the ESOP component, based on their pre-tax deferrals of their Alion salary.

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Summary Compensation Table

The following table sets forth all compensation with respect to our Chief Executive Officer and our other most highly paid executive officers (the named executive officers), whose total salary and bonus exceeded $100,000 for the year ended September 30, 2007.


											Non-Equity
							Phantom				Incentive		Deferred
Name and Principal							Stock		SAR		Plan		Compensation		All Other
Position	Year		Salary		Bonus(1)		Awards(2)		Awards(2)		Compensation(3)		Earnings		Compensation(5)		Total

Bahman Atefi		2007	$	532,997		—	$	976,353		—	$	490,000		—	$	87,120	$	2,086,470
Chief Executive Officer and President
Stacy Mendler		2007	$	321,206		—	$	429,595		—	$	180,000		—	$	65,618	$	996,419
Chief Operating Officer and Executive VP
Jack Hughes		2007	$	308,913		—	$	410,068		—	$	180,000		—	$	58,083	$	957,064
Executive VP, Chief Financial Officer and Treasurer
Rob Goff		2007	$	308,562		—	$	146,453		—	$	255,000		—	$	45,119	$	755,134
Defense Operations Integration Sector Senior VP
Scott Fry		2007	$	295,431		—	$	195,271		—	$	150,000		—	$	38,120	$	678,822
Engineering and Integration Solutions Sector Senior VP
Randy Crawford(4)		2007	$	210,494		—	$	195,271		—	$	135,000		—	$	89,102	$	629,867
Engineering and Information Technology Sector Senior VP


(1)		This column includes non-incentive based cash bonuses awarded to our named executive officers, such as sign-on bonuses. None of our named executive officers received any non-incentive bonuses in fiscal year 2007. See the column entitled “Non-equity Incentive Plan Compensation” for other bonuses awarded for their service in fiscal year 2007.

(2)		These columns reflect the dollar amounts that were recognized in fiscal 2007 for financial statement reporting purposes under SFAS 123(R) with respect to phantom stock and SAR awards granted to our named executive officers in fiscal year 2007.

(3)		This column includes cash bonuses awarded to our named executive officers under the Non-Equity Incentive Plan for their service in fiscal year 2007.

(4)		This column includes the following amounts with respect to our Named Executive Officers:


	•	Company matching contributions under Alion’s KSOP;

	•	Company contributions for long and short term disability;

	•	any amounts paid by the Company for life insurance premiums;

	•	any amounts paid or reimbursed by the company with respect to health and welfare;

	•	any amounts paid or reimbursed by the Company with respect to social club membership; and

	•	any amounts paid or reimbursed by the Company with respect to leased cars.

Please see table below for detailed information regarding all other compensation.

All Other Compensation


	Company				Long and Short				Term Life
	Matching		Health and		Term Disability		Club		Insurance Paid
Name and Principal	Contributions Under		Welfare		Paid by the		Membership		by the
Position	Alion’s KSOP		Benefits		Company		Fees		Company		Leased Cars		Total

Bahman Atefi	$	14,869	$	43,758	$	3,921	$	4,920	$	486	$	19,165	$	87,120
Stacy Mendler	$	14,300	$	29,262	$	2,644		—	$	486	$	18,926	$	65,618
Jack Hughes	$	14,300	$	23,696	$	2,567		—	$	486	$	17,034	$	58,083
Rob Goff	$	14,300	$	15,168	$	2,565		—	$	486	$	12,600	$	45,119
Scott Fry	$	10,341	$	13,075	$	2,491		—	$	481	$	11,733	$	38,120
Randy Crawford	$	12,242	$	64,821	$	1,725		—	$	333	$	9,981	$	89,102


(5)		Mr. Crawford resigned as Sector Senior Vice President of the Engineering and Information Technology Sector on June 15, 2007.

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Phantom Stock Plans

Initial Phantom Stock Plan

In February 2003, the Compensation Committee of Alion’s Board of Directors approved, and the Board of Directors subsequently adopted, the Alion Science and Technology Phantom Stock Plan (the Initial Phantom Stock Plan). The Initial Phantom Stock Plan has a term of ten years. The Initial Phantom Stock Plan is administered by the Compensation Committee or by the Board of Directors (if it so chooses) which may grant key management employees awards of phantom stock.

Vesting. Under the Initial Phantom Stock Plan, awards vest according to the following schedule:


	Vested Amount for
	Grant in
	February			November
Anniversary from Grant Date	2003			2003

1^st		—			20	%
2^nd		—			20	%
3^rd		50	%		20	%
4^th		25	%		20	%
5^th		25	%		20	%

The Initial Phantom Stock Plan contains provisions for acceleration of vesting in the event of the employee’s death, disability, or a change in control of the Company or in other circumstances. Terminated employees will usually forfeit their rights to all unvested phantom stock. In certain instances, however, an employee may receive a pro rata portion of his or her unvested phantom stock upon termination. For awards made prior to November 9, 2005, when an employee voluntarily terminates for good reason or is involuntarily terminated for any reason other than cause or just cause, as defined in his or her employment agreement with us, then that employee will receive a pro rata portion of his or her unvested phantom stock based on a ratio:


	•	the numerator of which is the number of months from the date of grant of the phantom stock through the end of the month of such termination; and

	•	the denominator of which is 60.

For awards made on or after November 9, 2005, when an employee voluntarily terminates for good reason or is involuntarily terminated for any reason other than cause or just cause, as defined in the Initial Phantom Stock Plan, then that employee will receive a pro rata portion of his or her phantom stock equal to the greater of (i) the amount vested under the award’s normal vesting schedule, or (ii) the number of shares of phantom stock multiplied by the ratio set forth above.

Payments. Phantom stock awards issued under the Initial Phantom Stock Plan are normally paid at the time the award becomes fully vested, or else upon the employee’s earlier death, disability or termination of service. However, a grantee may request payment for any portion of a phantom stock award that was vested on or before December 31, 2004, by filing a written election to exercise with the Compensation Committee at least 6 months before the requested exercise date and at least 3 months in advance of the ESOP valuation date that will apply to such exercise, and can continue to hold such unexercised phantom stock awards until the award becomes completely vested.

Amendment. In November 2005, the Board of Directors amended the Initial Phantom Stock Plan to permit employees to make a one-time election to receive payment for phantom shares as they vest each year or when fully vested. This election does not apply to awards vested before December 31, 2004 under the Initial Phantom Stock Plan, because the phantom stock holder may already exercise such awards at any time. An award holder who does not make an acceleration election as described above may elect to defer the proceeds of phantom stock into the Alion Science and Technology Corporation Executive Deferred Compensation Plan for a 5 year period, if he or she

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is eligible for the plan, by filing a deferral election with the Company at least one year in advance of the payment event. A 180 day election period applies for phantom stock awards vested on or before December 31, 2004.

As of September 30, 2007, the Company had granted 223,685 shares of phantom stock under the Initial Phantom Stock Plan.

Second Phantom Stock Plan

On November 9, 2004, the Company’s Compensation Committee approved, and the full Board of Directors adopted, The Alion Science and Technology Corporation Performance Shares and Retention Phantom Stock Plan (the Second Phantom Stock Plan) to comply with the requirements of the American Jobs Creation Act. The Second Phantom Stock Plan permits awards of retention share phantom stock and performance share phantom stock. A retention award is for a fixed number of shares determined at the date of grant. A performance award is for an initial number of shares subject to change at the vesting date. Performance phantom shares are subject to forfeiture for failure to achieve a specified threshold value for a share of the Company’s common stock as of the vesting date. If the value of a share of the Company’s common stock equals the threshold value but does not exceed the target value, the number of performance shares in a given grant may be decreased by a specified percentage (generally up to 50 percent). If the value of a share of the Company’s common stock exceeds a pre-established target price on the vesting date, the number of performance shares in a given grant may be increased by a specified percentage (generally up to 20%).

Vesting. Performance share awards vest three years from date of grant (unless otherwise provided in an individual award agreement) and retention share awards vest as specified in each individual award agreement, provided that the grantee is still employed by the Company. Accelerated vesting is provided in the event of death, disability, involuntary termination without cause, or upon a change in control of the Company or in other circumstances, unless the individual award agreement provides otherwise.

Payments. Grants are to be paid out on the “payment date” specified in the award agreement, which is generally five years and sixty days from the date of grant, unless the award holder elected to accelerate payment by filing an election no later than December 31, 2005, or elects to defer the proceeds of phantom stock into the Alion Science and Technology Corporation Executive Deferred Compensation Plan, as described below.

Amendment. In November 2005, the Board of Directors amended the Second Phantom Stock Plan to permit employees to make a one-time election to receive payment for phantom shares as they vest each year or when fully vested. An award holder who does not make an acceleration election as described above may elect to defer the proceeds of phantom stock into the Alion Science and Technology Corporation Executive Deferred Compensation Plan for a 5 year period, if he or she is eligible for the plan, by filing a deferral election with the Company at least one year in advance of the payment event.

As of September 30, 2007, the Company had granted 294,148 shares of retention incentive phantom stock and 213,215 shares of performance incentive phantom stock of the Company pursuant to the Second Phantom Stock Plan. The performance-based grants were fixed based on the September 30, 2007 share price.

Director Phantom Stock Plan

On November 9, 2005, the Company’s Compensation Committee approved, and the full Board of Directors adopted, the Alion Science and Technology Corporation Board of Directors Phantom Stock Plan (the Director Phantom Stock Plan). The Director Phantom Stock Plan provides for annual awards of shares of phantom stock to non-employee directors of the Company. The number of shares of phantom stock granted each year to each non-employee director is equal to the quotient obtained by dividing $35,000 by the fair market value of one share of the Company’s stock as of the date of the award rounded up to the next highest whole number. Fair market value is determined by the Compensation Committee in its sole discretion using the most recent valuation of the Company’s common stock made by an independent appraisal that meets the requirements of IRC Section 401(a)(28)(C), as of a date that is no more than 12 months before the date of the award.

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Vesting. Grants under the Director Phantom Stock Plan vest in one-third increments each year for three years from the date of the award. Vesting of an award accelerates upon a grantee’s death or disability or upon a change of control of the Company or in other circumstances.

Payments. Before each award is granted (or within 30 days of the grant date for individuals who become a director on the grant date), a director may elect whether to receive payment for phantom shares as they vest, or when the award is fully vested. A director who elects to receive payment when an award has fully vested may elect to defer the proceeds of the award into the Alion Science and Technology Director Deferred Compensation Plan provided the election is made no later than one year before the award fully vests. All payments made under the awards are required to be in cash.

As of September 30, 2007, the Company had granted 13,786 shares of phantom stock under the Director Phantom Stock Plan.

Under the three phantom stock plans, members of the Company’s Compensation Committee who are eligible to receive phantom stock or who have been granted phantom stock may vote on any matters affecting the administration of the plan or the grant of phantom stock, except that a member cannot act upon the granting of phantom stock to himself or herself. These voting provisions also apply to members of the Company’s Board of Directors when the board resolves to act under the plans.

When granted, phantom stock provides the employee with the right to receive payment upon exercise of the phantom stock. The terms of each phantom stock grant are evidenced in a phantom stock agreement which determines the:


	•	Date of grant;

	•	Number of shares of the phantom stock awarded; and

	•	Provisions governing vesting of the phantom stock awarded.

The plans also provide that phantom stock awarded at different times need not contain similar provisions.

Under the plans, the payment that the Company will make upon the vesting of phantom stock is intended to be made in one lump sum within 60 days of the date of vesting unless a later date is set forth in an individual award agreement. The Compensation Committee, or the Company’s Board of Directors, if it resolves to do so, may delay payment for five years. If the payment is delayed, it will include interest accrued at the prime rate as of the date of vesting until the payment date. In general, the Company expects that the Compensation Committee, or the Board of Directors if it resolves to do so, will examine the Company’s available cash and anticipated cash needs in determining whether to delay payment. Under limited circumstances, payments from the exercise of phantom stock may be rolled over into any non-qualified deferred compensation plan available to the employee.

No voting or other rights associated with ownership of the Company’s common stock are given to phantom stockholders. References to shares of common stock under the plan are for accounting and valuation purposes only. As a result, an employee who receives phantom stock does not have any of the rights of a stockholder as a result of a grant of phantom stock.

All three phantom stock plans permit the Compensation Committee to defer payments if it determines that payment is administratively impracticable or would jeopardize the solvency of the Company (provided that such impracticability or insolvency was unforeseeable as of the grant), or if the payment would violate a loan covenant or similar contract, or not be deductible under Section 162(m) of the Internal Revenue Code or if the payment would violate U.S. federal securities laws or other applicable law.

All three phantom stock plans contain a provision to prevent an award to a person who is or would become (if the award were made) a “disqualified person” for as long as the Company maintains the ESOP. For this purpose, “disqualified person” means any individual who directly or beneficially (such as under the Alion ESOP) holds at least 10% of Alion equity, including outstanding common stock and “synthetic equity”, such as SARs or phantom stock. Any award that violates this provision is void.

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Subject to adjustments for merger or other significant corporate transactions or special circumstances, the shares of common stock that may be used for awards under all three phantom stock plans of the Company shall not exceed 2,000,000 shares (whether or not such awards have expired, terminated unexercised, or become unexercisable, or have been forfeited or otherwise terminated, surrendered or cancelled).

The number of shares of the Company’s common stock used for reference purposes with respect to grants of phantom stock under the three phantom stock plans is as follows:


							Cumulative Shares
	Shares Issued by			Cumulative Shares			Authorized under
Date of Issuance	Plan			Issued by Plan			all Plans

February 2003		171,000	(1)		171,000	(1)		173,000	(1)
November 2003		52,685	(1)		223,685	(1)		225,000	(1)
February 2005		316,629	(2)		316,629	(2)		2,000,000	(2)
August 2005		2,960	(2)		319,589	(2)		2,000,000	(2)
November 2005		122,318	(2)		441,907	(2)		2,000,000	(2)
November 2006		65,456	(2)		507,363	(2)		2,000,000	(2)
November 2005		7,808	(3)		7,808	(3)		2,000,000	(3)
November 2006		5,978	(3)		13,786	(3)		2,000,000	(3)


(1)		Number of shares authorized under the Initial Phantom Stock Plan as periodically amended and approved by the Compensation Committee of Alion’s Board of Directors.

(2)		Number of shares authorized under the Second Phantom Stock Plan as periodically amended and approved by the Compensation Committee of Alion’s Board of Directors.

(3)		Number of shares authorized under the Director Phantom Stock Plan as periodically amended and approved by the Compensation Committee of Alion’s Board of Directors.

The following table sets forth information regarding phantom stock granted to the Named Executive Officers pursuant to the Initial and Second phantom stock plans.

Name

Number of shares

Grant Date

Grant Type

Full vesting period

Period(s) until payout

Bahman Atefi

65,500

(1)

February 2003

Retention

February 2008(2)

February 2006, 2007, 2008(3)

18,695

(1)

November 2003

Retention

November 2008(2)

November 2006, 2007, 2008(3)

43,951

February 2005

Retention

February 2008(4)

67,888

(5)

February 2005

Performance

February 2008(4)

22,290

November 2005

Retention

November 2008(4)

27,863

November 2005

Retention

November 2010(4)

24,378

November 2006

Retention

November 2009(4)

Jack Hughes

10,000

(1)

February 2003

Retention

February 2008(2)

February 2006, 2007, 2008(3)

6,798

(1)

November 2003

Retention

November 2008(2)

November 2006, 2007, 2008(3)

30,297

February 2005

Retention

February 2008(4)

46,797

(5)

February 2005

Performance

February 2008(4)

11,145

November 2005

Retention

November 2008(4)

13,931

November 2005

Retention

November 2010(4)

10,239

November 2006

Retention

November 2009(4)

Stacy Mendler

28,500

(1)

February 2003

Retention

February 2008(2)

February 2006, 2007, 2008(3)

6,798

(1)

November 2003

Retention

November 2008(2)

November 2006, 2007, 2008(3)

24,151

February 2005

Retention

February 2008(4)

37,305

(5)

February 2005

Performance

February 2008(4)

11,145

November 2005

Retention

November 2008(4)

13,931

November 2005

Retention

November 2010(4)

10,726

November 2006

Retention

November 2009(4)

Robert Goff

3,399

(1)

November 2003

Retention

November 2008(2)

November 2008(3)

25,821

(5)

February 2005

Performance

February 2008(4)

November 2010(4)

8,080

November 2005

Retention

November 2008(4)

3,657

November 2006

Retention

November 2009(4)

Scott Fry

2,507

February 2005

Retention

February 2009(4)

February 2010(4)

4,179

November 2005

Retention

November 2008(4)

4,876

November 2006

Retention

November 2009(4)

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(1)		The initial set of awards made in February 2003 was made solely to Alion’s executive management team. The awards made in November 2003 were made to executive and senior management of Alion.

(2)		Pursuant to the Initial Phantom Stock Plan, recipients will become fully vested on the fifth year from the grant date, or approximately February 2008 and November 2008.

(3)		Pursuant to the Initial Phantom Stock Plan, recipients will be paid commencing on the fifth year from the date of grant. However, in November 2005, the Initial Phantom Stock Plan was amended to permit employees to make a one-time election to receive payment for phantom shares as they vest each year or when fully vested. Mr. Atefi, Mr. Hughes, and Ms. Mendler made this one-time election, whereas Mr. Goff did not make this election.

(4)		Pursuant to the Second Phantom Stock Plan, recipients may be awarded performance-based or retention-based phantom stock. Under this plan, performance-based phantom stock will become fully vested three years from the date of grant; retention-based phantom stock will become fully vested as specified in the individual agreements. Under this plan, recipients of performance-based and retention-based phantom stock will be paid as specified in the individual agreements.

(5)		Pursuant to the Second Phantom Stock Plan, performance awards are subject to change at the vesting date. The performance-based grants in February 2005 were fixed based on the September 30, 2007 share price.

Stock Appreciation Rights (SAR) Plans

2002 SAR Plan

In November 2002, the Board of Directors adopted the Alion Science and Technology Corporation 2002 Stock Appreciation Rights Plan (the 2002 SAR Plan). The purpose of the 2002 SAR Plan was to attract, retain, reward and motivate employees responsible for the Company’s continued growth and development and its future financial success. The 2002 SAR Plan is administered by the Compensation Committee of our Board of Directors or its delegate (the administrative committee). The 2002 SAR Plan has a 10-year term and permits grants to our directors, officers, employees and consultants.

Amendment #1. In November 2004, the Board of Directors amended the 2002 SAR Plan to provide that, on or after October 3, 2004, there would be no further grants under the 2002 SAR Plan. Grants made prior to October 3, 2004 remain in force. Under the 2002 SAR Plan, from December 2002 through November 2003, the Company issued 236,400 SARs to directors, officers, and employees. Outstanding SAR awards cannot exceed the equivalent of 10% of the Company’s outstanding shares of common stock on a fully diluted basis (assuming the exercise of any outstanding options, warrants and rights including, without limitation, SARs, and assuming the conversion into stocks of any outstanding securities convertible into stock), which amount may be adjusted in the event of a merger or other significant corporate transaction or in other circumstances. The 2002 SAR Plan contains a provision to prevent an award to a person who is or would become (if the award were made) a “disqualified person”. For this purpose, “disqualified person” means any individual who directly or beneficially holds at least 10% of Alion equity, including outstanding common stock and “synthetic equity”, such as SARs or phantom stock. Any award that violates this provision is void. Should a grantee become a “disqualified person”, the full amount of any outstanding award that has not yet vested shall be forfeited.

Vesting. Grants to employees vest at 20% per year; grants to members of the Company’s Board of Directors vest ratably over each member’s then-current term of office. The 2002 SAR Plan contains a provision for accelerated vesting in the event of death, disability or a change in control of the Company or in other circumstances.

Payments. A grantee has the right to receive payment for vested SARs equal to the difference between the appraised value of a share of Alion common stock as of the grant date and the appraised value of a share of Alion common stock as of the exercise date based on the most recent valuation of common stock held by the ESOP Trust. Under the 2004 amendment to the 2002 SAR Plan, SARs are normally paid at the time the award becomes fully

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vested, or else upon the SAR holder’s earlier death, disability or termination of service. However, a grantee may request payment for any portion of an SAR that was vested on or before December 31, 2004 at any time, and can continue to hold such unexercised SARs for up to 60 days after the date at which a grant becomes completely vested. The 2002 SAR Plan permits the Compensation Committee to defer payments if it determines that payment is administratively impracticable or would jeopardize the solvency of the Company (provided that such impracticability or insolvency was unforeseeable as of the grant date), or if the payment would violate a loan covenant or similar contract, or not be deductible under Section 162(m) of the Internal Revenue Code, or if the payment would violate U.S. federal securities laws or other applicable law.

As of September 30, 2007, the Company had granted under the 2002 SAR Plan, 236,400 SARs, of which approximately 120,316 SARs remain outstanding.

2004 SAR Plan

On January 13, 2005, the Company’s Board of Directors adopted a second SAR plan, the Alion Science and Technology Corporation 2004 Stock Appreciation Rights Plan (the 2004 SAR Plan), to comply with the deferred compensation provisions of the American Jobs Creation Act of 2004. The 2004 SAR Plan is administered by the Compensation Committee of the Board of Directors or its delegate (the administrative committee). The 2004 SAR Plan has a 10-year term and permits grants to Alion directors, officers, employees and consultants. Under the 2004 SAR Plan, the chief executive officer has the authority to award SARs, as he deems appropriate; however, awards to executive officers are subject to the approval of the administrative committee of the 2004 SAR Plan. Outstanding SAR awards cannot exceed the equivalent of 12 percent of the Company’s outstanding shares of common stock on a fully diluted basis (assuming the exercise of any outstanding options, warrants and rights including, without limitation, SARs, and assuming the conversion into stock of any outstanding securities convertible into stock), which amount may be adjusted in the event of a merger or other significant corporate transaction or in other special circumstances. As per the 2002 SAR Plan, awards may not be made to a “disqualified person.”

Vesting. Awards to employees vest ratably over four years and awards to directors vest ratably over each director’s term of service. The 2004 SAR Plan contains a provision for accelerated vesting in the event of death, disability or a change in control of the Company or in other special circumstances.

Payments. SARs are normally paid on the first anniversary of the date the award becomes fully vested, or else upon the SAR holder’s earlier death, disability or termination of service, or change in control. Under the 2004 SAR Plan, a SAR holder may elect to defer the proceeds of the SAR into the Alion Science and Technology Corporation Executive Deferred Compensation Plan for a 5-year period, if he or she is eligible for such plan, by filing a deferral election with the Company at least one year in advance of the payment event. The 2004 SAR Plan permits the Compensation Committee to defer payments if it determines that payment is administratively impracticable or would jeopardize the solvency of the Company (provided that such impracticability or insolvency was unforeseeable as of the grant), or if the payment would violate a loan covenant or similar contract, or not be deductible under Section 162(m) of the Internal Revenue Code or if the payment would violate U.S. federal securities laws or other applicable law.

A grantee under the 2004 SAR Plan has the right to receive payment for vested SARs equal to the difference between the appraised value of a share of Alion common stock as of the grant date and the appraised value of a share of Alion common stock as of the exercise date per the most recent valuation of the common stock held by the ESOP Trust. For SARs granted under the 2004 SAR Plan before November 9, 2005 and outstanding when a change in control of the Company occurs, payment is based on the number of SARs multiplied by the share price at the date of the change in control (or earlier valuation, if higher).

As of September 30, 2007, the Company had granted, under the 2004 SAR Plan, 809,515 SARs of which approximately 673,288 SARs remaining outstanding. There were no grants of SARs to the Named Executive Officers pursuant to the Company’s stock appreciation rights plans during the year ended September 30, 2007.

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Subject to certain restrictions under the respective SAR plan, our Board of Directors may amend or terminate either SAR plan at any time.

Grants of Plan-Based Awards

The following table sets forth information concerning grants of plan-based awards to the named executive officers during fiscal year 2007:


															All
															other
															stock		All
															awards:		other
															Number		SAR		Exercise		Grant
															of		awards:		or		date
															shares		Number		base		fair
															of		of		price		value
			Estimated future payments						Estimated future payments						stock		securities		of		of stock
			under Non-equity incentive						under Equity incentive						or		underlying		SAR		and
	Grant		plan awards(1)						plan awards(2)						units		options		awards		SAR
Name	date		Threshold		Target		Maximum		Threshold		Target		Maximum		(#)(3)		(#)		($/Sh)		awards(4)

Bahman Atefi		11/14/2006		—		—		—		—		—		—		24,378		—		—	$	1,000,000
Stacy Mendler		11/14/2006		—		—		—		—		—		—		10,726		—		—	$	440,000
Jack Hughes		11/14/2006		—		—		—		—		—		—		10,239		—		—	$	420,000
Rob Goff		11/14/2006		—		—		—		—		—		—		3,657		—		—	$	150,000
Scott Fry		11/14/2006		—		—		—		—		—		—		4,876		—		—	$	200,000
Randy Crawford		11/14/2006		—		—		—		—		—		—		4,876		—		—	$	200,000


(1)		Threshold, target and maximum amounts do not apply to the Company’s bonus program.

(2)		Threshold, target and maximum amounts only apply to performance based phantom stock, and not to retention based phantom stock. Only retention based phantom stock was issued to the Named Executive Officers in fiscal year 2007.

(3)		This column represents the amount of Phantom stock awards given to the Named Executive Officers.

(4)		The share price at the grant date of November 14, 2006 was $41.02.

Outstanding Equity Awards at Fiscal Year-End

The following table sets forth information concerning SAR and Phantom Stock awards held by the named executive officers during fiscal year 2007:


	SAR Awards								Phantom Stock Awards
	Number of		Number of
	securities		securities						Number of		Market value of
	underlying		underlying		SAR				shares or		shares or units of
	unexercised SARs		unexercised SARs		exercise				units of stock that		stock that have not
	(#)		(#)		price				have not vested		vested (4)
Name	Exercisable		Unexercisable		($)		SAR expiration date		(#)		($)

Bahman Atefi		—		—		—		—		208,262	$	8,340,893
Stacy Mendler		—		—		—		—		106,025	$	4,246,341
Jack Hughes		—		—		—		—		116,277	$	4,656,894
Rob Goff(1)		—		240	$	10.00		12/23/07		38,172	$	1,528,789
(2)		—		1,000	$	14.71		12/01/08		—		—
Scott Fry(3)		2,000		2,000	$	19.94		12/01/09		10,309	$	412,875


(1)		In December 2002, Mr. Goff was awarded 1,200 SARs at the exercise price of $10.00 per share, of which 240 SARs were outstanding as of September 30, 2007.

(2)		In December 2003, Mr. Goff was awarded 2,500 SARs at the exercise price of $14.71 per share, of which 1,000 SARs were outstanding as of September 30, 2007.

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(3)		In February 2005, Mr. Fry was awarded 4,000 SARs at the exercise price of $19.94 per share, all of which were outstanding as of September 30, 2007.

(4)		The market value is based on the share price of $40.05 as of September 30, 2007.

SAR Exercises and Phantom Stock Vested

The following table sets forth information concerning SARs exercised by the named executive officers and vesting of Phantom Stock awards to the named executive officers during fiscal year 2007.


	SAR Awards					Phantom Stock Awards
	Number of shares
	acquired on		Value realized on			Number of shares		Value realized on
	exercise		exercise			acquired on vesting		vesting
Name	(#)		($)			(#)		($)

Bahman Atefi		—		—			20,114	$	805,564
Stacy Mendler		—		—			8,485	$	339,809
Jack Hughes		—		—			3,860	$	154,578
Rob Goff		240	$	7,445(1	)		680	$	27,226
		500	$	13,155(2	)
Scott Fry		—		—			627	$	25,107
Randy Crawford		—		—			9,610	$	384,865


(1)		Based on the exercise price of $10.00 per share and the December 27, 2006 share price of $41.02 per share.

(2)		Based on the exercise price of $14.71 per share and the December 27, 2006 share price of $41.02 per share.

Deferred Compensation Plans

We maintain two Deferred Compensation Plans. One plan, the Executive Deferred Compensation Plan, covers members of management and other highly compensated officers of the Company. The other plan, the Directors Deferred Compensation Plan, covers members of the Company’s Board of Directors.

Each plan permits an individual to make a qualifying election to forego current payment and defer a portion of his or her compensation. Officers may defer up to 50% of their annual base salary and up to 100% of their bonus, SAR and/or phantom stock payments. Directors may defer up to 100% of their fees and up to 100% of their SAR payments.

Each Plan permits an individual to defer payment to a specified future date and to specify whether deferrals are to be paid in a lump sum or installments. Under certain limited circumstances, deferrals may be paid out early or further deferred. In general, individuals may make only one qualifying deferral election per year.

None of the Named Executive Officers elected to defer their compensation to any non-tax qualified defined contribution or other plan during fiscal year 2007.

Other Potential Post-Termination Payments

We have entered into agreements and arrangements with our named executive officers that would provide them with certain payments and benefits in the event that the Company is subject to a change in control or termination without cause, which are described below:

Severance Agreements. We have entered into severance agreements with each of our named executive officers, which provide that if the officer is involuntarily terminated without cause or terminated following a change in control, he or she will be entitled to receive lump sum cash payment as set forth in their individual employment agreements. The named executive officers are entitled to receive Consolidated Omnibus Budget Reconciliation Act (“COBRA”) benefits for 18 months following termination. In addition, each named executive officer is entitled to receive outplacement services; provided, however, that under no circumstances shall outplacement services be provided beyond the December 31 of the second calendar year following the calendar year in which the named executive officer’s separation from service occurred.

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Stock Incentive and Deferred Compensation Plans. Under the terms of our stock incentive and deferred compensation plans, all unvested stock, options and deferred compensation awards held by the named executive officers, are subject to accelerated vesting following termination,

The following table sets forth our estimates regarding the potential value of any cash payments and benefits and accelerated vesting of stock awards to be received by the named executive officers under their employment agreements and plans, assuming that a change in control of the Company occurred on the last business day of fiscal 2007.

Termination by the Company without Cause;
Termination by Executive based upon Constructive Termination;
Termination in the event of Death or Disability;
Termination upon Expiration of the Employment Agreement due to Company Election Not to Extend


	Severance		Early Vesting of
	Amount		Stock Awards		Other		Total
Name	(a)		(b)		(c)		(d)

Bahman Atefi	$	2,060,000	$	8,340,893	$	25,000	$	10,425,893
Stacy Mendler	$	757,569	$	4,246,341	$	25,000	$	5,028,910
Jack Hughes	$	735,792	$	4,656,894	$	25,000	$	5,417,686
Rob Goff	$	470,027	$	1,528,789	$	25,000	$	2,023,816
Scott Fry	$	450,054	$	412,875	$	25,000	$	887,929


(a)		Represents a cash payment of a certain percentage of the annual salary payable to the executive and a certain percentage of the bonus that would have been earned by the executive as of such date, the latter of which was based upon the Company’s actual bonus payment for performance for fiscal year 2007.


Name	Salary			Bonus

Bahman Atefi		200	%		200	%
Stacy Mendler		150	%		150	%
Jack Hughes		150	%		150	%
Rob Goff		100	%		100	%
Scott Fry		100	%		100	%


(b)		Represents the value of the stock and stock option awards held by the executive and unvested as of September 30, 2007. In the case of stock awards, the value of the unvested awards is the number of unvested shares multiplied by the closing market of the Company’s stock on September 30, 2007. In the event of SAR awards, the value of the unvested awards is the number of unvested shares multiplied by the difference between the share price of the Company’s stock on September 30, 2007 and the exercise price for each such SAR award. The amount in this column applies and would be received by the executive if the termination occurs within one year following the execution of a definitive agreement for a change of control, which transaction is subsequently consummated.

(c)		Represents outplacement services in an amount not to exceed $25,000 with a firm selected by the Company and at the reasonable expense of the Company; provided, however, that under no circumstances shall such outplacement services be provided beyond the December 31 of the second calendar year following the calendar year in which the executive’s separation from service occurred.

		In addition, the Company is obligated to pay the executive, if eligible for and elects to receive, medical and/or dental benefits pursuant to the provisions of COBRA for himself and/or any qualifying beneficiaries. The Company shall pay on the executive’s behalf the amount of the applicable COBRA that exceeds the amount of premium payable by the executive for the same level of coverage immediately prior to the effective date of termination.

(d)		Represents the maximum amount that the executive can receive, including in the event the executive is entitled to full vesting of his or her stock and SARs in the event of a termination occurring within one year following the execution of a definitive agreement for a change in control, which transaction is subsequently consummated.

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Director Compensation


	Fees						Non-equity		Change in
	earned or		Phantom				incentive		nonqualified
	paid in		Stock		SAR		plan		deferred		All other
	cash		awards		awards		compensation		compensation		compensation		Total
Name	($)(1)		($)(2)		($)		($)		earnings		($)(3)		($)

Bahman Atefi		—		—		—		—		—		—		—
Edward C. (Pete) Aldridge, Jr.	$	37,500	$	35,000		—		—		—		—	$	72,500
Leslie Armitage	$	41,500	$	35,000		—		—		—		—	$	76,500
Lewis Collens	$	36,000	$	35,000		—		—		—	$	2,398	$	73,398
Admiral (Ret.) Harold W. Gehman, Jr.	$	45,000	$	35,000		—		—		—	$	1,425	$	81,425
Donald E. Goss	$	43,000	$	35,000		—		—		—	$	4,889	$	82,889
General (Ret.) George A. Joulwan	$	43,000	$	35,000		—		—		—		—	$	78,000
General (Ret.) Michael E. Ryan	$	45,000	$	35,000		—		—		—	$	4,497	$	84,497


(1)		This column represents the total fees including the annual retainer fee made to the non-employee directors. The Company’s employee directors do not receive any additional compensation for their services as members of the Board of Directors. For the year ended September 30, 2007, the Company’s non-employee directors received an annual retainer of $25,000, payable in quarterly installments, for their services as members of the Board of Directors. As of October 1, 2007, the annual retainer increased to $30,000. These services include preparation for and attendance in person at four Board of Directors meetings per year and all committee meetings that take place on the same day as a full Board of Directors meeting. In addition, each director receives a fee of $2,500 for in-person attendance at each additional Board of Directors meeting, and $1,000 for telephone attendance at each additional Board of Directors meeting. The chairman of the Audit and Finance Committee receives $7,500 per year for each year he or she serves in such capacity. The other board committee chairmen receive $5,000 per year for each year he or she serves in such capacity. Board committee members receive $1,000 per committee meeting if the committee meeting occurs on a day other than the day of a full Alion Board of Directors meeting. Alion reimburses directors for reasonable travel expenses in connection with attendance at Board of Directors and board committee meetings.

(2)		The awards represent a grant made to directors of the Company. For the year ended September 30, 2007, each of the Company’s non-employee directors received an annual award of $35,000 in shares of phantom stock under our Director Phantom Stock Plan. As of October 1, 2007, the annual award increased to $40,000 in shares of phantom stock. Each award vests ratably over a three year period. The stock awards will vest over a period of 3 years from the respective grant date. The amount in this column represents the expense amount recognized by the Company for fiscal year 2007 under Financial Accounting Standard Board Statement of Financial Accounting Standards No 123 (revised 2004) Share-Based Payment (FAS 123R). The Company’s calculation of the expense amount for FAS 123R purposes is based on a model that includes subjective assumptions, which are set forth in and discussed in more detail in the footnotes to the financial statements for the Company contained in this annual report. The Company’s directors also have the option to participate in a deferred compensation plan for tax deferral of their annual compensation and/or payments to be made upon exercise of their phantom stock awards. For more information about the Alion Science and Technology Corporation Director Phantom Stock Plan, please read Item 11. “Executive Compensation — Phantom Stock Plans — Director Phantom Stock Plan.”

(3)		The amounts included in this column represent the amount paid by the Company for travel expenses for the Board of Directors meetings.

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Compensation Committee Interlocks and Insider Participation

The members of the Compensation Committee are Harold Gehman (Chairman), Leslie Armitage, Lewis Collens, George Joulwan, and Pete Aldridge. None of the members, during the fiscal year, was an officer or employee of our Company, formerly an officer of the Company or involved in a related party transaction. Dr. Atefi is a member of the board of trustees of IIT where Mr. Collens was the President up until July 2007. Dr. Atefi is the President and Chief Executive Officer of the Company.

Compensation Committee Report

The Compensation, Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report.

THE COMPENSATION COMMITTEE
Harold Gehman, Jr., Chairman
Pete Aldridge, Jr., Committee Member
Leslie Armitage, Committee Member
Lewis Collens, Committee Member
George Joulwan, Committee Member


Item 12.	*Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters*

The following table sets forth certain information as of September 30, 2007, regarding the beneficial ownership of the Company’s common stock by certain beneficial owners and all directors and Named Executive Officers, both individually and as a group. The Company knows of no other person not disclosed herein beneficially owning more than 5% of the Company’s common stock. The address of the beneficial owner (as required) and the dates applicable to the beneficial ownership indicated are set forth in the footnotes below.


			Amount and Nature
			of Beneficial			Percentage
Name of Beneficial Owner	Title of Class		Ownership			of Class(1)

Five Percent Security Holders:
Illinois Institute of Technology(2)		Common stock		1,080,437	(3)		17.7
Directors(4) and Executive Officers:
Bahman Atefi		Common stock		67,707	(5)		1.3
Jack Hughes		Common stock		5,870	(5)		*
Stacy Mendler		Common stock		72,771	(5)		1.5
Rob Goff		Common stock		11,514	(5)		*
Scott Fry		Common stock		3,434	(5)		*
All Directors and Executive Officers as a Group (5 Persons )		Common stock		161,296	(5)		3.2


*		less than 1%.

(1)		Applicable percentages based on 5,012,934 shares outstanding on September 30, 2007, and also includes shares of common stock subject to warrants that may be exercised within 60 days of September 30, 2007. Such shares are deemed to be outstanding for the purposes of computing the percentage ownership of the individual or entity holding the shares, but are not deemed outstanding for purposes of computing the percentage of any other person shown in the table. This table is based upon information in the Company’s possession and believed to be accurate. Unless indicated in the footnotes to this table and subject to community property laws where applicable, the Company believes that each of the shareholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned.

(2)		Illinois Institute of Technology’s address is 3300 South Federal Street, Chicago, IL 60616.

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(3)		The number of shares deemed to be beneficially held by IIT represents currently exercisable warrants held by IIT under the Subordinated Warrant for an aggregate of 1,080,437 shares of common stock.

(4)		No directors (other than Dr. Atefi) are believed by the Company to be beneficial owners of its common stock.

(5)		Includes beneficial ownership of shares of Alion’s common stock pursuant to the Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan, which the Company refers to as the KSOP.

Changes in Control

The Company does not know of any arrangements, the operation of which may at a subsequent date result in a change in control of the Company.


Item 13.	*Certain Relationships and Related Transactions, and Director Independence*

Since the beginning of the Company’s last fiscal year, including any currently proposed transactions, no directors, executive officers or immediate family members of such individuals were engaged in transactions with us or any subsidiary involving more than $120,000, other than the arrangements described in the section “Executive Compensation.”

In accordance with our Audit and Finance Committee Charter and procedures established by the committee, our Audit and Finance Committee is responsible for reviewing and approving the terms and conditions of all related party transactions. Any material financial transaction with a director or executive officer of our company or a member of the immediate family of a director or officer would need to be approved by our Audit and Finance Committee prior to our company entering into such transaction.

Independent Directors

At least a majority of the Company’s directors meet the test of “independence” as defined by the listing standards of AMEX. The AMEX standards provide that to qualify as an “independent” director, in addition to satisfying certain bright-line criteria, the board of directors must affirmatively determine that a director has no material relationship with the Company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the Company). Our board of directors has determined that Pete Aldridge, Jr., Leslie Armitage, Lewis Collens, Harold Gehman, Jr., Donald Goss, George Joulwan, and Michael Ryan, satisfy the bright-line criteria and that none has a relationship with the Company that would interfere with such person’s ability to exercise independent judgment as a member of the board. Therefore, we believe that each of such directors is independent under the AMEX rules.

The Audit and Finance Committee is currently comprised of Donald Goss, Leslie Armitage, Harold Gehman, Jr., and Michael Ryan. All members of the Audit and Finance Committee are independent in accordance with the listing standards of the AMEX.

The Compensation Committee is currently comprised of Harold Gehman, Jr., Pete Aldridge, Jr., Leslie Armitage, Lewis Collens and George Joulwan. All members of the Compensation Committee are independent in accordance with the listing standards of the AMEX.

The Governance and Compliance Committee is currently comprised of Michael Ryan, Bahman Atefi, George Joulwan and Harold Gehman, Jr. All members of the Governance and Compliance Committee, excluding Bahman Atefi, are independent in accordance with the listing standards of the AMEX.


Item 14.	*Principal Accountant Fees and Services*

Consistent with the charter of the Audit and Finance Committee, the Committee is responsible for engaging the Company’s independent auditors. Beginning with the year ended September 30, 2003, all audit and permitted non-audit services require pre-approval by the Audit and Finance Committee. The full Committee approves proposed services and fee estimates for these services. During fiscal years 2007 and 2006 all services performed by the auditors were pre-approved by the Committee.

128

The following table summarizes the fees of KPMG LLP, the Company’s independent registered public accounting firm up until May 12, 2006, and Deloitte & Touche LLP, the Company’s independent registered public accounting firm commencing on July 11, 2006, billed to the Company for each of the last two fiscal years for audit services and billed to the Company in each of the last two fiscal years for other services:


Fee Category	2007		2006

Audit Fees(1)	$	1,045,145	$	1,235,970
Audit-Related Fees(2)		230,625		292,646
Tax Fees and All Other Fees		56,775		58,866

Total Fees	$	1,332,545	$	1,587,482


(1)		Audit fees consist of fees for the audit of the Company’s financial statements, the review of the interim financial statements included in the Company’s quarterly reports on Form 10-Q, and other professional services provided in connection with statutory and regulatory filings or engagements.

(2)		Audit-related fees consist of fees for assurance and related services that are reasonably related to the performance of the audit and the review of the Company’s financial statements and which are not reported under “Audit Fees”. In fiscal years 2006 and 2007, these services related to audit services provided in conjunction with acquisitions, accounting consultations, and audits of employee benefit plans. In fiscal years 2007 and 2006, these services related to audit of employee benefit plan and Sarbanes-Oxley Section 404 assistance. These services were approved by the Audit and Finance Committee.

PART IV


Item 15.	*Exhibits and Financial Statement Schedules*


(a)	Consolidated Financial Statements of Alion Science and Technology Corporation


Reports of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 2007 and 2006 (restated)
Consolidated Statements of Operations for the years ended September 30, 2007, 2006 and 2005
Consolidated Statements of Redeemable Common Stock and Accumulated Deficit, for the years ended September 30, 2007, 2006 and 2005 (restated)
Consolidated Statements of Cash Flows for the years ended September 30, 2007 (restated), 2006 and 2005
Notes to Consolidated Financial Statements


(b)	Consolidated Financial Statement Schedule


Schedule II — Valuation and Qualifying Accounts (in thousands)


	Balance at		Charged to								Balance at
	Beginning		Costs and								End of
Allowance for Doubtful Accounts Receivable	of Year		Expenses		Deductions(1)			Acquisitions			Year

Fiscal year ended 2007	$	3,961	$	2,176	$	(865	)	$	—		$	5,272
Fiscal year ended 2006	$	3,539	$	667	$	(462	)	$	217	(2)	$	3,961
Fiscal year ended 2005	$	2,896	$	700	$	(970	)	$	913	(3)	$	3,539


(1)		Accounts receivable written off against the allowance for doubtful accounts.

(2)		Adjustments pursuant to the allocation of purchase price to assets acquired and liabilities assumed in Alion’s acquisitions of BMH, WCI, MA&D and the Anteon Contracts.

(3)		Adjustments pursuant to the allocation of purchase price to assets acquired and liabilities assumed in Alion’s acquisitions of CATI, METI, and JJMA.

129


	(c)	Exhibits


Exhibit
No.			Description

	3	.2	Amended and Restated By-laws of Alion Science and Technology Corporation.(24)
	3	.3	Third Amended and Restated Certificate of Incorporation of Alion Science and Technology Corporation.(15)
	4	.1	Indenture dated as of February 8, 2007, among Alion Science and Technology Corporation, certain subsidiary guarantors and Wilmington Trust Company, as trustee. (27)
	4	.2	Form of 10.25% Senior Notes due 2015.(27)
	4	.3	Amended and Restated Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan.(28)
	4	.4	First Amendment to Amended and Restated Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan.(30)
	10	.1	Seller Note Securities Purchase Agreement by and between IIT Research Institute and Alion Science and Technology Corporation (“Seller Note Agreement”).(2)
	10	.2	Seller Warrant Agreement by and among Alion Science and Technology Corporation, IIT Research Institute and Alion Science and Technology Employee Ownership, Savings and Investment Trust (“Seller Warrant Agreement”).(3)
	10	.3	Rights Agreement by and among Alion Science and Technology Corporation, IIT Research Institute and Alion Science and Technology Employee Ownership, Savings and Investment Trust.(2)
	10	.4	Term B Senior Credit Facility (the “Credit Agreement”) that includes a revolving credit facility and Term B note, by and among Credit Suisse First Boston as arranger, various lenders, and Alion Science and Technology Corporation.(8)
	10	.5	First Amendment to the Seller Warrant Agreement.(8)
	10	.6	Second Amendment to the Seller Warrant Agreement.(9)
	10	.7	Commitment letter agreement by and between Alion Science and Technology Corporation and Credit Suisse First Boston.(10)
	10	.8	Third Amendment to the Seller Warrant Agreement.(11)
	10	.9	Stock Purchase Agreement by and among Alion Science and Technology Corporation, John J. McMullen Associates, Inc., Marshall and Ilsley Trust Company, N.A. as Trustee to the John J. McMullen, Inc. Employee Stock Ownership Trust and P. Thomas Diamant, Anthony Serro, and David Hanafourde.(12)
	10	.10	Incremental Term Loan Assumption Agreement and Amendment No. 1 under the Credit Agreement .(13)
	10	.11	Employment Agreement between Alion Science and Technology Corporation and Anthony Serro.(14)*
	10	.12	Employment Agreement between Alion Science and Technology Corporation and P. Thomas Diamant.(14)*
	10	.13	Alion Science and Technology Corporation Board of Directors Phantom Stock Plan.(16)*
	10	.14	Amended and Restated Alion Science and Technology Corporation Phantom Stock Plan.(16)*
	10	.15	Amended and Restated Alion Science and Technology Corporation Performance Shares and Retention Phantom Stock Plan.(16)*
	10	.16	Amended and Restated Alion Science and Technology Corporation 2002 Stock Appreciation Rights Plan.(16)*
	10	.17	Amended and Restated Alion Science and Technology Corporation 2004 Stock Appreciation Rights Plan.(16)*
	10	.18	Amended and Restated Alion Science and Technology Corporation Executive Deferred Compensation Plan.(16)*
	10	.19	Amended and Restated Alion Science and Technology Corporation Director Deferred Compensation Plan.(16)*
	10	.20	Commitment letter by and between Alion Science and Technology Corporation, Credit Suisse and Credit Suisse Securities (USA) LLC.(18)
	10	.21	Incremental Term Loan Assumption Agreement and Amendment No. 2 under the Credit Agreement.(19)

130


Exhibit
No.			Description

	10	.22	Fourth Amendment to the Seller Warrant Agreement.(20)
	10	.23	Mezzanine Warrant Redemption Agreement by and between Alion Science and Technology Corporation and Illinois Institute of Technology.(20)
	10	.24	Alion Mezzanine Warrant Redemption Agreement by and among Alion Science and Technology Corporation, Alion Science and Technology Employee Ownership, Savings and Investment Trust and Bahman Atefi.(20)
	10	.25	Asset Purchase Agreement dated as of June 4, 2006, by and between Anteon Corporation, Alion Technical Services Corporation and Alion Science and Technology Corporation.(21)
	10	.26	Incremental Term Loan Assumption Agreement and Amendment No. 3 under the Credit Agreement.(21)
	10	.27	Bridge Loan Agreement dated as of June 30, 2006, by and among Alion Science and Technology Corporation, HFA, METI, CATI, JJMA, BMH, WCI, MA&D, CS, and the lenders party thereto (“Bridge Loan Agreement”).(21)
	10	.28	Closing Letter Agreement dated as of June 30, 2006, by and among Alion Science and Technology Corporation, Alion Technical Services Corporation and Anteon Corporation.(21)
	10	.29	First Amendment to Seller Note Agreement.(21)
	10	.30	Commitment letter by and between Alion Science and Technology Corporation, Credit Suisse and Credit Suisse Securities (USA) LLC.(22)
	10	.31	Amendment No. 1 to Bridge Loan Agreement.(25)
	10	.32	Incremental Term Loan Assumption Agreement under the Credit Agreement.(26)
	10	.33	Purchase Agreement dated January 26, 2007 among Alion Science and Technology Corporation, certain subsidiary guarantors and Credit Suisse Securities (USA) LLC.(27)
	10	.34	Amendment No. 4 to the Credit Agreement.(27)
	10	.35	Registration Rights Agreement dated February 8, 2007 among Alion Science and Technology Corporation, certain subsidiary guarantors and Credit Suisse Securities (USA) LLC.(27)
	10	.36	Employment Agreement between Alion Science and Technology Corporation and Dr. Bahman Atefi.(29)*
	10	.37	Employment Agreement between Alion Science and Technology Corporation and Stacy Mendler.(31)*
	10	.38	Employment Agreement between Alion Science and Technology Corporation and John M. Hughes.(31)*
	10	.39	Employment Agreement between Alion Science and Technology Corporation and James Fontana.(34)*
	10	.40	Employment Agreement between Alion Science and Technology Corporation and Rob Goff.(31)*
	10	.41	Employment Agreement between Alion Science and Technology Corporation and Scott Fry.(34)*
	10	.42	Employment Agreement between Alion Science and Technology Corporation and Buck Buchanan.(34)*
	10	.43	Incremental Term Loan Assumption Agreement under the Credit Agreement.(32)
	12		Computation of Ratios
	14		Code of Ethics(33)
	16		Letter from KPMG LLP dated May 31, 2006.(23)

131


Exhibit
No.			Description

	21		Subsidiaries of Alion Science and Technology Corporation are wholly-owned (either directly or indirectly) by Alion Science and Technology Corporation:
			(i) Human Factors Applications, Inc., incorporated in the Commonwealth of Pennsylvania,
			(ii) Innovative Technology Solutions Corporation, incorporated in the State of New Mexico,
			(iii) Alion-IPS Corporation, incorporated in the Commonwealth of Virginia,
			(iv) Alion-METI Corporation, incorporated in the Commonwealth of Virginia,
			(v) Alion-CATI Corporation, incorporated in the State of California,
			(vi) Alion-JJMA Corporation, incorporated in the State of New York,
			(vii) Alion Technical Services Corporation, incorporated in the Commonwealth of Virginia,
			(viii) Alion Technical Services Corporation, incorporated in the State of Delaware,
			(ix) Alion Canada (U.S.), Inc., incorporated in the State of Delaware,
			(x) Alion Science and Technology (Canada) Corporation, incorporated in the Province of Nova Scotia,
			(xi) Alion-BMH Corporation, incorporated in the Commonwealth of Virginia,
			(xii) Washington Consulting, Inc., incorporated in the Commonwealth of Virginia,
			(xiii) Alion-MA&D Corporation, incorporated in the State of Colorado, and
			(xiv) Washington Consulting Government Services, Inc., incorporated in the Commonwealth of Virginia.
	23	.1	Consent of Deloitte and Touche LLP.
	23	.2	Consent of KPMG LLP.
	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 Principal 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 Principal 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 from the Company’s Pre-Effective Amendment No. 3 to the Registration Statement on Form S-1 filed with the SEC on October 7, 2002.

(2)		Incorporated by reference from the Company’s Post-Effective Amendment No. 3 to the Registration Statement on Form S-1 filed with the SEC on March 24, 2003.

(3)		Incorporated by reference from the Company’s December 2002 Form 10-Q filed with the SEC on February 3, 2003.

(4)		Incorporated by reference from the Company’s August 2003 Form 10-Q filed with the SEC on July 4, 2003.

(5)		Incorporated by reference from the Company’s Registration Statement on Form S-8 filed with the SEC on April 28, 2004.

(6)		Incorporated by reference from the Company’s March 2004 Form 10-Q filed with the SEC on May 17, 2004.

(7)		Incorporated by reference from the Company’s June 2004 Form 10-Q filed with the SEC on August 13, 2004.

(8)		Incorporated by reference from the Company’s September 2004 Form 10-K filed with the SEC on December 28, 2004.

(9)		Company’s Post-effective Amendment No. 5 to the Registration Statement on Form S-1 filed with the SEC on January 24, 2005.

(10)		Incorporated by reference from the Company’s Form 8-K filed with the SEC on March 9, 2005.

(11)		Incorporated by reference from the Company’s Form 8-K filed with the SEC on March 14, 2005.

(12)		Incorporated by reference from the Company’s Form 8-K/A filed with the SEC on April 6, 2005.

132


(13)		Incorporated by reference from the Company’s Form 8-K filed with the SEC on April 6, 2005.

(14)		Incorporated by reference from the Company’s Form 8-K filed with the SEC on April 7, 2005.

(15)		Incorporated by reference from the Company’s March 2005 Form 10-Q filed with the SEC on May 13, 2005.

(16)		Incorporated by reference from the Company’s Form 8-K filed with the SEC on December 2, 2005.

(17)		Incorporated by reference from the Company’s September 2004 Form 10-K filed with the SEC on January 31, 2006.

(18)		Incorporated by reference from the Company’s Form 8-K filed with the SEC on February 23, 2006.

(19)		Incorporated by reference from the Company’s Form 8-K filed with the SEC on March 29, 2006.

(20)		Incorporated by reference from the Company’s Form 8-K filed with the SEC on March 31, 2006.

(21)		Incorporated by reference from the Company’s Form 8-K filed with the SEC on June 7, 2006.

(22)		Incorporated by reference from the Company’s June 2006 Form 10-Q filed with the SEC on August 14, 2006

(23)		Incorporated by reference from the Company’s Form 8-K/A filed with the SEC on June 1, 2006.

(24)		Incorporated by reference from the Company’s September 2006 Form 10-K filed with the SEC on December 1, 2006.

(25)		Incorporated by reference from the Company’s Form 8-K filed with the SEC on December 14, 2006.

(26)		Incorporated by reference from the Company’s Form 8-K filed with the SEC on January 10, 2007.

(27)		Incorporated by reference from the Company’s Form 8-K filed with the SEC on February 8, 2007.

(28)		Incorporated by reference from the Company’s Form S-4 filed with the SEC on April 30, 2007.

(29)		Incorporated by reference from the Company’s Form S-4 (8-K) filed with the SEC on June 21, 2007.

(30)		Incorporated by reference from the Company’s Form 8-K filed with the SEC on July 13, 2007.

(31)		Incorporated by reference from the Company’s Form 8-K filed with the SEC on July 20, 2007.

(32)		Incorporated by reference from the Company’s Form 8-K filed with the SEC on July 20, 2007.

(33)		Incorporated by reference from the Company’s Form 8-K filed with the SEC on November 15, 2007.

(34)		Incorporated by reference from the Company’s September 2007 Form 10-K filed with the SEC on December 28, 2007.

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

133

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Alion Science and Technology Corporation
(Registrant)


	By:	/s/ Bahman Atefi

Bahman Atefi

Chairman, Chief Executive Officer and Director

Date: March 12, 2008

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Signature	Title	Date


/s/ Bahman Atefi Bahman Atefi	Chairman, Chief Executive Officer and Director	March 12, 2008

/s/ Michael J. Alber Michael J. Alber	Principal Financial Officer	March 12, 2008

/s/ Gary N. Amstutz Gary N. Amstutz	Senior Vice President and Executive Director of Finance	March 12, 2008

/s/ Leslie L. Armitage Leslie Armitage	Director	March 12, 2008

/s/ Lewis Collens Lewis Collens	Director	March 12, 2008

/s/ Harold W. Gehman, Jr. Harold Gehman	Director	March 12, 2008

/s/ Donald E. Goss Donald E. Goss	Director	March 12, 2008

/s/ George A. Joulwan George A. Joulwan	Director	March 12, 2008

/s/ Michael E. Ryan Michael E. Ryan	Director	March 12, 2008

/s/ Edward C. Aldridge, Jr. Edward C. (Pete) Aldridge, Jr.	Director	March 12, 2008

Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the Act by Registrants which Have Not Registered Securities Pursuant to Section 12 of the Act

No annual report or proxy material has been sent to security holders.

134


	•	Part III — Item 15. Exhibits and Financial Statement Schedules.


PART I
	Item 1.	Business	4
	Item 1A.	Risk Factors	21
	Item 1B.	Unresolved Staff Comments	31
	Item 2.	Properties	31
	Item 3.	Legal Proceedings	32
	Item 4.	Submission of Matters to a Vote of Security Holders	33
PART II
	Item 5.	Market for Registrant’s Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities	33
	Item 6.	Selected Financial Data	33
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	59
	Item 8.	Financial Statements and Supplementary Data	60
	Item 9A.	Controls and Procedures	105
	Item 9A(T).	Controls and Procedures	105
	Item 9B.	Other Information	105
PART III
	Item 10.	Directors, Executive Officers and Corporate Governance	106
	Item 11.	Executive Compensation	111
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters	127
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	128
	Item 14.	Principal Accountant Fees and Services	128
	Item 15.	Exhibits and Financial Statement Schedules	129
EX-12
EX-23.1
EX-23.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2


Item 8.	*Financial Statements and Supplementary Data*


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


				Years Ended September 30,
ACTUAL DATA	2003			2004			2005			2006			2007

Fixed Charges
Cash interest expense	$	3,774		$	7,563		$	9,328		$	19,349		$	33,695
Amortization of capitalized expenses related to indebtedness		353			2,791			3,897			2,591			3,145

Total fixed charges	$	4,127		$	10,354		$	13,225		$	21,940		$	36,840
Earnings
Pre-tax earnings (loss)	$	(12,616	)	$	(15,094	)	$	(40,172	)	$	(31,089	)	$	(42,780	)
Fixed charges		4,127			10,354			13,225			21,940			36,840

Earnings before fixed charges	$	(8,489	)	$	(4,740	)	$	(26,947	)	$	(9,149	)	$	(5,940	)
Ratio of earnings to fixed charges		(1	)		(1	)		(1	)		(1	)		(1	)


(1)		Earnings for fiscal 2003 to 2007 were inadequate to cover fixed charges in those periods by $8.5 million, $4.7 million, $26.9 million, $9.1 million, and $5.9 million, respectively.