UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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.)

1750 Tysons Boulevard
Suite 1300
McLean, VA 22101
(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. o Yes þ No

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

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. o Yes þ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

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.:

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

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

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, 2010 was 5,658,234.

Documents Incorporated by Reference: None

 

 

ALION SCIENCE AND TECHNOLOGY CORPORATION
FORM 10-K
TABLE OF CONTENTS

PART I
Item 1. Business			1
Item 1A. Risk Factors			11
Item 1B. Unresolved Staff Comments			21
Item 2. Properties			21
Item 3. Legal Proceedings			22
Item 4. [Removed and Reserved]			22
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities			22
Item 6. Selected Financial Data			23
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			43
Item 8. Financial Statements and Supplementary Data			44
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			78
Item 9A. Controls and Procedures			78
Item 9B. Other Information			78
PART III
Item 10. Directors, Executive Officers and Corporate Governance			79
Item 11. Executive Compensation			86
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters			103
Item 13. Certain Relationships and Related Transactions, and Director Independence			104
Item 14. Principal Accountant Fees and Services			104
PART IV
Item 15. Exhibits and Financial Statement Schedule			105
Exhibit 12
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

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 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.

Factors that could cause actual results to differ materially from anticipated results include, but are not limited to:

	•		ERISA law changes affecting the Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan;
	•		tax law changes affecting treatment and deductibility of goodwill;
	•		costs to comply with the Dodd-Frank Act, including changes in to SEC rules and corporate governance requirements;
	•		government customer failures to exercise contract options;
	•		government project funding decisions;
	•		government contract procurement risks, such as award protests and contract terminations;
	•		competitive pricing pressures and/or difficulty in hiring and retaining employees;
	•		current and/or future legal or government agency proceedings arising from our operations or our contracts and the risk of potential fines, penalties and contract liabilities, suspension or debarment;
	•		any future inability to maintain adequate control over financial reporting;
	•		limits on our financial and operational flexibility given our substantial amount of debt;
	•		business acquisitions that increase costs or liabilities, are disruptive or which we fail to integrate;
	•		material changes in other laws or regulations affecting our business;
	•		additional debt and financing terms and availability;
	•		general volatility in the debt and securities markets;
	•		our ability to meet existing and future debt covenants;
	•		private securities litigation risks, regulatory proceedings or government enforcement actions related to our prior debt covenant compliance disclosures; 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 14, 2010. We undertake no obligation to update any of these factors or to publicly announce any change to our forward-looking statements in this report, 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 the environment. We provide research and development services primarily to U.S. government agencies, particularly the U.S. Department of Defense (DoD), state and foreign governments, and other commercial customers.

We had $834.0 million in revenue for the year ended September 30, 2010, a 4.0% increase over 2009. Federal government contract revenue was 97.5% of current year revenue; with 92.5% from DoD contracts. For the year ended September 30, 2009, federal government contracts accounted for 96.5% of revenue, with 91.7% from DoD contracts.

We provide professional engineering services and scientific expertise in a range of specialized fields, or core business areas described below. Annual revenue, by core business area was:

		Revenue by Fiscal Year
Core Business Area		2010								2009								2008
										(In thousands)
Naval Architecture and Marine Engineering		$	363,209				43.6	%		$	365,917				45.6	%		$	325,631				44.1	%
Defense Operations			194,940				23.4	%			203,859				25.4	%			220,539				29.8	%
Modeling and Simulation			152,420				18.3	%			99,420				12.4	%			67,119				9.1	%
Technology Integration			50,512				6.1	%			50,762				6.3	%			51,294				6.9	%
Energy and Environmental Sciences			40,041				4.8	%			39,914				5.0	%			37,108				5.0	%
Information Technology and Wireless Communications			32,866				3.8	%			42,353				5.3	%			37,791				5.1	%
Total		$	833,988				100.0	%		$	802,225				100.0	%		$	739,482				100.0	%

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.

•

We provide total ship design services for military and commercial customers including defining requirements, analyzing concepts, and studying feasibility. We provide contract design, detail design and production support.

•

We provide systems engineering/design integration, hull form development and performance analysis, structural design and analysis, weight engineering and intact and damage stability analysis.

•

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.

•

We provide mission and threat analysis, evaluate candidate warfare and combat systems, and develop specifications and installation drawings for topside and below-deck interface requirements, and ship modernizations.

•

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.

Defense Operations. We perform military and policy analyses, assess logistics management readiness and operational support training, and analyze critical infrastructure risks.

(a)

We analyze major programs and issues related to joint warfare training, mission rehearsal, experimentation and other transformational activities. We develop net-centric initiatives and integrate C4I (command, control, communication, and computer intelligence) initiatives.

•

We support DoD strategic planning efforts and operational exercises. We analyze, plan and implement base realignments and assess the defense industrial base.

•

We provide program, systems and legislative analyses to Office of the Secretary of the Air Force.

•

We help develop department-wide DoD education programs. We develop technology, compile courseware and translate it into electronic and web-based distance learning media.

•

We provide the tools and support to assess vulnerabilities and protect infrastructure such as ports, power plants and communications nodes.

•

We collaborate with DoD communities of interest and produce Joint Capabilities Integration and Development System analysis and capabilities documents.

•

We provide DoD requirements and concepts integration analysis (futures analysis).

Modeling and Simulation. We use our modeling and simulation expertise to assist our customers in examining event outcomes.

•

We design and conduct strategic and operations analytic war games to evaluate future operational concepts and force transformation initiatives. We create and implement multi-dimensional simulation system tactical training scenarios for the multi-national experiment series.

•

We manage the DoD Modeling and Simulation Information Analysis Center. We develop modeling and simulation tools to support integration and federation of stand-alone simulator-based training and large scale distributed training events.

•

We develop phenomenological models for nuclear, chemical, biological and electromagnetic environments.

•

We develop multi-dimensional visualization files to simultaneously display actual improvised explosive device events, terrain databases and scenario scripts to replay events and allow units to adjust tactics, techniques, and procedures.

•

We use current industry gaming technology to develop proprietary and open source solutions for customers who use “serious” gaming for training and education.

•

We maintain a threat generation library to support world-wide Air Force and Joint training and mission rehearsal operations.

•

We provide modeling and simulation, C4I and operational support for the U.S. Navy’s Fleet Synthetic Training and its Continuous Training Environment which delivers distributed, on-demand training.

Technology Integration. We provide system integration and design services, including facility engineering services, to DoD, other federal departments and agencies, and commercial customers.

•

We use technology, re-engineering, and materials selection to enhance production, improve performance, reduce cost, and extend the life of engineered systems.

•

We develop and integrate processes and equipment for rapid prototype production and flexible manufacturing. We maintain our own rapid prototyping and limited production manufacturing facilities.

•

We provide engineering, architectural, construction management, logistics, design oversight, and inspection services.

•

We apply reliability engineering methods to improve system availability and enhance maintainability and supportability.

•

We support numerous research and development activities focused on taking advantage of new and emerging technologies. These include the Army’s Night Vision and Electronic Sensors Directorate, the Army, Air Force, and Navy Research Laboratories, and system developers throughout DoD.

•

We develop human systems integration products and provide technical services to ensure Army, Air Force and Navy staff and force structures can operate, support and maintain their complex integrated systems.

Information Technology and Wireless Communications. We provide services and technologies to improve information flow across networks and organizations. We analyze customer requirements, develop system concepts and perform trade off studies to identify and implement the best design. We lead efforts to verify a design is properly built and integrated, and provide post-delivery end user support.

•

We provide management and information technology consulting services focused on developing and implementing innovative business solutions and management services for military, civilian and commercial customers.

•

We provide project management, earned value management, change management and process design and improvement services.

•

We provide information management, enterprise architecture, service oriented architecture, web portals and business intelligence.

•

We offer a full range of spectrum management, planning, and operational support services to determine radio frequency propagation and coverage profiles for networks to operate free of interference, cover desired geographic areas and perform as designed.

•

We deliver optimized information systems designs through advanced wireless design and evaluation techniques using modeling and simulation, prototyping, experimentation, and field testing.

•

We develop detailed data architectures and enhance data visualization to enable our customers to design, document, test and deploy complex integrated systems that support efficient data mining, data flow and knowledge management.

•

We provide wireless security, logistics and asset tracking technologies to support and maximize fielded systems’ operational capabilities.

Energy and Environmental Sciences. We support more cost-effective energy production and enhance environmental protection for DoD, federal departments and agencies, and commercial customers.

•

We conduct, develop, and improve processes and equipment for generating power and providing alternative energy sources.

•

We provide nuclear safety and other performance-related analyses to the U.S. Department of Energy, National Laboratories, and the commercial power industry.

•

We develop and evaluate methods for detecting chemical, biological, and other toxic agents.

•

We develop, test and implement methods for measuring air quality.

•

We operate laboratory facilities that determine the constituents and properties of wastes and effluents, develop and validate analytical methods and instruments, and determine the potential health effects of various substances for the U.S. Environmental Protection Agency and the National Institutes of Health.

Corporate History

Alion Science and Technology Corporation was organized in October 2001, as a for-profit Delaware corporation to acquire substantially all the assets and liabilities of IITRI, a not-for-profit Illinois corporation. Alion was an S-corporation from its formation until March 2010 when the Company issued common stock warrants constituting a second class of stock and became a C-corporation. Alion is entirely owned by an employee stock ownership plan (ESOP, the Plan). The Company is the successor in interest to IITRI, a government contractor founded in 1935. The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Trust (the ESOP Trust) owns all of Alion’s issued and outstanding common stock. In December 2002, some eligible IITRI employees directed funds from qualifying retirement account balances into Alion’s ESOP. State Street Bank and Trust Company, the ESOP Trustee, used those proceeds to purchase Alion common stock. The Company used the ESOP proceeds, together with funds from bank loans and other debt to complete the IITRI purchase.

The Alion ESOP

The Alion Science and Technology Corporation Employee Ownership, Savings and Investment Plan, is a KSOP — a qualified retirement plan that includes an ESOP invested in Alion common stock and a non-ESOP component invested in mutual funds. The ESOP Trust owns all outstanding shares of our common stock. Eligible employees can purchase beneficial interests in our common stock by:

•

rolling over an eligible retirement account balance from another plan into the ESOP when initially hired;

•

transferring funds to the ESOP from the non-ESOP component of the KSOP during semi-annual election periods; and/or

•

directing a portion of pre-tax earnings to the ESOP.

The ESOP Trustee uses the money employees invest in the ESOP to purchase Alion common stock and allocates ESOP interests to employee accounts according to the Plan’s terms. We make retirement plan contributions to the ESOP and the non-ESOP component for all eligible employee participants. We also make matching contributions to the ESOP for eligible employees based on their pre-tax salary deferrals.

The ESOP Trustee holds record title to all shares of Alion common stock allocated to ESOP accounts. Except in certain limited circumstances, the ESOP Trustee must vote those shares as directed by the ESOP committee. The ESOP committee consists of four members of Alion’s management team and three other Alion employees; it is responsible for financial management and administration of the ESOP.

By law, Alion is required to value the common stock held in the ESOP component at least once a year. Alion has chosen to have the ESOP Trustee value the common stock in the ESOP twice a year — as of March 31 and September 30. All ESOP transactions must occur at the current fair market value of the common stock held by the ESOP Trust. Semi-annual valuations permit employees to invest in Alion common stock twice a year and permit former employees and beneficiaries to request ESOP distributions at mid-year and year end.

Business Strategy

We plan to grow revenue organically and through strategic acquisitions, capitalizing on our skilled work force and our sophisticated solutions competencies. We have several key strategies.

Broaden existing core competencies. We plan to expand our expertise and keep pace with technological developments. We hire skilled employees, engage in business development initiatives and invest in research and development to extend our core business area capabilities and enhance our ability to serve our customers. Acquisitions significantly enhanced our core expertise in naval architecture and marine engineering, information technology, modeling and simulation, and defense operations. We increase our employees’ technology skills through training and customer- and internally-funded research and development. Through Alion University we offer employees programs in engineering, program management, and finance and administration to keep Alion at the forefront of the federal and commercial technology solutions markets.

Expand market share by leveraging experience and reputation. We perform a variety of services for a broad base of approximately 500 customers, including Cabinet-level government departments and agencies, and state and foreign governments. We plan to use our sophisticated capabilities and customer relationships to expand our market presence by delivering solutions to new customers and offering existing customers new capabilities. We intend to use our customer relationships and our sophisticated technology expertise to strategically expand our Department of Homeland Security (DHS) customer base. For the third year in a row Washington Technology ranked us among the top government contractors providing information technology products and services, systems integration, telecommunications, and professional engineering services. Defense News ranked Alion in its Top 100 contractors and Washington Business Journal ranked us in its top twenty technology employers and government contractors

Improve financial performance and increase sales. We believe key elements of our success have been our focus on growing our business and achieving operating efficiencies. Over the past five years our revenue grew at a 17.7% compound annual rate from $369.2 million in 2005 to $834.0 million in 2010. This year revenue grew by 4.0% organically. We intend to strengthen financial performance through organic growth, strategic acquisitions, and controlling operating costs. We believe that a more competitive cost structure will enhance our ability to win business and improve our financial performance. We believe Alion’s increased size and expertise position us to bid on larger government programs and broaden our customer base.

Market and Industry Background

In its first National Security Strategy (NSS) the Obama Administration called economic revival its top priority and an attack from weapons of mass destruction (WMD) the nation’s top threat. While focusing important attention on the imperative to rebuild America’s economy and to reduce the federal deficit, the NSS lays out broad policy objectives including an expectation that the defense budget will not decline. Understanding that a certain amount of growth is needed, President Barack Obama’s defense budget proposal calls for one percent real growth each year at a time when the funding curve for all other federal agencies has flattened. The Obama Administration’s FY 2011 and estimated FY 2012 budget requests will seek 1% in inflation-adjusted real growth, 2%-3% in internal cost avoidance and 4% year over year growth while maintaining force structure and modernization.

To achieve these budget and program priorities, the Defense Department is taking steps to achieve efficiencies needed to save $100 billion over five years beginning in fiscal 2012. Secretary Gates plans to eliminate organizational duplication, downsize certain commands, eliminate certain information technology infrastructure programs and consolidate functions and offices within DoD. Defense spending is approximately $700 billion per year with approximately $300 billion of those funds spent for internal military and civilian salaries and benefits, operations and sustaining facilities and infrastructure. The remainder —about $400 billion is spent equally between products (e.g., weapons, electronics, fuel, and facilities) and services (e.g., IT services, knowledge-based services, facilities upkeep, and transportation). Secretary Gates has directed the services to apply their annual cost savings to fund military pay and benefits and weapons acquisition programs.

Phasing out time-and-material and sole source ID/IQ contracts, utilizing fixed-price performance-based contracts and fixed-price level of effort or cost-plus-fixed-fee contracts are among the many cornerstones of Under Secretary Carter’s “Do more without more” initiative that seeks savings by providing incentives for greater efficiency in industry service contracting. Reduced internal defense overhead, eliminating unproductive or unneeded programs and activities, and improved contracting efficiencies are expected to yield two-thirds of the savings according to Deputy Secretary of Defense Lynn.

Defense Secretary Gates has directed the military services to adopt an expanded set of counterinsurgency (COIN) models and simulation tools to be prepared for the operational, geographic, linguistic and cultural complexities that are confronting military forces. “We must align our training, personnel processes and programs to provide deploying units...with language, cultural, tactical and interagency skills required to conduct COIN operations,” according to Gates.

The Defense Department has consistently sought less expensive, but more effective training, in all segments of the training market: Virtual; Live; Constructive/C4ISR; and Education. Spending on training continues with slow but stable growth. Complex missions and increased use of improvised explosive devices have increased the need for high-fidelity mission rehearsal simulations, allowing military personnel to see, hear and act as they would in a real mission with specialized recognition, detection, avoidance and execution mission scenarios for Iraq and Afghanistan. Similarly, redesign and improvement of training ranges and distance learning and modern computer based education remain fairly stable.

The U.S. military has almost “no situational awareness” when a cyber attack is underway on the 7 million computers and 15,000 computer networks it operates, according to Lieutenant General Keith Alexander, Commander of the U.S. Cyber Command and Director of the U.S. National Security Agency. The lack of real-time situational awareness puts military forces (and operations) at substantial risk. Situational awareness refers to the ability to understand what’s going on around you. On a battlefield, it means knowing where allied and enemy forces are and what they are doing. In cyberspace, it means understanding who is on particular networks and what they are doing. The Cyber Command is providing technical assistance to the Department of Homeland Security, which is the lead federal agency for defending non-defense government web sites while law enforcement agencies such as the FBI help defend the private sector from cyber crime and intellectual property theft.

Even as the government focuses on changing the procurement environment and contracting activity, Alion’s cost-reimbursable revenue has continued to increase each year. We do not perform inherently governmental functions; we deliver highly sophisticated scientific and engineering research services. Management believes increased government in-sourcing for acquisition-skilled support services will not materially adversely affect our operations or demand for our higher end technical expertise. However, we expect in-sourcing may ultimately reduce some of our future revenue from professional technical services contracts for program and acquisition management, and operations, training and logistics support.

Because Alion is not involved in producing or designing many of the major platforms that are facing budgetary constraints, we do not expect future acquisition program cuts or delays to materially adversely affect us. Although the CG(X) ship acquisition program which we support was cancelled, we believe we have significant opportunities in other ship programs we already support with key waterfront and headquarters roles, such as DDG-51, Littoral Combat Ships and the Joint High Speed Vessel program.

We do not expect other acquisition program cuts or delays to adversely affect us significantly. Rather, we expect to benefit from a focus on extending the service life and capabilities of existing systems across all branches of the Defense Department because we provide these kinds of services. We think cost-containment will help us sell the government services and technical solutions that improve operating efficiency and effectiveness.

We are primarily a government contractor.

For the years ended September 30, 2010, 2009 and 2008, 97.5%, 96.5% and 93.9% of our revenue came from federal government contracts. The Defense Department is our largest customer. We expect most of our revenue will continue to come from federal government contracts that we perform as a prime contractor or subcontractor. As a prime contractor, we have direct contact with the applicable government agency. As a subcontractor, we work for a prime contractor, which serves as the point of contact with the government agency overseeing the program.

Our federal government contracts are normally multi-year contracts funded on an annual basis at the discretion of Congress. Congress usually appropriates funds for a given program at the beginning of each government fiscal year in October. This means a contract is usually only partially funded at the outset of a major program. Normally a procuring agency commits additional money to a contract only as Congress makes appropriations in future fiscal years. The government can modify or discontinue any contract at its discretion or due to contractor default. The government can terminate or modify a contract for any of a variety of reasons, including funding constraints, changing government priorities or changes in program requirements. If the government terminates one of our contracts at its discretion, it typically pays us for all the services we performed and costs we incurred prior to termination, our termination-related costs, and a negotiated contract fee.

Contract Types. We have a diverse contract base. Many customers utilize our ID/IQ multiple-award delivery order contract vehicles. Five of our six largest contracts are ID/IQ delivery order contracts representing 58.2% of this year’s revenue. Our single largest individual contract generated approximately 13% of current year revenue. As of September 30, 2010, we had a portfolio of approximately 955 individual active contracts and task orders. We have three types of pricing structures for our contracts: cost-reimbursement, fixed-price and time-and-material.

Cost-reimbursement contracts allow us to recover our direct labor and materials costs, a share of allocable indirect expenses, plus a fixed or variable fee depending on the contract. Indirect expenses are costs related to operating our business that we recover under government contract rules. Fixed-price contract customers pay a stated amount intended to cover all our direct and indirect costs, and profits. We assume the risk of any cost overruns and receive the benefit of any cost savings on fixed price contracts. Time-and-material contracts have fixed hourly billing rates designed to cover our labor costs, indirect expenses and profit, and cost reimbursable provisions for materials and other direct costs. We have traditional closed-end contracts and multiple award contracts which require sustained post-award effort to realize revenue. The following table summarizes our revenue by contract type for the years ended September 30, 2010, 2009, and 2008.

		For the Years Ended September 30,
Contract Type		2010								2009								2008
										(In thousands)
Cost-reimbursement		$	636,232				76.3	%		$	567,284				70.8	%		$	517,760				70.0	%
Fixed-price			87,610				10.5	%			91,797				11.4	%			70,078				9.5	%
Time-and-material			110,146				13.2	%			143,144				17.8	%			151,644				20.5	%
Total		$	833,988				100.0	%		$	802,225				100.0	%		$	739,482				100.0	%

We try to reduce our financial and performance risks at each stage in the contracting process. However, sometimes we begin providing services before a U.S. government agency has actually signed or funded a contract or task order. We are at risk for costs we incur before a new contract is executed or an existing contract is modified. The practice is customary in our industry, particularly where a company has oral notification of a contract award, but has not received required contract documents. We designed our internal procedures to provide services “at risk” only when we believe funding is highly probable and delays are administrative or technical in nature. In most cases, we get paid for all our costs when a contract is ultimately executed or modified. However, we cannot be certain, when we work at risk, that we will receive an executed contract or that we will be paid for all our costs. As of September 30, 2010, we had $25.0 million in contract costs at risk.

We compete for key contracts from various U.S. government agencies. Our business development and technical personnel target contract opportunities, and analyze each customer’s priorities and overall market dynamics. Depending upon whether a targeted contract is a renewal or a new opportunity, we spend from three to 18 months developing and executing our competitive strategy. When we decide to pursue a contract, we mobilize a core group of employees with the requisite expertise to lead our bidding and proposal preparation efforts. We supplement our internal capabilities with a network of consultants and other industry experts as necessary. To enhance our prospects of winning a contract, we team with other contractors, frequently our competitors, who have complementary technical strengths.

When we win a contract or task order, we assign a project manager and a task leader to ensure we timely deliver high-quality services. Program managers regularly interface with customers to evaluate Alion’s performance and customer satisfaction levels. Managers use our financial management and information systems to compare costs to funding ceilings and measure performance and profitability.

Government Oversight. Federal government auditors and technical specialists regularly review our contract administration and cost accounting policies and practices. Costs on flexibly-priced federal government contracts are subject to Defense Contract Audit Agency (DCAA) and other audits and negotiated adjustments. An audit may reveal that some costs charged to a government contract are not allowable, either in whole or in part. In these circumstances, we must repay the federal government any money it paid us for unallowable costs, plus interest and possible penalties. The government considers Alion a major contractor and maintains an on site audit office. DCAA is currently auditing the Company’s 2005 and 2006 claimed indirect costs. Indirect rates through 2004 have been settled. The Company timely submitted its indirect cost proposals for fiscal years 2009, 2008 and 2007 and expects to submit its 2010 proposal next March as required. 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 we expect from existing contracts. On September 30, 2010, backlog on existing contracts and executed delivery orders totaled $2.8 billion, of which $407.8 million was funded. The Company estimates it has an additional $3.8 billion of unfunded contract ceiling value for an aggregate total backlog of $6.6 billion. Funded backlog is the value of executed contract funding less previously recognized revenue. Unfunded backlog is the estimated value of additional funding not yet authorized by customers on our existing contracts. Pre-negotiated contract options, options not yet exercised by a customer for additional years and other extension opportunities in existing contracts are included in estimated contract ceiling backlog. The Company estimates unfunded contract ceiling value for ID/IQ and similar contracts as the difference between estimated total contract value and the total value of all executed delivery orders.

Because the U.S. government operates under annual appropriations, its departments and agencies typically fund contracts on an incremental basis. Thus, only a portion of total contract backlog is “funded.” Funded backlog varies based on procurement and funding cycles and other factors beyond our control. Future funding from executing new contracts and extending or renewing existing contracts increases our backlog; completed contracts, early terminations, and reductions in estimated future revenue on existing contracts reduce backlog. Estimates of future revenue from contract backlog are by their nature inexact. Timing and receipt of future revenue are subject to various contingencies, many of which are outside of our control. Accordingly, year over year comparisons are not necessarily indicative of future revenue trends. The table below shows the value of our contract backlog as of September 30, 2010, 2009 and 2008.

		September 30,
		2010				2009				2008
		(In millions)
Backlog:
Funded		$	407.8			$	376.5			$	340.5
Unfunded			6,205.9				6,008.4				4,475.8
Total		$	6,613.7			$	6,384.9			$	4,816.3

Proposal backlog is an estimate, as of a specific date, of the contract value of proposals we are preparing to submit in response to a customer request, and proposals we have submitted for which we are awaiting an award decision. How much of our proposal backlog we ultimately realize as revenue depends upon our success in the competitive proposal process, and on receiving tasks and funding under ensuing contracts. We will not win contract awards for all of the proposals we submit to potential customers. Our past proposal backlog contract win rates 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, 2010, 2009 and 2008.

		September 30,
		2010				2009				2008
		(In millions)
In-process		$	280.0			$	361.0			$	529.0
Submitted			1,715.0				1,491.0				1,057.0
Total		$	1,995.0			$	1,852.0			$	1,586.0

Corporate Culture, Employees and Recruiting

We strive to create a culture that promotes performance excellence, respect for colleagues’ ideas and judgment, and recognizes the value of our professional staff’s unique skills and capabilities. We seek to attract highly qualified and ambitious employees. 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 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 offer.

As of September 30, 2010, we had approximately 3,101 employees, and approximately 2,886 full-time employees. Approximately 30% of our employees have Ph.D.s or masters degrees, and approximately 79% of our employees have college degrees. More than 29% of our employees have Top Secret or higher level security clearances. We believe we have a good relationship with our employees. None of our employees is covered by a collective bargaining agreement.

We view our employees as our most valuable asset. Our success depends in large part on attracting and retaining talented, innovative, 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 technical skills in our core business areas is at times extremely competitive. This makes employee recruiting and retention in these and other specialized areas extremely important. We recognize that our benefits package, work environment, incentive compensation, and employee-owned culture will continue to be important in recruiting and retaining highly skilled employees.

Our Customers

We provide scientific, research and development, technical expertise, and operational support to a diverse group of U.S. government customers, as well as commercial, state, local and international government customers. As of September 30, 2010, we had approximately 500 customers, including a number of Cabinet-level U.S. government departments and agencies, state, and foreign governments. We have approximately 550 Department of Defense contracts and delivery orders with the U.S. Navy, Army and Air Force; the Joint Forces Command; DARPA; the Defense Information Systems Agency and others representing 92.5% of our 2010 revenue. Other federal government departments and civilian agencies accounted for 5.0% of our sales, including the National Institute of Environmental Health Sciences, the U.S. Department of Energy and the EPA. State and local governments and commercial and international customers accounted for the remaining 2.5% of current year revenue. The table below shows revenue by customer category for fiscal years ended September 30, 2010, 2009 and 2008.

		September 30,
		2010								2009								2008
		(In thousands)
U.S. Department of Defense		$	771,835				92.5	%		$	735,304				91.7	%		$	660,969				89.4	%
Other Federal Civilian Agencies			41,413				5.0	%			38,474				4.8	%			33,168				4.5	%
Commercial and International			20,740				2.5	%			28,447				3.5	%			45,345				6.1	%
Total		$	833,988				100.0	%		$	802,225				100.0	%		$	739,482				100.0	%

Competition

The U.S. government engineering and technology services industries consist of a large number of enterprises ranging from small, niche-oriented companies to multi-billion dollar corporations that serve many U.S. government customers. Corporations frequently form teams to pursue contract opportunities because large contracting initiatives are highly competitive and government customers have diverse requirements. Prime contractors leading large proposal efforts typically select team members based on particular capabilities and experience relevant to each opportunity. Companies that compete on one opportunity may be team members on another opportunity.

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

We also compete at the task order level, where knowledge of the customer, its procurement requirements and its environment is often the key to winning business. We have been successful in ensuring our presence on numerous contracts and GSA Schedules, and in competing for tasks under those contracts. The variety of contract vehicles at our disposal, as a prime contractor or subcontractor, allows us to market our services to any U.S. government agency. We have experience 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. Most government contracts we seek are competitive awards. We believe our customers typically consider the following key factors in awarding contracts: technical capabilities and approach; personnel quality and management capabilities; previous successful contract performance; and price.

In our experience, price and technical capabilities are a customer’s two most important considerations in contracts for complex technological programs. We believe our customer knowledge, our government contracting and technical capabilities, and our pricing policies enable us to compete effectively. Over the past three years, we won 61% of the dollar value of all contracts we bid on and over 83% of the dollar value of contract bids where we were the incumbent.

Change in Tax Status

From inception until March 22, 2010, Alion was an S-corporation and was not subject to federal or most state income taxes. All our subsidiaries were qualified S-corporation subsidiaries or disregarded entities. An S corporation is a reporting entity which can only have a single class of stock, no more than 100 shareholders, and only certain types of shareholders, such as individuals, trusts and certain tax-exempt organizations, including ESOPs. Alion’s income and losses were allocated to the ESOP Trust, its tax-exempt shareholder.

On March 22, 2010, we issued deep-in-the-money warrants deemed to constitute a second class of stock. Because we now have two classes of stock, we no longer qualify as an S-corporation and automatically became a C-corporation. Some of our subsidiaries are also subject to separate state income tax and reporting requirements. We will file two sets of tax returns this year, one for part of the year as an S corporation and the other for the part of the year as a C corporation. We are also subject to franchise and other business taxes that are not affected by our change in federal tax status.

The Internal Revenue Code permits the IRS to impose significant penalties on a subchapter S employer that maintains an ESOP if the ESOP allocates stock to certain “disqualified persons” above statutory limits or if disqualified persons as a group own 50% or more of a company’s stock. For this purpose, a “disqualified person” is typically someone who owns 10% or more of the subchapter S employer’s stock (including deemed ownership through stock options, warrants, stock appreciation rights, phantom stock, and similar rights). The KSOP and the SAR plan include provisions designed to prohibit allocations that violate these limits. Apart from the warrants related to the IIT subordinated note that formerly represented approximately 24% of our common stock, no one person held an ownership interests representing more than 5% of Alion while we were an S corporation. See Note 14 — Redeemable Common Stock Warrants in our audited financial statements elsewhere in this report.

Business Development and Promotional Activities

We promote our contract research services by meeting face-to-face with current and potential customers, obtaining new work from satisfied customers, and responding to requests for proposals (RFPs) and international tenders current and prospective customers publish or direct to our attention. We use our knowledge of and experience with U.S. government procurement procedures, and our relationships with government personnel, to try to maximize our ability to respond timely to RFPs and customer requests. We bid on contracts in our core business areas and related areas, that we believe we have a good chance of winning. When we bid on a potential contract, we draw on our core business area expertise to display the technical skills we can bring to a particular contract.

Our business developers work face to face with customers, are experienced in marketing to government customers, know the services and products they represent, and understand each particular customer’s organization, mission and culture. These professionals possess a working knowledge of rules governing the marketing limitations that are unique to the government arena. They understand government funding systems, conflict of interest restrictions and procurement integrity directives, and the procedural requirements designed to establish a level competitive playing field and ensure appropriate use of public funds.

Our technical staff is an integral part of our promotional efforts. The customer relationships they develop through their work often lead to additional business and new research opportunities. We hold weekly company-wide business development meetings to review proposal opportunities and determine strategy in pursuing these opportunities. We also use independent consultants for promoting business, developing proposal strategies and preparing proposals as necessary.

We spent approximately $0.7 million, $0.7 million, and $1.0 million on internally-funded research and development for the years ended September 30, 2010, 2009 and 2008. This is in addition to our substantial research and development activities on customer-funded projects. We believe actively fostering an environment of innovation is critical to our ability to grow our business, allowing us to be proactive in addressing issues of national concern in public health, safety and national defense.

Resources

In most of our work, we use computer and laboratory equipment and other supplies readily available from multiple vendors. Disruption in availability from any particular vendor is not likely to materially affect our ability to perform our contracts. For some of our specialized laboratory work, we depend on supplies of special materials and equipment whose unavailability could adversely affect experimental laboratory tasks. However, we believe these kinds of delays or disruptions are not likely to materially affect our overall operations or financial condition.

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 certain license rights to our inventions and copyright works. Government agencies and other contractors (including our competitors) can obtain the right to exploit our inventions. 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 they develop while employed by Alion.

Foreign Operations

In each of the past three fiscal years, nearly 100% of our revenue came from contracts with U.S.-based customers. We treat sales to U.S. government customers as United States sales regardless of where we perform our services.

Company Information Available on the Internet

Our internet address is www.alionscience.com. Information on the Company’s website is not incorporated by reference into this report.

Environmental Matters

We are subject to federal, state, 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 or reduce air and water pollution. Issuing authorities can renew, modify, or revoke these permits.

Operating and maintenance costs associated with environmental compliance and preventing contamination at our facilities are a normal, recurring part of our operations. These costs have not been material in the past and are not material to our total operating costs or cash flows. Such costs are usually allowable under government contracts. Based on information presently available to us and on current U.S. government environmental policies relating to allowable costs, all of which are subject to change, we do not expect environmental compliance to materially affect us. We also believe our facilities’ environmental compliance costs will continue to be allowable.

Under existing U.S. environmental laws, potentially responsible parties can be held jointly and severally liable. We could 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 remediation of a site, the statutory framework may allow us to pursue rights of contribution from other potentially responsible parties.

Item 1A.		Risk Factors

Risks Related to Our Debt Structure

We have incurred a significant amount of debt; our debt load may limit our financial and operational flexibility which could prevent us from fulfilling our obligations under our debt agreements.

In August 2004, we refinanced the senior debt we incurred to acquire IITRI’s assets. Partly to fund our growth through subsequent acquisitions, we incurred substantial additional debt. In March 2010, we re-financed our outstanding Term B senior debt and subordinated debt by issuing Senior Secured Notes. As of September, 2010, we owe lenders $580.5 million: approximately $313.3 million in senior secured note principal; $250 million in unsecured note principal; and $17.2 million in accrued interest. Secured note principal will increase from now through November 2014 as we issue notes to pay payment-in-kind (PIK) interest. We have managed significant amounts of debt since December 2002. However, we continue to face challenges in functioning as a highly leveraged company in volatile and unfavorable credit markets.

Our substantial debt has and could continue to:

•

make it more difficult for us to satisfy our debt-related obligations; any failure to comply with any of our debt instrument obligations, including restrictive and financial covenants, could result in an event of default under our debt agreements;

•

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

•

increase our vulnerability to general adverse economic and industry conditions and make it more difficult for us to react to changing conditions;

•

limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions, other business opportunities, new technologies or other general corporate requirements;

•

require a substantial portion of our operating cash flow to pay interest on our debt and reduce our ability to use our cash flow for future business needs;

•

limit our flexibility to plan for, or react to changes in our business and the government contracting industry; and

•

place us at a competitive disadvantage compared to less leveraged companies.

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

We have the ability to incur additional debt, including the ability to raise up to $10 million of additional senior secured indebtedness with first-out rights and an additional $10 million of pari passu senior secured indebtedness, subject to limitations that are imposed by the covenants in the new revolving credit facility, the indenture governing the 10¹/4% senior unsecured notes, which we refer to as the “First Indenture”, and the indenture governing the 12% senior secured notes, which we refer to as the “Second Indenture”. In addition, the payment of PIK interest on the secured notes will increase our debt by the amount of such PIK payments. The First Indenture, the new revolving credit facility and the Second Indenture do not completely prohibit us from incurring additional debt. The more we borrow, the more we, and in turn our security holders, become exposed to the risks described under “We have incurred a significant amount of debt; our debt load may limit our financial and operational flexibility which could prevent us from fulfilling our obligations under our debt agreements.” See “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Discussion of Debt Structure” for additional information.

Our First Indenture, the new revolving credit facility and the Second Indenture restrict our operations.

Our First Indenture, the new revolving credit facility, and the Second Indenture contain, 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 First Indenture, the new revolving credit facility and the Second Indenture 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 capital stock other than to satisfy ESOP repurchase obligations or pay certain amounts 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; or

•

transfer or sell assets outside the ordinary course of business.

Our new revolving credit facility requires us, and our future debt agreements may require us, to maintain specified financial levels relating to, among other things, our minimum trailing four-quarter EBITDA. Our future debt agreements may also impose other minimum financial performance requirements including, but not limited to, net worth tests. Events beyond our control can affect our ability to meet these financial performance requirements; we cannot guarantee that we will meet these tests.

Default under the new revolving credit facility, the First Indenture or the Second Indenture could allow lenders to declare all amounts outstanding under the new revolving credit facility, the Secured Notes and the Unsecured Notes to be immediately due and payable. We have pledged substantially all of our assets to secure the debt under the new revolving credit facility and the secured notes. If lenders under the new revolving credit facility declare amounts outstanding under the new revolving credit facility to be due, they could proceed against those assets. Any event of default could have a material adverse effect on our business, financial condition and operating results if creditors were to exercise their rights.

From time to time we may require consents or waivers from our lenders to permit actions that the new revolving credit facility, the First Indenture or the Second Indenture prohibit. If, in the future, lenders refuse to waive the restrictive covenants and/or financial levels under the new revolving credit facility, the First Indenture and/or the Second Indenture, then we could be in default on the new revolving credit facility, the First Indenture and/or the Second Indenture. We could be prohibited from undertaking actions necessary or desirable to maintain or expand our business. There is no guarantee we will be able to obtain additional consents or waivers from our lenders.

We may not be able to obtain financing in the future, and the terms of any future financings may limit our ability to manage our business. Difficulties in obtaining financing on favorable terms would have a negative effect on our ability to execute our business strategy.

We may need to seek additional capital in the future to refinance or replace existing long-term debt, meet current or future business plans, meet working capital needs or for other reasons. Based on current market conditions, the availability of financing is, and may continue to be, limited. There can be no assurance that we will be able to obtain future financings on acceptable terms, if at all. In addition, the secured notes, the new revolving credit facility and the unsecured notes will all mature between August 2014 and February 2015, which could further limit our ability to obtain additional financing on acceptable terms, if at all.

Our corporate family credit ratings at Standard & Poor’s and Moody’s Investors Service were lowered in fiscal year 2009 to B- and Caa3. A downgrade in such ratings could increase our cost of capital, or limit any attempt to obtain additional financing in the future. An increase in our cost of capital would adversely affect our results of operations and our financial position.

If we are unable to obtain alternative or additional financing arrangements in the future, or if we cannot obtain financing on acceptable terms, we may not be able to execute our business strategies. Moreover, the terms of any such additional financing may restrict our financial flexibility, including the debt we may incur in the future, or may restrict our ability to manage our business as we had intended.

If we breach our financial covenants, we could have to amend the financial covenants of the new revolving credit facility which could materially impact our ability to finance our future operations, future acquisitions or capital needs.

In October 2009, we agreed with our then senior lenders to amend the interest coverage ratio and the maximum senior secured leverage ratio covenants under our previously existing Term B Senior Credit Agreement effective through the end of our fiscal year 2010 and through the end of our first quarter of our fiscal year 2011 in order to provide us with more flexibility. On December 14, 2009, we entered into a waiver agreement to the Term B Senior Credit Agreement under which our lenders agreed to waive, among other things, covenant defaults that resulted from either the miscalculation of Consolidated EBITDA or the failure to comply with covenants had the cash outflows relating to the settlement of deferred compensation plans and certain retirement obligations been deducted from the calculation of Consolidated EBITDA. The waiver applied to these defaults that existed on or before December 14, 2009 and to any defaults that arose as a result of properly calculating Consolidated EBITDA for the fiscal year and quarter ended September 30, 2009. The waiver did not apply to any covenant breach after December 14, 2009 and for any periods after our fiscal year end 2009.

We expect to be able to meet the financial and other debt covenants under the new revolving credit facility for at least the next 24 months. However, we may be unable to meet these financial and other debt covenants in the future, which could require us to amend the new revolving credit facility on less favorable terms. If we were to default under the new revolving credit facility, we could pursue an amendment or waiver of the new revolving credit facility with our existing lenders, but there can be no assurance that the lenders would grant an amendment or waiver. In light of current credit market conditions, any such amendment or waiver might be on terms, including additional fees, increased interest rates and other more stringent terms and conditions materially disadvantageous to us. If we were unable to meet these financial covenants in the future and unable to obtain future covenant relief or an appropriate senior lenders’ waiver, we could be in default under the new revolving credit facility. This could cause all amounts borrowed under it and all underlying letters of credit to become immediately due and payable, expose our assets to seizure, cause a potential cross-default under our indentures and possibly require us to invoke insolvency proceedings including, but not limited to, a voluntary case under the U.S. Bankruptcy Code.

Risks Related to Internal Controls

We could incur adverse effects from our prior disclosures relating to our failures to comply with prior financial covenants.

In 2009, we determined that the Consolidated EBITDA we had reported to our lenders did not conform to the definitions in our debt agreements. We failed to deduct certain deferred compensation and ESOP-related cash outflows and this overstated our Consolidated EBITDA. As correctly calculated, our Consolidated EBITDA indicated we had failed to comply with the senior secured leverage and interest coverage ratio covenants in our now-extinguished Term B Senior Credit Agreement. Our failure to meet these covenants led to non-compliance with other covenants in the Term B Senior Credit Agreement. These covenant defaults made all amounts outstanding under the Term B Senior Credit Agreement immediately callable by the administrative agent or lenders holding a majority of the loans outstanding. As a result, we initially incorrectly reported these amounts as non-current rather than current liabilities. In December 2009, we obtained a waiver of covenant defaults that occurred prior to December 31, 2009.

We are unable to predict the likelihood of or potential outcomes from private securities litigation, regulatory proceedings or government enforcement actions relating to our prior disclosures regarding covenant compliance. These matters could be time-consuming and expensive to resolve, distract management from other business concerns and harm our reputation and our business. Adverse findings in litigation, regulatory proceedings or government enforcement actions, could require us to pay damages or penalties or impose other remedies which could harm our reputation, our business and our financial condition.

We discovered errors in our historic calculations of Consolidated EBITDA because of which we failed to comply with certain covenants in our previously existing Term B Senior Credit Agreement. Our prior disclosures relating to our compliance with our financial covenants could have material adverse effects on our business and financial condition.

In late 2009, we discovered that the Consolidated EBITDA we had reported to our lenders did not conform to the definition in our previously existing Term B Senior Credit Agreement. Since entering into the agreement, we had miscalculated several components of Consolidated EBITDA over numerous periods of time. For example, from 2004 to 2009 we had not deducted from Consolidated EBITDA cash outflows related to deferred compensation plans, including the stock appreciation rights plans, phantom stock plans and the Long-Term Incentive Plan, as well as share redemption payments for prior 401-K matching and retirement plan contributions. These errors resulted in our overstating Consolidated EBITDA by the amount of these deductions. After properly taking these miscalculations into account, the result was that the Company was not compliant with the senior secured leverage (or predecessor test) and interest coverage ratio covenants in the Term B Senior Credit Agreement for eleven quarters between June 30, 2006 and September 30, 2009. Our non-compliance with these financial covenants triggered non-compliance with other covenants under the Term B Senior Credit Agreement.

We are unable to predict the likelihood of potential outcomes from private securities litigation, regulatory proceedings or government enforcement actions relating to our prior disclosures regarding covenant compliance. The resolution of these matters could be time-consuming and expensive, distract management from other business concerns and harm our reputation and our business. Furthermore, if we were subject to adverse findings in litigation, regulatory proceedings or government enforcement actions, we could be required to pay damages, fines and penalties and have other remedies imposed, which could harm our reputation and our business and financial condition.

Risks Related to Our Business and Operations

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

Despite recognizing a $50.7 million gain on extinguishing our subordinated debt this year, we have had a net loss every year since our inception in late 2002. We expect to incur a net loss in at least our next four years of operation, fiscal years 2011 through 2014. Interest expense on existing debt, amortization of purchased contracts and future deferred income tax expense are among the most significant factors contributing to our estimated future net losses. The size of future losses and achieving profitability depend on sustaining significant revenue growth and controlling expenses. We may not become profitable if revenue grows more slowly than we anticipate, or if operating expenses exceed our expectations. Even if we become profitable, we may not be able to sustain our profitability.

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

Our ability to pay our debt, to comply with financial covenants, and to fund working capital 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. Risk factors include:

	•		when and how much of our contract backlog our customers fund;
	•		how much time our customers take to pay us;
	•		when and whether we win new contracts and how we perform on our contracts;
	•		whether we can increase annual revenue and/or operating income;
	•		how much in payroll deferrals and rollovers our employees spend to purchase our common stock ;
	•		how much we have to spend to repurchase our stock from current and former employees;
	•		current economic conditions and conditions in the defense contracting industry;
	•		U.S. government spending levels, both generally and by our particular customers;
	•		failure by Congress to timely approve budgets for federal departments and agencies we support;
	•		operating difficulties, operating costs or pricing pressures;
	•		new legislation or regulatory developments that adversely affect us; and
	•		any delays in implementing strategic projects.

These factors will also affect our ability to meet future ESOP repurchase obligations. In August 2014, we must re-pay any outstanding revolving credit facility balance. We are required to pay all principal and accrued interest outstanding on our Senior Secured Notes on November 1, 2014. Three months later on February 1, 2015, we are required to pay all principal and accrued interest outstanding on our Senior Unsecured Notes.

We may not generate sufficient cash flow to comply with our financial covenants and 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 the funds we need for required debt payments, we may have to refinance our debt. We cannot be certain we could refinance our obligations on favorable terms, or at all. Absent refinancing, our lenders would be able to accelerate our debt’s maturity. As a result, we could default under our other senior debt, expose our assets to seizure, or declare bankruptcy.

We face intense competition from many companies that have greater resources than we do. This could cause price reductions, reduced profitability, and loss of market share.

We operate in highly competitive markets and often 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, Computer Sciences Corporation, CACI International Inc, Science Applications International Corporation, 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 vie 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 availability of key professional personnel. Our competitors have established relationships among themselves or with third parties, including through mergers and acquisitions, to increase their ability to address client needs. They may establish new relationships; new competitors or competitive alliances 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 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 most of our revenue. If we do not retain or replace these contracts our operations will suffer.

The following six federal government contracts accounted for half of our revenue both this year and last year.

	1.		Modeling and Simulation Information Analysis Center for the Defense Information Systems Agency (13.0%, 6.8%)
	2.		Seaport Multiple Award Contract for the Naval Sea Systems Command (NAVSEA) (12.7%, 14.3%)
	3.		Technical and Analytical Support for the U.S. Air Force (10.3%, 9.5%)
	4.		Seaport E Multiple Award Contract for NAVSEA (9.2%, 5.2%)
	5.		Weapons System Information Analysis Center for the Defense Information Systems Agency (6.0%, 5.5%)
	6.		Engineering, Financial and Program Management Support Services to the U.S. Navy Virtual SYSCOM (5.0%, 7.0%)

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, operating results or 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 ability to meet our financial obligations could be materially and adversely affected.

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, and will consider other acquisitions in the future. We may not be able to locate suitable acquisition candidates at prices we consider appropriate or to finance acquisitions on terms satisfactory to us. If we do identify an appropriate acquisition candidate, we may not be able to successfully negotiate acquisition terms or financing 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. Integration difficulties could be increased by the need to coordinate geographically dispersed organizations, integrate personnel with disparate business backgrounds and combine different corporate cultures. We also may not realize cost efficiencies or synergies that we anticipated when selecting our acquisition candidates. In addition, future impairments of intangible assets could reduce our future reported earnings. Acquisition candidates might have liabilities or adverse operating issues that we fail to discover through due diligence prior to acquisition, but which we have to assume in an acquisition. Such liabilities could have a material adverse effect on our business, financial condition, operating results and ability to meet our financial obligations.

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.

Availability of highly trained and skilled professional, administrative and technical personnel is critical to our future growth and profitability. Even in the current economic climate, competition in our industry 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 timely meet all our needs for these employees. We cannot be certain 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. Failure to recruit and retain a sufficient number of these employees could adversely affect our ability to maintain and grow our business. Some of our contracts require us to staff a program with personnel the customer considers key to successful performance. If we cannot provide these key personnel or acceptable substitutes, the customer may terminate the contract, and we may not be able to recover our costs.

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

Our success will depend on our ability to keep pace with changing technologies in our core business areas. These technologies can change rapidly. Even if we keep up with the latest developments and available technology, newer services or technologies could negatively affect our business. Integrating our research services’ diverse technologies involved 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 faster pace as our competitors, many of which have greater resources than we do.

A continued economic downturn could harm our business.

Our business, financial condition, operating results and ability to meet our financial obligations may be affected by various economic factors. Continued unfavorable economic conditions may make it more difficult for us to maintain or continue our revenue growth. In an economic recession, or under other adverse economic conditions which may arise from natural or man-made events, customers and vendors may be less likely to meet contractual terms and payment or delivery obligations. Continued weakness or further deterioration of economic conditions may have a material adverse effect on our business, financial condition, operating results and ability to meet our financial obligations.

Adverse changes in market conditions, the stock market or the merger and acquisition environment in our industry could adversely affect the value of our goodwill which could cause us to recognize an impairment charge.

If market conditions were to become more unfavorable, if merger and acquisition activity in our industry were to occur at significantly lower prices, or we are unable to grow our revenue and operating profit, we might have to recognize an impairment charge to the significant goodwill we have from our prior acquisitions. An impairment charge could have a material adverse effect on our operating results, our ability to meet our debt covenants and continuing access to our credit facility.

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

We are exposed to the risk of employee fraud or other misconduct. Employee misconduct could include intentional failures to comply with U.S. government procurement regulations, unauthorized activities, attempts to obtain reimbursement for improper expenses, or submission of falsified time records. Employee misconduct could also involve 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. It can control the election of a majority of our directors, the outcome of all matters submitted to a vote of stockholders, and can change our management. The interests of the ESOP Trust may not be fully aligned with the interests of the ESOP participants 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. We are also 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. We may incur substantial costs in the future because of: modifications to current laws and regulations; new laws and regulations; new guidance or new interpretation of existing laws or regulations; violations of environmental laws or required operating permits; or discovery of previously unknown contamination.

On March 22, 2010, our S corporation election automatically terminated and we became a C corporation for U.S. federal income tax purposes. As a C corporation we are subject to federal and state income tax at regular corporate rates. The increase in our effective tax rate could reduce cash available to pay our debt and other financial obligations and to invest in our operations.

At all times from Alion’s formation through March 22, 2010, we were treated as an S corporation for U.S. federal income tax purposes. As an S corporation, we were not subject to federal income taxes or most state income taxes. Our income, gains, losses, deductions and credits flowed to our sole shareholder, the ESOP Trust. On March 22, 2010, we became a C-corporation required to pay federal and state income taxes at regular corporate rates. Our change in tax status could reduce cash available to repay debt, invest in operations or fulfill our other financial obligations.

The Internal Revenue Service (IRS) could successfully challenge the validity of our S corporation election for tax periods prior to March 22, 2010, and we could possibly owe additional U.S. federal and state income tax.

At all times from Alion’s formation through March 22, 2010, we believe Alion was a valid S corporation under the provisions of the Internal Revenue Code and in those states that recognize S corporation status. We filed appropriate federal and state S corporation and state C corporation tax returns for all years through fiscal 2009. If the IRS or state tax agencies were to successfully challenge our S corporation status, we might owe additional federal and state income taxes. Additional tax obligations would reduce cash available to repay debt, reinvest in operations or fulfill our other financial obligations.

Risks Related to Our Industry

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

U.S. government agency contracts provided approximately 98%, 97%, and 94% of our revenue for the years ended September 30, 2010, 2009 and 2008. In fiscal years 2010, 2009 and 2008, DoD contracts accounted for approximately 93%, 92% and 89% of our total revenue. Contracts with other government agencies accounted for approximately 5% of our total revenue each year. We expect U.S. government contracts are likely to continue to account for a significant portion of our revenue in the future. Changes in U.S. government contracting policies could directly affect our financial performance. Factors that could materially adversely affect our U.S. government contracting business include:

•

budgetary constraints affecting U.S. government spending generally, or specific departments or agencies in particular;

•

changes in U.S. government fiscal policies or available funding;

•

changes in U.S. government programs or requirements;

•

U.S. government curtailment of its use of technology services firms;

•

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 industry; and

•

General economic conditions.

These or other factors could cause U.S. government departments or agencies to reduce their purchases under contracts, to exercise their right to terminate contracts or fail to exercise options to renew contracts, any of which could have a material adverse effect on our business, financial condition, operating results and 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. Our continuing performance under these contracts, or the possibility of new contracts from these agencies, could be materially adversely affected by agency spending reductions or budget cutbacks. Such reductions or cutbacks could materially adversely affect our business, financial condition, operating results and ability to meet our financial obligations.

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

Each year, Congress must approve budgets for each of the U.S. government departments and agencies we support. When Congress is unable to agree on budget priorities, and is unable to pass the annual budget on a timely basis, it typically enacts a continuing resolution. A continuing resolution allows U.S. government agencies to operate at spending levels equal to or less than levels approved in the prior budget cycle. This can delay funding we expect to receive from clients for work we are already performing. A continuing resolution can delay or even cancel new initiatives which could adversely affect our business, financial condition, operating results and ability to meet our financial obligations.

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

The maximum contract value identified in a U.S. government contract does not necessarily determine the revenue we will realize from that contract. Congress normally appropriates funds for a given program each fiscal year, even when actual contract performance may take many years. As a result, U.S. government contracts ordinarily are only partially funded at the time of award. Normally a procuring agency commits additional money to a contract only as Congress makes subsequent fiscal year appropriations. Estimates of future revenue attributed to backlog are not necessarily precise. 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 existing contract options. Many 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 adversely affect our business, financial condition, operating results and ability to meet our financial obligations.

Many of our U.S. government customers procure goods and services through ID/IQ, GWAC or GSA Schedule contracts under which we must 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 increase competition and pricing pressure requiring us to make sustained post-award efforts to obtain awards and realize revenue. 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, operating results and ability to meet our financial obligations.

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

U.S. government agencies can terminate contracts with suppliers at any time without cause. If a government agency terminates one of our contracts without cause, we are likely to be compensated for services we have provided or costs we incurred up to the termination date, and receive payment for termination-related costs and a negotiated contract fee. However, if the U.S. government terminates a contract because we defaulted under the terms of the contract, we may be liable for any extra costs the U.S. government incurs to procure undelivered services from another company. Termination of any of our large U.S. government contracts could negatively impact our revenue and adversely affect our business, financial condition, operating results and ability to meet our financial obligations.

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

The total price on a cost-reimbursement contract is primarily based on allowable costs incurred subject to a contract funding limit. U.S. government regulations require us to notify our customers of any cost overruns or underruns on a cost-reimbursement contract. We may not be able to recover cost overruns in excess of a contract’s funding limit and may not earn the profit we anticipated from the contract.

In a fixed-price contract, we estimate project costs and agree to perform services for a predetermined price regardless of our actual costs. We pay for any cost overruns. If we fail to anticipate technical problems, or accurately estimate or control costs, we may face a lower fixed-price contract profit margin or even a loss. Provisions in our financial statements for estimated contract losses may not be adequate to cover all our actual losses.

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

Based on profit as a percentage of estimated standard costs, cost-reimbursement contracts are our least profitable type of contract because government regulations limit cost-reimbursement contract fee levels. Our U.S. government customers typically choose the type of contract they issue. To the extent that in the future cost-reimbursement contracts increase as a percentage of our contract mix, operating margins and results may suffer.

If our fixed-price contract revenue declines in total or as a proportion of our total business, or if profit rates on these contracts deteriorate, our operating margins and operating results may suffer.

We have historically earned higher profit margins on fixed-price contracts. If fixed-price contract revenue decreases, or customers shift to other types of contracts, our operating margins and operating results may suffer. We cannot ensure we will be able to maintain our historic profitability levels on fixed-price contracts overall.

Our subcontractors’ failure to perform contractual obligations could damage our reputation as a prime contractor and 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 timely perform services satisfactorily could 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. Subcontractor performance deficiencies could result in a government customer terminating our contract for default. A default termination could make us liable for customer re-procurement costs, 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 lower than expected contract revenue.

U.S. government contract payments received that exceed allowable costs are subject to adjustment and repayment after the government audits our contract costs. All our federal government contract indirect costs have been audited and negotiated through fiscal year 2004. The government is auditing our claims for fiscal years 2005 and 2006. We timely submitted our incurred cost proposals for fiscal years 2007-2009 and expect to submit our current year proposal when due. If the estimated reserves in our financial statements for excess billings and contract losses are not adequate, future government contract revenue may be lower than expected.

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

We are at risk for any costs we incur before a contract is executed or renewed. A customer may choose not to pay us for these costs. At September 30, 2010 we had $25 million in at-risk costs. While such costs were associated with specific anticipated contracts and funding modifications, we cannot be certain that our customers will execute these contracts or contract renewals or that they we pay us for all our 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 design opportunity for the chance of performing the future contract. We have, on occasion, declined to bid on particular projects because of actual or perceived conflicts of interest. 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 contract termination, fines, forfeiture of fees, suspension of payment 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 competitive bidding which is an inherently unpredictable process.

We obtain most of our U.S. government contracts through competitive bidding. We face risks associated with:

•

the frequent need to bid on programs in advance of the completion of their design, which can 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 we may not win; and

•

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

Upon expiration, U.S. government contracts may be subject to a competitive re-bidding process. We may not succeed in winning new contract awards or renewals in the future. Our failure to renew or replace existing contracts when they expire or win new contracts, would negatively impact our business, financial condition, operating results and 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, 2010, we had approximately 174 DoD contracts that required us to maintain facility security clearances at our 27 sites, and approximately 2,715 of our employees held security clearances needed to perform these 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. Individual employees are selected to be cleared, based on specific classified contract task requirements and each employee’s technical, administrative or management expertise. Once an employee gets security clearance, he or she can have access to classified contract information, based on clearance level and “need to know.” Protecting classified information is paramount. Loss of a facility clearance, or an employee’s failure to obtain or maintain a security clearance, could result in a U.S. government customer terminating an existing contract or choosing not to renew a contract. If we cannot maintain or obtain the required security clearances for our facilities and our employees, or obtain these clearances in a timely manner, we may be unable to perform certain U.S. government contracts. Lack of required clearances could also impede our ability to bid on or win new government contracts, which might result in terminating current research activities. This could damage our reputation and our revenue would likely decline, which would adversely affect our business, financial condition, operating results and ability to meet our financial obligations.

Item 1B.		Unresolved Staff Comments

None.

Item 2.		Properties

Our principal operating facility is in McLean, Virginia and consists of 23,823 square feet of leased office space. We also lease approximately 74 additional office facilities totaling 997,664 square feet. Of these, our largest offices are located in Washington, DC; Fairfax, Alexandria, Vienna, Arlington, Norfolk, Suffolk, and Newport News, Virginia; Pittsburgh and West Conshohocken, Pennsylvania; Huntsville, Alabama; Mystic, Connecticut; Annapolis Junction 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 18 laboratory facilities totaling 103,008 square feet, for contract-related research. Our largest laboratories are located in Durham, North Carolina; Chicago and Geneva, Illinois; Annapolis Junction and Lanham, Maryland; West Conshohocken, Pennsylvania; and Louisville, Colorado. Lease terms vary in length from one to ten years, and are generally at market rates.

Aggregate average monthly base rental expense for fiscal years 2010 and 2009 was $2,647,976 and $2,005,800. 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. We consider our leased space to be adequate for our current operations, and foresee no difficulties in meeting any future space requirements.

Item 3.		Legal Proceedings

As previously reported, the Company is involved in a lawsuit related to a steam pipe explosion that occurred on or about April 23, 2004 on a construction site at 17th Street, NW in Washington, D.C. The Company no longer believes this legal proceeding to be material. We are not involved in any other legal proceeding other than routine legal proceedings occurring in the ordinary course of business. We believe that these routine legal proceedings, including the steam pipe lawsuit, are not material to our financial condition, operating results, or cash flows.

As a government contractor, from time to time we may be subject to DCAA audits and federal government inquiries. The federal government may suspend or debar for a period of time a federal contractor found to have violated the False Claims Act, or who has been indicted or convicted of violations of other federal laws. This could also result in fines or penalties. Given Alion’s dependence on federal government contracts, suspension or debarment could have a material adverse effect on our business, financial condition, operating results, and ability to meet our financial obligations. We are not aware of any such pending federal government claims or investigations.

Item 4.		[Removed and Reserved]

PART II

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

There is no established public trading market for Alion’s common stock. As of September 30, 2010, the ESOP Trust was the only holder of our common stock. The ESOP Trustee is independent of the Company and its management. Consistent with its fiduciary responsibilities, the ESOP Trustee retains an independent third party valuation firm to assist it in determining the fair market value (share price) at which the Trustee may acquire or dispose of investments in Alion common stock. Alion’s transactions with the Trust during the past two years were based on the fair market value share prices and dates set out below.

		Share
Valuation Date		Price
September 30, 2010		$	26.65
March 31, 2010		$	28.00
September 30, 2009		$	34.50
March 31, 2009		$	34.30

In fiscal year 2010, Alion employees directed approximately $4.0 million in pre-tax salary deferrals and rollovers to the ESOP Trust to purchase beneficial interests in Alion common stock, approximately $2.1 million at $28.00 per share and approximately $1.9 million at $26.65 per share. The Company did not use an underwriter and did not pay underwriter discounts or commissions. Alion offered and sold beneficial interests in the KSOP to eligible employees under a registration statement filed on Form S-8. There were no other sales of unregistered securities other than sales of unregistered securities already reported by the Company in current reports on Form 8-K.

Dividend Policy

We are required to make “distributions” to purchase common stock from the ESOP to meet our repurchase obligations. We do not expect to pay any dividends and the terms of our credit agreements limit our ability to do so. We currently intend to retain future earnings, if any, to use in operating our business. Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will depend on our operating results, our financial condition, contractual restrictions, applicable law and other factors our Board of Directors determines to be relevant. The Senior Secured Notes, the Senior Unsecured Notes and our revolving credit facility prohibit us from paying dividends without consent from the respective lenders.

Item 6.		Selected Financial Data

The following table presents selected historical consolidated financial data for Alion for each of the last five fiscal years through September 30, 2010. Read this information along with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes in this annual report. We derived our consolidated operating data for the years ended September 30, 2010, 2009 and 2008 and our September 2010 and 2009 consolidated balance sheet data from our audited consolidated financial statements included in this annual report. We derived our consolidated operating data for the years ended September 30, 2007 and 2006 and our September 2008, 2007 and 2006 consolidated balance sheet data from our consolidated financial statements not included in this annual report. Our historical consolidated financial information may not be indicative of our future performance.

		Selected Financial Data of Alion Science and Technology Corporation
		For Years Ended September 30,
		2010				2009				2008				2007				2006
		(In thousands, except share and per share data)
Consolidated Operating Data:
Contract revenue		$	833,988			$	802,225			$	739,482			$	737,587			$	508,628
Direct contract expenses			638,000				615,700				566,408				562,139				381,467
Operating expenses			157,068				148,960				152,117				161,283				129,466
Operating income (loss)			38,920				37,565				20,957				14,165				(2,305	)
Interest expense (a)			(67,613	)			(55,154	)			(47,382	)			(51,226	)			(29,691	)
Net loss		$	(15,232	)		$	(17,041	)		$	(25,334	)		$	(42,770	)		$	(31,115	)
Basic and diluted loss per share		$	(2.81	)		$	(3.25	)		$	(5.01	)		$	(8.35	)		$	(6.19	)
Basic and diluted weighted-average common shares outstanding			5,427,979				5,246,227				5,057,337				5,121,033				5,029,670
Consolidated Balance Sheet
Data at End of Period:
Net accounts receivable		$	174,032			$	180,157			$	168,451			$	186,660			$	150,412
Total assets			646,302				647,498				655,946				683,970				650,969
Working capital			59,796				27,833				33,275				60,880				52,284
Current portion of long-term debt and interest(b)			17,217				14,428				11,932				14,541				2,816
Long-term debt, excluding current portion(b)			521,957				535,822				528,774				556,943				478,859
Common stock warrants			20,785				—				—				—				—
Redeemable common stock warrants			—				32,717				39,996				33,610				35,234
Redeemable common stock			150,792				187,137				200,561				200,768				213,719
Accumulated deficit			(246,270	)			(274,559	)			(276,876	)			(260,147	)			(221,009	)
Other Data:
Depreciation and amortization		$	16,732			$	18,959			$	20,715			$	21,824			$	16,566
Cash flows provided by (used in):
Operating activities		$	2,396			$	8,995			$	29,320			$	(5,008	)		$	(15,678	)
Investing activities			(2,147	)			(2,347	)			(12,152	)			(25,438	)			(284,423	)

There were no acquisitions or material dispositions in 2010, 2009 or 2008. Operating results for all acquisitions are included in Alion’s results from their dates of acquisition. In July 2007, we bought substantially all the assets of LogConGroup, Inc. for $1.7 million plus up to $0.5 million in contingent consideration through 2011. In June 2006, Alion paid Anteon Corporation approximately $221.7 million for a group of customer contracts and related workforce. In May 2006, we acquired Micro Analysis and Design, Inc. for approximately $18.0 million. In February 2006, we purchased BMH Associates, Inc. for approximately $26.5 million and Washington Consulting, Inc. for $20.3 million.

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

The following discussion of Alion’s financial condition and results of operations should be read together with the consolidated financial statements and related notes included in this annual report. This discussion contains forward-looking statements about our business and operations that involve risks and uncertainties. Future results may differ materially from those we currently anticipate as a result of the “Risk Factors” described beginning on page 14 and elsewhere in this annual report.

About This Management’s Discussion and Analysis

Our discussion provides an overview of our business and critical accounting policies; explains year-over-year changes in operating results; describes our liquidity, capital resources and certain other obligations; and discloses market and other risks that could affect us.

Overview

Alion provides scientific, engineering and information technology solutions and expertise to research and develop technological solutions for problems relating to national defense, homeland security, and energy and the environment. Our principal customers are federal government departments and agencies and, to a lesser extent, commercial and international entities. Our revenue increased 4.0%, 8.5%, and 0.3% for the years ended September 30, 2010, 2009 and 2008. The following table presents summary operating results and contract backlog data for the past three fiscal years.

		For the Years Ended September 30,
		2010				2009				2008
		(In thousands)
Revenue		$	833,988			$	802,225			$	739,482
Net loss		$	(15,232	)		$	(17,041	)		$	(25,334	)

		September 30,
		2010				2009				2008
		(In millions)
Backlog:
Funded		$	407.8			$	376.5			$	340.5
Unfunded			6,205.9				6,008.4				4,475.8
Total		$	6,613.7			$	6,384.9			$	4,816.3

Alion contracts primarily with the federal government. We expect most of our revenue will continue to come from U.S. Department of Defense contracts. The rest of our revenue comes from a variety of commercial entities, and state, local and foreign government customers. The table below shows the percentage of revenue we derived from each major customer type for each of the past three fiscal years.

		September 30,
		2010								2009								2008
		(In thousands)
U.S. Department of Defense		$	771,835				92.5	%		$	735,304				91.7	%		$	660,969				89.4	%
Other Federal Civilian Agencies			41,413				5.0	%			38,474				4.8	%			33,168				4.5	%
Commercial and International			20,740				2.5	%			28,447				3.5	%			45,345				6.1	%
Total		$	833,988				100.0	%		$	802,225				100.0	%		$	739,482				100.0	%

We intend to expand our research offerings in commercial and international markets; however, any expansion will be incremental. Commercial and international revenue amounted to approximately 2.5%, 3.5%, and 6.1% of total revenue in fiscal 2010, 2009 and 2008. Our international revenue primarily comes from naval architecture and marine engineering services and telecommunications research and software.

We earn our revenue by providing employee and subcontractor services. The key to generating revenue is hiring new employees to meet customer requirements; retaining existing employees; and deploying our staff on revenue-generating contracts. We closely monitor hiring success, attrition trends, and direct labor utilization. Hiring enough employees with appropriate security clearances is a key challenge in maintaining and growing our business. We try to optimize employee labor content on our contracts because we can earn higher profits from employee services than from subcontractor services or from other contract costs like hardware or software we re-sell to customers. We plan to continue to grow revenue organically by capitalizing on our skilled work force and our sophisticated solutions competencies. If we identify opportunities and we have sufficient financial resources available, we intend to pursue strategic acquisitions.

Our mix of contract types (i.e., cost-reimbursement, fixed-price, and time-and-material) affects our revenue and operating margins. A significant portion of our revenue comes from services performed on cost-reimbursement contracts under which customers pay us for approved costs, plus a fee (profit) on the work we perform. We recognize revenue on cost-reimbursement contracts based on our actual costs plus a pro-rata share of fees earned. We also have a number of fixed-price government and commercial contracts for which we use the percentage-of-completion method to recognize revenue. Fixed price contracts involve higher financial risks, and in some cases higher margins, because we must deliver specified services at a predetermined price regardless of our actual costs. Failure to anticipate technical problems, estimate costs accurately or control performance costs on a fixed-price contract may reduce the contract’s overall profit or cause a loss. On time-and-material contracts, customers pay us for labor and related costs at negotiated, fixed hourly rates. We recognize time-and-material contract revenue at contractually billable rates as we deliver labor hours and incur direct expenses.

Despite the President’s stated goal of reducing government’s use of cost-reimbursable contracts, Alion’s cost-reimbursable revenue increased this year as it has for the past several years. Because the scientific and engineering services we deliver are not by nature inherently governmental functions, Management believes any changes aimed at reducing overall reliance on government contractors will not materially adversely affect operations. If the government ultimately shifts contracting activity away from the cost-reimbursement arena to fixed-price contracting, Management believes Alion would likely benefit. All other factors being equal, the Company’s fixed price type contracts traditionally generate higher profit margins than cost-reimbursable contracts.

The table below summarizes revenue by contract type for each of the past three fiscal years.

		For the Years Ended September 30,
Contract Type		2010								2009								2008
		(In thousands)
Cost-reimbursement		$	636,232				76.3	%		$	567,284				70.8	%		$	517,760				70.0	%
Fixed-price			87,610				10.5	%			91,797				11.4	%			70,078				9.5	%
Time-and-material			110,146				13.2	%			143,144				17.8	%			151,644				20.5	%
Total		$	833,988				100.0	%		$	802,225				100.0	%		$	739,482				100.0	%

Results of Operations

There were no significant acquisitions affecting reported results for each of the past three fiscal years, except for this year’s sale of Human Factors Applications Inc. (HFA) and several Office of Naval Research (ONR) contracts. The Company sold several ONR contracts on July 9, 2010. Consolidated results include the ONR contracts for all periods presented through the date of sale. The Company sold its HFA subsidiary on September 30, 2010. Consolidated results include HFA for all periods presented.

Year ended September 30, 2010 Compared to Year ended September 30, 2009

The table below presents selected comparative financial information for fiscal years ended September 30, 2010 and 2009. Our discussion and analysis refers to financial information in this table and to Alion’s consolidated financial statements in this annual report on Form 10-K.

		Year Ended September 30,
		2010								2009
						%								%
Selected Financial Information						Revenue								Revenue
		(In thousands)
Total revenue		$	833,988							$	802,225
Total direct contract costs			638,000				76.5	%			615,700				76.7	%
Direct labor costs			272,015				32.6	%			272,148				33.9	%
Material and subcontract costs			348,437				41.8	%			316,957				39.5	%
Other direct costs			17,548				2.1	%			26,595				3.3	%
Gross profit			195,988				23.5	%			186,525				23.3	%
Total operating expense			157,068				18.8	%			148,960				18.6	%
Major components of operating expense:
Indirect expenses including facilities costs			71,238				8.5	%			68,457				8.5	%
General and administrative			70,976				8.5	%			60,867				7.6	%
Depreciation and amortization			16,732				2.0	%			18,959				2.4	%
Income from operations		$	38,920				4.7	%		$	37,565				4.7	%

Contract Revenue. Fiscal 2010 revenue increased $31.8 million (4.0%) over fiscal 2009. This was driven by a $68.9 million (12.2%) increase in cost-reimbursable contract revenue which was offset by a $33.0 million (23.1%) decline in time and material contract revenue and a $4.2 million (4.6%) drop in fixed price contract revenue. Modeling and Simulation revenue increased $53.0 million (53.3%) and was more than 167% of total increased sales as government customers extended periods of performance and directed work to Alion’s Information Analysis Center contracts. This change coincided with a related increase in cost-plus contract work and a decline in time-and-material tasking, a continuation of recent trends in our contract mix. Revenue from all other core business areas declined. Defense Operations sales were down $8.9 million (4.4%) and Naval Architecture and Marine Engineering revenue was essentially flat (down $2.7 million, less than one percent). Other areas declined $9.6 million in the aggregate (7.2%). Federal government contract revenue increased $39.5 million (5.1%) this year. Department of Defense contracts accounted for $36.5 million of that increase. Revenue from state and local government contracts and commercial and international customers continued to decline (down $7.7 million, more than 27%). Alion continues to experience weak customer demand as lower state revenues and the slow pace of economic expansion continue to limit these markets.

Direct Contract Expenses and Gross Profit. Fiscal 2010 direct contract costs increased $22.3 million (3.6%) over fiscal 2009. Direct labor costs did not change materially but declined as a percentage of revenue. Other direct costs declined by $9.0 million while subcontractor and material costs increased $31.5 million (up 9.9%). Increased subcontractor costs are the result of continued reliance on Alion as a prime contractor rather overseeing the work of other contractors. Gross profit in fiscal 2010 grew by $9.5 million (5.1%) partly as a result of recognizing additional cost-plus revenue related to prior years’ indirect rate variances. Contract fee rates were slightly lower (7.1%) this year compared to 2009 where rates reached an historical level of 7.3% overall.

Operating Expenses. Fiscal 2010 operating expenses were up $8.1 million (5.4% overall) compared to fiscal 2009 and increased to 18.8% of current year sales. Indirect contract expenses were up $4.6 million (12.9%) reflecting lower overall labor productivity. Rent and related costs declined $1.8 million as the Company shed some excess space. Depreciation and amortization expense declined by $2.2 million as charges for prior years’ acquired contracts began to tail off. Fiscal 2009 general and administrative expenses included $5.2 million in credits to stock-based compensation from changes in Alion’s share price and employee forfeitures of prior years’ phantom stock grants. This year, Alion recognized $1.2 million in stock-based compensation credits for changes in Alion’s share price. Excluding executive compensation expense (stock-based compensation, bonuses, severance and incentive compensation), fiscal 2010 general and administrative expenses increased $5.8 million (9.6%) over prior year expenses. The Company spent $2.1 million in increased legal costs including contract protests and financing related activities and $2.7 million for information technology and management reporting improvements. Other general and administrative expense fluctuations were immaterial.

In July 2010, Alion subsidiary WCGS sold several contracts with the Office of Naval Research for $5.0 million and recognized a gain on the transaction. In September 2010, Alion sold its HFA subsidiary for $275 thousand and recognized a $2.4 million loss. There were no comparable transactions in 2009. The Company classified these transactions as operating expenses (credits) as the underlying activities of HFA and the ONR contracts were and remain part of Alion’s ongoing business operations. Alion continues to perform work for the U.S. Navy and is still engaged in providing environmental services.

Operating Income. The $2.6 million gain from the ONR and HFA sales partially offset significantly higher operating expenses this year. Revenue from prior years’ indirect rate variances improved operating margins by $3.2 million. As a result, this year’s $38.9 million in operating income was only $1.4 million less than last year’s $37.6 million and operating income for both years was 4.7% of revenue.

Other Expense. Interest income, interest expense and other aggregate non-operating expenses for 2010 increased $12.3 million compared to 2009. Higher average investment balances, $24 million in excess cash from the March 2010 re-financing, and a reduced demand on the revolver led to lower interest expense on our revolver ($0.7 million decrease) and modestly higher interest income ($28 thousand increase). Despite lower outstanding principal on the Senior Term Loan this year, cash pay interest expense was adversely affected by a 100 basis point interest rate increase for February and March. Fees and penalties associated with the September and December 2009 covenant waivers ultimately cost Alion more than $3.9 million. Management had expected to close a re-financing transaction prior to March 1, 2010. The new Secured Notes were not issued until March 22, 2010. As a result, we had to pay a $2.6 million fee (100 basis points) to the Term B Lenders on March 1, 2010.

This year Alion had $16.3 million in Senior Secured Note cash pay interest expense. This was partially offset by not having to pay interest for more than six months for the extinguished Term B and Subordinated Notes (savings of $11.9 million and $2.4 million respectively). In fiscal 2010, non-cash interest expense was $7.5 million higher than it was in 2009. We faced increased charges for PIK interest on the Senior Secured Notes ($3.3 million). Our debt issue cost amortization charges increased $2.1 million to $7.2 million for the current year as a result of issuing our Senior Secured Notes in March. Last year, Alion had a $7.3 million benefit from the Subordinated Note Warrants’ decline in value; this year, we only had a $160 thousand credit to expense. In fiscal 2009 we had $4.9 million in deferred non-cash Subordinated Note interest charges; we had no comparable expense this year.

		Year Ended September 30,
		2010				2009
		(In millions)
Cash Pay Interest
Revolver		$	320			$	1,005
Senior Term Loan			11,047				22,925
Senior Secured Notes			16,303				—
Senior Unsecured Notes			25,625				25,625
Subordinated Note			—				2,447
Other cash pay interest and fees			4,023				447
Sub-total cash pay interest			57,318				52,449
Deferred and Non- cash Interest
Debt issue costs and other non-cash items			7,192				5,067
Senior Secured Notes PIK Interest			3,263				—
Subordinated Note interest			—				4,917
Redeemable warrants			(160	)			(7,279	)
Sub-total non-cash interest			10,295				2,705
Total interest expense		$	67,613			$	55,154

Debt Extinguishment. On March 22, 2010, Alion used proceeds from issuing $310 million of Secured Note Units to retire the then-outstanding Term B Credit Facility loans, the Subordinated Note and related warrants, and to pay debt issue costs. We paid approximately $240 million to retire Term B debt at par plus accrued interest. We recognized a $6.7 million loss on extinguishing this debt by writing off the balance of unamortized Term B-related debt issue costs.

Alion paid $25 million to retire the Subordinated Note and related warrants at a steep discount to both carrying and estimated fair values. We recognized a $67.7 million gain on extinguishing these liabilities offset in part by writing off $10.3 million in unamortized debt issue and debt modification costs. Alion recognized a one-time $50.7 million net benefit from re-financing and debt extinguishment transactions.

Income Tax Expense. Until March 22, 2010, Alion had no material income tax expense as the Company and its subsidiaries were a consolidated pass-through entity whose income was attributable to our sole shareholder, the tax-exempt ESOP Trust. Some states did not recognize Alion’s S corporation status and required the Company and its subsidiaries to file separate state tax returns. Alion’s Canadian subsidiary has always been a taxable entity required to accrue a Canadian tax liability as necessary.

On March 22, 2010, Alion issued 310,000 Units each of which consists of $1,000 in Secured Note face value and a warrant to purchase 1.9439 shares of Alion common stock. The warrants entitle the holders to purchase a total of 602,614 shares of common stock at a penny per share. The fair value of each warrant on the date of issue was approximately $67.05. The warrants are considered to constitute a second class of stock under the IRC. S-corporations are only permitted to have a single class of stock. By issuing the Secured Note warrants, Alion’s S-corporation status automatically terminated and the Company ceased to be a pass-through entity exempt from income taxes. We were required to recognize current income tax expense for the effect of our change in reporting status.

Alion initially recognized approximately $35.4 million of deferred tax assets related to timing differences for expenses previously recorded that are estimated to generate deductions on future income tax returns. We also recognized a $33.8 million deferred tax liability related to tax-deductible goodwill arising from prior year acquisitions. Prior to establishing a valuation allowance, Alion had a $1.6 million net deferred tax asset arising from conversion to a C-corporation. However, our history of losses makes it unlikely that we will be able to realize the full benefit of our deferred tax assets. We were required to establish a full valuation allowance for deferred tax assets and recognize $33.8 million in deferred tax expense on conversion to C corporation status.

In the second half of this year, we recognized additional deferred tax assets and a related valuation allowance of approximately $1.5 million; we recorded $3.4 million in deferred tax liabilities related to goodwill amortization. This year, we recognized $37.2 million in total current tax expense for deferred tax liabilities and $36.9 million for deferred tax assets and valuation allowances. In 2010 our Canadian subsidiary recognized a $40 thousand tax benefit for Canadian research and development tax credits received compared to $152 thousand in similar credits received in 2009.

Net Loss. This year’s $15.2 million net loss was $1.8 million (10.6%) less than last year’s because of our operating results, our significant interest expense, our $50.7 million gain on debt extinguishment and our $37.2 million in income tax expense.

Year ended September 30, 2009 Compared to Year ended September 30, 2008

The table below presents selected comparative financial information for fiscal years ended September 30, 2009 and 2008. Our discussion and analysis refers to financial information in this table and to Alion’s consolidated financial statements in this annual report on Form 10-K.

		Year Ended September 30,
		2009								2008
						%								%
Selected Financial Information						Revenue								Revenue
		(In thousands)
Total revenue		$	802,225							$	739,482
Total direct contract costs			615,700				76.7	%			566,408				76.6	%
Direct labor costs			272,148				33.9	%			248,409				33.6	%
Material and subcontract costs			316,957				39.5	%			295,122				39.9	%
Other direct costs			26,595				3.3	%			22,877				3.1	%
Gross profit			186,525				23.3	%			173,074				23.4	%
Total operating expense			148,960				18.6	%			152,117				20.6	%
Indirect personnel and facilities			68,457				8.5	%			70,930				9.6	%
General and administrative expense			60,867				7.6	%			59,484				8.0	%
Depreciation and amortization			18,959				2.4	%			20,715				2.8	%
Income from operations		$	37,565				4.7	%		$	20,957				2.8	%

Contract Revenue. Fiscal year 2009 revenue increased $62.7 million (8.5%) over prior year revenue. This was driven by a $49.5 million (9.6%) increase in cost-reimbursable contract revenue; a $21.7 million (31.0%) increase in fixed price contract revenue; and an $8.5 million (5.6%) decline in time and material contract revenue. Naval Architecture and Marine Engineering revenue increased $40.3 million (12.4%) and was more than 64% of total increased sales. Modeling and Simulation revenue increased $32.3 million (48.1%) which was more than 51% of the total sales increase. Information Technology sales grew by $4.6 million (12.1%), about 7% of overall increased sales. Growth in these areas in 2009 was offset by a $16.7 million decline in Defense Operations revenue (7.6%), which was more than one-quarter of Alion’s year over year change in revenue. Federal government contract revenue increased $79.6 million (11.5%) this year. Department of Defense contracts accounted for $74.3 million of that increase. Revenue from state and local government contracts and commercial and international customers continued to decline as customers in these areas reduced expenses in response to lower tax revenues and weakened customer demand. Alion’s increased fixed price revenue is partly due to its decision to offer its commercial business capabilities to government customers.

Direct Contract Expenses and Gross Profit. Fiscal year 2009 direct contract costs increased $49.3 million (8.7%) over the prior year. Direct costs as a percentage of revenue did not materially change. Direct labor and other costs grew by nearly 10% while subcontract and material costs only increased by 7.4% reflecting increased work as a prime contractor rather than as a subcontractor. Gross profit in 2009 grew at a slightly lower rate (7.8%) than revenue did while contract fee rates increased to historical levels (7.3% overall) compared to the lower levels seen the prior year (5.6%).

Operating Expenses. Fiscal year 2009 operating expenses were down $3.1 million (2.1% overall) compared to the prior year and declined to 18.6% of current year sales. Indirect contract expenses were down 11.4%, almost $4.6 million, as a result of higher labor productivity and reduced information technology expenses. Higher rent and related costs ($2.1 million increase) were driven by expanded use of existing space, declining sublease income and modest escalations in lease costs. Amortization expense declined by almost $2.0 million as charges for prior years’ acquired contracts began to tail off. Credits to stock-based compensation expense in fiscal 2009 were the result of forfeitures of prior years’ phantom stock grants. Excluding stock-based compensation adjustments, fiscal 2009 general and administrative expenses increased $7.1 million (12.1%). Aggregate executive compensation expenses increased approximately $2.8 million: $5.5 million for bonuses and long-term incentive programs was offset by $2.7 million in reduced executive severance costs. The Company expanded its business development and IDIQ contract vehicle program management office increasing current year costs by $2.4 million. The Company invested an additional $1.9 million in 2009 to expand and improve its information technology and management systems. Reduced litigation expenses ($1.2 million) offset fiscal 2009 costs to upgrade corporate finance and accounting functions and consolidate offices in Virginia.

Operating Income. Fiscal year 2009 operating income of $37.6 million was $16.6 million (79.2%) greater than prior year operating income due to higher contract fee margins and reduced operating expenses. Operating income was 4.7% of revenue, compared to 2.8% of revenue the prior year.

Other Expense. Other expense for fiscal year 2009 increased $8.5 million (18.3%) over last year almost solely due to increases in cash interest expense. Amendments to the Subordinated Note in 2008 increased total interest expense and interest payable in cash ($2.4 million). The higher interest rate on the Term B Senior Credit Agreement cost the Company $6.5 million more in interest in 2009 (39.3% increase) despite slightly lower interest expense for the revolving credit facility due to lower average balances. Reduced non-cash interest expense from the decline in the value of outstanding warrants was offset by increased expenses for amortizing prior year debt issue costs and loan amendment fees. In fiscal 2008, Alion recognized a $750 thousand gain on the sale of non-operating assets compared to a $19 thousand loss in 2009. In 2009, the Company recognized $402 thousand in other income for de-recognition of acquisition-related liabilities.

		Year Ended
		September 30,
		2009				2008
		(In millions)
Cash Pay Interest
Revolver		$	1,005			$	1,884
Senior Term Loan			22,925				16,453
Senior Unsecured Notes			25,625				25,625
Subordinated Note			2,447				—
Other cash pay interest and fees			447				426
Sub-total cash pay interest			52,449				44,388
Deferred and Non-cash Interest
Debt issue costs and other non-cash items			5,067				1,766
Subordinated Note interest			4,917				3,978
Redeemable warrants			(7,279	)			(2,750	)
Sub-total non-cash interest			2,705				2,994
Total interest expense		$	55,154			$	47,382

Income Tax Expense. Throughout 2009 and 2008 Alion was a qualified subchapter S corporation and all its wholly-owned domestic subsidiaries were qualified subchapter S subsidiaries disregarded 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, accrued a tax liability, as required. In fiscal year 2009, Alion recognized a $152 thousand tax benefit for Canadian research and development tax credits received compared to $7 thousand in state income tax expense in 2008.

Net Loss. The 2009 $17.0 million net loss was $8.3 million (32.7%) less than the prior year’s loss due to increased sales, improved contract margins and lower operating expenses which offset higher borrowing costs.

Liquidity and Capital Resources

The Company requires liquidity to service its debt, invest in capital assets, and fund working capital and acquisitions. Our principal working capital need is funding accounts receivable, which increase as our business grows. We are funding our current business with cash from operating activities and access to our revolving credit facility. We intend to fund future operations in a similar fashion.

Cash Flows.

Alion continued to sustain losses; $15.2 million after taxes in fiscal 2010 versus $17.0 million in 2009. This year we generated approximately $2.4 million from operations including $4.7 million from selling some contracts and our HFA subsidiary. We received $4.5 million in cash from the sale of certain contracts we had with the Office of Naval Research and an additional $200 thousand from our HFA sale. This year, we experienced significant fluctuations in both cash activities and non-cash charges. Although debt extinguishment contributed $50.7 million to our bottom line and offset the $37.2 million we recognized for income taxes, these were non-cash transactions. The cash flow effects of issuing new debt and extinguishing our former debt are reported in our financing activities. Current year non-cash charges for depreciation ($16.8 million) declined $2.3 million from last year. Non-cash charges for compensation increased $4.8 million ($3.3 million in current year expense versus a $1.5 million prior year credit). Non-cash debt-related expenses including interest accruals climbed to $18.5 million in 2010. Last year our redeemable common stock warrants declined by $7.3 million which reduced non-cash debt-related expenses for 2009 to less than $300 thousand. This year we had higher non-cash debt-related expenses due to higher charges for amortizing the cost of our newly-issued Senior Secured Notes and increased interest expense overall.

Last year subcontractor and other expense accruals for which Alion had yet to receive invoices generated $12.7 million more in cash than the $1.6 million provided this year. We used approximately $16.1 million to pay invoices which we funded in part from increased collection of receivables. Last year we funded $12.7 million of billed and unbilled receivables and $4.3 million in other assets. This year operating cash flow declined by $6.6 million compared to last year because of increased vendor payments. Alion’s re-financing transactions materially affected operating cash flow as the Company paid off a $3.9 million Term B interest obligation and $3.9 million in covenant waiver-related fees included in cash paid for interest. Last year interest accruals provided $2.5 million in cash; this year that increased $5.7 million to $8.2 million.

Alion collected $849.8 million in receivables in fiscal 2010, $15.3 million more than the $834.0 million in revenue recognized. Prior year collections were $801.2 million. This is the second year in a row that our improved collections led days’ sales outstanding (DSO) to decline. At September 30, 2010 DSO had dropped to 76.2 days, a slight increase over our third quarter performance and 5.8 days better than last year’s 82.0 days outstanding. (We determine DSO based on trailing twelve month revenue and net receivables.)

Our collections efforts led billed receivables to decline by $13.9 million year over year. Our unbilled receivables increased by $7.2 million over last year largely attributable to variance revenue recognized late in the fourth quarter that the Company expects to bill and collect in the first quarter of fiscal 2011. Unbilled accounts receivable continue at significant levels and are 47% of total accounts receivable. Currently billable amounts increased by $12.9 million. At risk receivables declined by $11.4 million as we achieved progress in obtaining previously delayed contract funding. Contract retainages and rate variances increased by $6.3 million consistent with fourth quarter variance revenue recognized. Increased unbilled balances from obtaining contract funding represent currently billable amounts for which we intend to issue invoices next quarter and collect payment within typical time frames. Management expects DSO to track at current levels.

Capital expenditure levels this year were unchanged from last year. There were no significant earn outs or asset sales. Cash management efforts continued to hold total year-to-date revolver borrowing activity to $84.2 million. Our revolver borrowing this year is down $420.7 million from $504.9 million in 2009 activity. From October 2009 through March 2010 our highest revolver balance was $12.4 million and our weighted average utilized balance was less than $1.1 million. We did not use our revolver at all from April through September 2010 which caused our average utilized revolver balance to decrease to $509 thousand for the full year.

Alion’s re-financing transactions were our most significant non-operating activities this year. On March 22, 2010, Alion issued 310,000 Units for gross proceeds of $302.3 million. We allocated $20.8 million in proceeds to the warrants issued along with the Secured Notes and paid $13.5 million in third-party debt issue costs and $1.3 million in debt issue costs for our current revolving credit agreement. Earlier this year we paid $825 thousand to renew our former revolving credit facility and $2.6 million in Term B Loan fees that we charged directly to interest expense.

We used $240 million from selling the 310,000 Units to retire the Term B Loan and pay off accrued interest. Last year we paid $3.0 million in Subordinated Note principal. This year, pursuant to our December 2009 agreement with IIT, we paid $25 million to re-purchase the entire Subordinated Note and related warrants at a significant discount to carrying value. We had approximately $24 million of additional cash on hand after issuing the Secured Notes and retiring the Term B Loan, the Subordinated Note and the related warrants. At year end, we had $26.6 million in available cash and access to our $25 million revolving credit facility which had no outstanding balance.

Share redemptions from the ESOP Trust and loans to the ESOP Trust were not materially different year over year. However, employee investments in Alion common stock continued to decline by almost $900 thousand this year. Last year, we received all employee deferrals within the fiscal year and $2.8 million in prior year deferrals. This year, we only received the mid-year employee salary deferrals invested in Alion common stock. We received the September salary deferrals at the beginning of fiscal 2011.

The Company cannot predict with any degree of accuracy the extent to which share re-purchases for distribution and diversification demands will increase in future years. However, as more employees meet statutory and Plan-specific age and length of service requirements, potential distribution and diversification demands are likely to increase. These demands can increase further with any increase in the price of a share of Alion common stock. While a decline in the price of a share of Alion common stock could reduce the value of each individual Plan participant’s beneficial interest, such a potential price decline could be offset by increased distribution and diversification requests and thus might not reduce the aggregate value of future demands on the Company’s cash. The Company attempts to monitor future potential impacts through reliance in part on internal and external financial models that incorporate Plan census data along with financial inputs intended to simulate changes in Alion’s share price.

Based on our existing long-term financing, our cash on hand, and our continuing cash management efforts we believe we will have sufficient cash from operations and the revolver to meet obligations over the next twenty four months. Alion retains the ability to restrict or defer certain types of cash payments that in the past caused the Company to fail to comply with certain prior debt covenants.

Cash flow effects and risks associated with equity-related obligations

Changes in the price of a share of Alion common stock affect cash outflows for ESOP share redemptions. Management is unable to forecast the share price the ESOP Trustee will determine in future valuations. Because future share prices may differ from the current share price, the Company is unable to forecast share redemption outflows. Current financial information includes the effects of the most recent ESOP Trust transactions. The next regularly scheduled valuation period ends March 2011. Interest rates, market-based factors and volatility, as well as the Company’s financial results will affect the future value of a share of Alion common stock.

After each semi-annual valuation period, the ESOP Plan permits former employees and beneficiaries to request distribution of their vested ESOP account balances. Consistent with the terms of the Plan, the Company intends to pay distribution requests in five annual installments and to defer initial payments as permitted. The Plan allows the Company to defer initial installment payments for five years for former employees who are not disabled, deceased or retired.

Discussion of Debt Structure

Alion’s current debt structure includes a $25 million revolving credit facility, the Secured Notes and the Unsecured Notes. On March 22, 2010, the Company retired its Term B Senior Credit Agreement, its Subordinated Note and Subordinated Note Warrants. The Company is in compliance with each of the affirmative and negative financial and non-financial covenants in its existing debt agreements.

Credit Agreement

On March 22, 2010, the Company entered into a new credit agreement (Credit Agreement), which consists of a $25.0 million senior revolving credit facility (Revolver) none of which was deemed or actually drawn as of September 30, 2010.

Under the Credit Agreement, Alion may request up to $10.0 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 Credit Agreement in full no later than August 22, 2014.

The Credit Agreement permits Alion to use the Revolver for working capital, other general corporate purposes, and to finance permitted acquisitions.

Security. The Credit Agreement is secured by a first priority security interest in all current and future tangible and intangible property of Alion and its guarantor subsidiaries, IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US) Corporation. On March 22, 2010 Alion and the subsidiary guarantors entered into an Intercreditor Agreement with Wilmington Trust Company and Credit Suisse AG, Cayman Islands Branch (Intercreditor Agreement). Under the Intercreditor Agreement, Credit Agreement lenders have a super priority right of payment with respect to the underlying collateral, superior to Secured Note holders’ rights.

Guarantees. The Company’s Credit Agreement obligations are guaranteed by the Company’s subsidiaries, IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US) Corporation. These subsidiaries also guarantee all the Company’s Secured Note and Unsecured Note obligations (described below). Previously, only CATI, METI, JJMA, BMH, WCI and MA&D were guarantors.

Interest and Fees. Alion can choose whether the Revolver bears interest at one of two floating rates using either a Eurodollar rate or an alternative base rate. The minimum interest rate on the Revolver is 8.5%. The Eurodollar interest rate is 600 basis points plus a 2.5% minimum interest rate. The alternate base rate is 500 basis points plus a 3.5% minimum interest rate.

Other Fees and Expenses. Each quarter Alion is required to pay a commitment fee of 175 basis points per year on the prior quarter’s daily unused Revolver balance. The Company paid approximately $235 thousand in Revolver commitment fees for fiscal year 2010.

Alion must pay letter-of-credit issuance and administrative fees, and up to a 25 basis point fronting fee. Each quarter Alion must also pay interest in arrears for all outstanding letters of credit. The interest rate is based on the Eurodollar loan rate which was 6.0% as of September 30, 2010. The Credit Agreement also requires the Company to pay an annual agent’s fee.

Covenants. The Credit Agreement requires the Company to achieve the following minimum trailing twelve month Consolidated EBITDA levels for the periods indicated below:

Period		Minimum Consolidated EBITDA
June 30, 2010 through March 31, 2011		$52.5 million
April 1, 2011 through September 30, 2011		$55.0 million
October 1, 2011 through September 30, 2012		$60.0 million
October 1, 2012 through September 30, 2013		$62.5 million
Thereafter		$65.0 million

The Credit Agreement defines Consolidated EBITDA as: (a) net income (or loss), as defined in the Credit Agreement; plus (b) the following items, without duplication, to the extent deducted from net income or included in the net loss, the sum of: (i) consolidated interest expense; (ii) provision for income taxes; (iii) depreciation and amortization, including amortization of other intangible assets; (iv) cash contributions to the ESOP in respect of the repurchase liability of the Company under the ESOP Plan; (v) any non-cash charges or expenses including (A) non-cash expenses associated with the recognition of the difference between the fair market value of the (now extinguished Subordinated Note) Warrants and the exercise price of the Warrants, (B) non-cash expenses with respect to the stock appreciation rights and phantom stock plans, and the Warrants and accretion of the Warrants and (C) non-cash contributions to the ESOP; (vi) any extraordinary losses and (vii) any nonrecurring charges and adjustments by the third-party valuation firm that prepares valuation reports in connection with the ESOP; minus (c) without duplication, (i) all cash payments made on account of reserves, restructuring charges and other non-cash charges added to net income (or included in net loss) pursuant to clause (b)(v) above in a previous period and (ii) to the extent included in net income (or net loss), any extraordinary gains and all non-cash items of income, in accordance with GAAP.

Senior Secured Notes

On March 22, 2010, Alion issued and sold $310 million of its private units (Units) to Credit Suisse, which informed the Company it had resold most of the units to qualified institutional buyers. Each of the 310,000 Units sold consisted of $1,000 in face value of Alion’s private 12% senior secured notes (Secured Notes) and a warrant to purchase 1.9439 shares of Alion common stock.

Security. The Secured Notes are secured by a first priority security interest in all current and future tangible and intangible property of Alion and its guarantor subsidiaries, IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US) Corporation. The Secured Notes are senior obligations of Alion and rank pari passu in right of payment with existing and future senior debt, including the Credit Agreement, except to the extent that the Intercreditor Agreement provides Credit Agreement lenders with a super priority right of payment with respect to the underlying collateral.

Guarantees. The Company’s obligations under the Secured Notes are guaranteed by the Company’s subsidiaries, IPS, CATI, METI, JJMA, BMH, WCI, WCGS, MA&D and Alion Canada (US) Corporation.

Interest and Fees. The Secured Notes bear interest at 12% per year; 10% is payable in cash and 2% increases the Secured Note principal (PIK Interest). Interest is payable semi-annually in arrears on May 1 and November 1. Alion pays interest to holders of record as of the immediately preceding April 15 and October 15. The Company must pay interest on overdue principal or interest at 13% per annum to the extent lawful. The Secured Notes mature November 1, 2014.

Covenants. As of September 30, 2010, the Company was in compliance with the covenants set forth in the Company’s Indenture with respect to the Company’s 12% Senior Secured Notes (“Secured Note Indenture”). The Company’s Indenture does not contain any financial covenants.

The Company is subject to a covenant under its Secured Note Indenture that restricts the Company’s ability to incur additional indebtedness. The Company and its Restricted Subsidiaries are prohibited from issuing, incurring, assuming, guaranteeing, and otherwise becoming liable for any Indebtedness as defined under the Secured Note Indenture unless the Company’s ratio of Adjusted EBITDA to Consolidated Interest Expense (each as defined in the Indenture) exceeds 2.0 to 1.0. Even if the Company’s Adjusted EBITDA to Consolidated Interest Expense ratio does not exceed 2.0 to 1.0, the Company may incur other permitted indebtedness which includes:

•

Indebtedness incurred pursuant to the Credit Agreement and certain other contracts up to $25 million less principal repayments made under that indebtedness;

•

Permitted inter-company indebtedness;

•

The Company’s 12% notes ;

•

Indebtedness pre-existing the issuance of the Company’s 12% notes;

•

Permitted Indebtedness of acquired subsidiaries;

•

Permitted refinancing Indebtedness;

•

Indebtedness under hedging agreements;

•

Performance, bid, appeal and surety bonds and completion guarantees;

•

Ordinary course insufficient funds coverage;

•

Guarantees in connection with permitted refinancing indebtedness;

•

Indebtedness of non-U.S. subsidiaries incurred for working capital purposes;

•

Indebtedness incurred for capital expenditure purposes and indebtedness for capital and synthetic leases not exceeding in the aggregate $25 million and 2.5% of the Company’s Total Assets as defined in the Indenture;

•

Permitted subordinated indebtedness of the Company or any Restricted Subsidiary incurred to finance a permitted acquisition, certain permitted transactions involving the ESOP and refinancing indebtedness of acquired non-U.S. subsidiaries in an amount not exceeding in the aggregate $35 million;

•

Reimbursement obligations with regard to letters of credit;

•

Certain agreements in connection with the acquisition of a business as long as the liabilities incurred in connection therewith are not reflected on the Company’s balance sheet;

•

Certain deferred compensation agreements; and

•

Certain other indebtedness not exceeding $20 million.

The Company is subject to a covenant under its Secured Note Indenture that restricts the Company’s ability to declare and pay any cash dividend or other distribution with regard to any equity interest in the Company, make any repurchase or redemption of any equity interest of the Company, make any repurchase or redemption of subordinated indebtedness, and make certain investments, except that the Company may make such payments in limited amounts if the Company’s ratio of Adjusted EBITDA to Consolidated Interest Expense exceeds 2.0 to 1.0 subject to certain limitations. Even if the Company’s Adjusted EBITDA to Consolidated Interest Expense does not exceed 2.0 to 1.0, the Company may make or pay:

•

Restricted Payments out of substantially concurrent contributions of equity to the Company and substantially concurrent incurrences of permitted indebtedness;

•

Certain limited and permitted dividends;

•

Certain repurchases of the Company’s equity securities deemed to occur upon exercise of stock options or warrants;

•

Cash payments in lieu of the issuance of fractional shares in connection with the exercise of warrants, options or other securities convertible into or exchangeable for the Company’s equity securities;

•

The required premium payable on the Senior Unsecured Notes in connection with a change of control of the Company;

•

Certain permitted inter-company subordinated obligations;

•

Certain repurchases and redemptions of subordination obligations of the Company or a Subsidiary Guarantor from Net Available Cash (as defined in the Secured Note Indenture);

•

Repurchases of subordinated obligations in connection with an asset sale to the extent required by the Secured Note Indenture;

•

Long term incentive plan payments to our directors, officers and employees, subject to a $3 million annual cap that may increase annually;

•

Any purchase, repurchase, redemption, defeasance or other acquisition or retirement for value of the Unsecured Notes, up to an aggregate amount of $10 million and

•

Certain other payments not exceeding $10 million in the aggregate.

The Secured Note Indenture restricts the Company’s ability to engage in other transactions including restricting the ability of subsidiaries to make distributions and pay dividends to parents, merging or selling all or substantially all of the Company’s assets, making certain issuances of Subsidiary equity securities, engaging in certain transactions with affiliates, incurring liens, entering into sale lease-back transactions and engaging in business unrelated to the Company’s business at the time the Company issued the Senior Unsecured Notes.

Events of Default. The Secured Note 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;

•

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; and

•

failure of any Secured Note security interest to constitute a valid and perfected lien with its applicable priority after a permitted cure period.

Change of Control. Upon a change in control, each Secured Note holder has the right to require Alion repurchase its notes in cash for 101% of principal plus accrued and unpaid interest. Any of the following events constitutes a change in control:

•

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 Alion;

•

individuals who constituted Alion’s board of directors on the date the Senior Secured Notes were issued, cease for any reason to constitute a majority of the Company’s board of directors;

•

the adoption of a plan relating to Alion’s liquidation or dissolution; 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 Alion to another person.

Optional Redemption. Prior to April 1, 2013, not more than once in any twelve month period, we may redeem up to $31 million of Secured Notes at a redemption price of 103% of the principal amount of the Secured Notes redeemed, plus accrued and unpaid interest to the redemption date.

Prior to April 1, 2013, the Company may redeem all, but not less than all, of the Secured Notes at a redemption price equal to 100% of the principal amount of the Secured 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 April 1, 2013, subject to certain conditions, the Company may use the proceeds of a qualified equity offering to redeem Unsecured Notes in an aggregate principal amount not to exceed $108.5 million at a redemption price equal to the sum of 112% of the aggregate principal amount of the notes actually redeemed, plus accrued and unpaid interest to the redemption date.

On or after April 1, 2013, the Company may redeem all or a portion of the Secured 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 periods set forth below:

Period		Redemption Price
April 1, 2013 to September 30, 2013			105.0	%
October 1, 2013 to March 31, 2014			103.0	%
April 1, 2014 and thereafter			100.0	%

Exchange Offer; Registration Rights. The Company filed a registration statement with the SEC offering to exchange the Senior Secured Notes for publicly registered notes. The registration statement was declared effective July 30, 2010; the exchange offer closed September 10, 2010; all outstanding notes were exchanged for publicly registered notes with the same terms.

Senior Unsecured Notes

On February 8, 2007, Alion issued and sold $250.0 million of its private 10.25% senior unsecured notes due February 1, 2015 (Senior Unsecured Notes) to Credit Suisse, which informed the Company it had resold most of the notes to qualified institutional buyers. On June 20, 2007, Alion exchanged its private Senior Unsecured Notes for publicly tradable Senior Unsecured Notes with the same terms.

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. Alion pays interest to holders of record as of the immediately preceding January 15 and July 15. The Company must pay interest on overdue principal or interest at 11.25% per annum to the extent lawful.

Covenants. As of September 30, 2009, the Company was in compliance with the covenants set forth in the Company’s Indenture with respect to the Company’s 10.25% Senior Unsecured Notes (“Unsecured Note Indenture”). The Company’s Unsecured Note Indenture does not contain any financial covenants.

The Company is subject to a covenant under its Unsecured Note Indenture that restricts the Company’s ability to incur additional indebtedness. The Company and its Restricted Subsidiaries are prohibited from issuing, incurring, assuming, guaranteeing, and otherwise becoming liable for any Indebtedness as defined under the Unsecured Note Indenture unless the Company’s ratio of Adjusted EBITDA to Consolidated Interest Expense (each as defined in the Indenture) exceeds 2.0 to 1.0. Even if the Company’s Adjusted EBITDA to Consolidated Interest Expense ratio does not exceed 2.0 to 1.0, the Company may incur other permitted indebtedness which includes:

•

Indebtedness incurred pursuant to the Senior Credit Facility and certain other contracts up to $360 million less principal repayments made under that indebtedness;

•

Permitted inter-company indebtedness;

•

The Company’s 10.25% notes ;

•

Indebtedness pre-existing the issuance of the Company’s 10.25% notes;

•

Permitted Indebtedness of acquired subsidiaries;

•

Permitted refinancing Indebtedness;

•

Indebtedness under hedging agreements;

•

Performance, bid, appeal and surety bonds and completion guarantees;

•

Ordinary course insufficient funds coverage;

•

Guarantees in connection with permitted refinancing indebtedness;

•

Indebtedness of non-U.S. subsidiaries incurred for working capital purposes;

•

Indebtedness incurred for capital expenditure purposes and indebtedness for capital and synthetic leases not exceeding in the aggregate $25 million and 2.5% of the Company’s Total Assets as defined in the Indenture;

•

Permitted subordinated indebtedness of the Company or any Restricted Subsidiary incurred to finance a permitted acquisition, certain permitted transactions involving the ESOP and refinancing indebtedness of acquired non-U.S. subsidiaries in an amount not exceeding in the aggregate $35 million;

•

Reimbursement obligations with regard to letters of credit;

•

Certain agreements in connection with the acquisition of a business as long as the liabilities incurred in connection therewith are not reflected on the Company’s balance sheet;

•

Certain deferred compensation agreements; and

•

Certain other indebtedness not exceeding $35 million.

The Company is subject to a covenant under its Unsecured Note Indenture that restricts the Company’s ability to declare and pay any cash dividend or other distribution with regard to any equity interest in the Company, make any repurchase or redemption of any equity interest of the Company, make any repurchase or redemption of subordinated indebtedness, and make certain investments, except that the Company may make such payments in limited amounts if the Company’s ratio of Adjusted EBITDA to Consolidated Interest Expense exceeds 2.0 to 1.0 subject to certain limitations. Even if the Company’s Adjusted EBITDA to Consolidated Interest Expense does not exceed 2.0 to 1.0, the Company may make or pay:

•

Restricted Payments out of substantially concurrent contributions of equity to the Company and substantially concurrent incurrences of permitted indebtedness;

•

Certain limited and permitted dividends;

	•		Certain repurchases of the Company’s equity securities deemed to occur upon exercise of stock options or warrants;
	•		Cash payments in lieu of the issuance of fractional shares in connection with the exercise of warrants, options or other securities convertible into or exchangeable for the Company’s equity securities;

•

The required premium payable on the Senior Unsecured Notes in connection with a change of control of the Company;

•

Certain permitted inter-company subordinated obligations;

•

Certain repurchases and redemptions of subordination obligations of the Company or a Subsidiary Guarantor from Net Available Cash (as defined in the Indenture);

•

Repurchases of subordinated obligations in connection with an asset sale to the extent required by the Indenture;

•

The redemption or repurchase for value of any Company equity securities for former Company employees who were also former Joint Spectrum Center employees after voluntary or involuntary termination of employment with the Company;

•

Certain permitted transactions with the ESOP not exceeding $25 million in the aggregate; and

•

Certain other payments not exceeding $30 million in the aggregate.

The Unsecured Note Indenture restricts the Company’s ability to engage in other transactions including restricting the ability of subsidiaries to make distributions and pay dividends to parents, merging or selling all or substantially all of the Company’s assets, making certain issuances of Subsidiary equity securities, engaging in certain transactions with affiliates, incurring liens, entering into sale lease-back transactions and engaging in business unrelated to the Company’s business at the time the Company issued the Senior Unsecured 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 a change in control, each Senior Unsecured Note holder has the right to require Alion repurchase its notes in cash for 101% of principal plus accrued and unpaid interest. Any of the following events constitutes a change in control:

•

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 Alion;

•

individuals who constituted Alion’s board of directors on the date the Senior Unsecured Notes were issued, cease for any reason to constitute a majority of the Company’s board of directors;

•

the adoption of a plan relating to Alion’s liquidation or dissolution; 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 Alion to another person.

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.

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	%

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

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

		5-Fiscal Year Period ($ In thousands)
		2011				2012				2013				2014				2015
Bank revolving credit facility
- Interest(1)		$	444			$	445			$	444			$	396			$	—
Senior Secured Notes
- Interest			31,223				31,850				32,490				33,144				16,821
- Principal			—				—				—				—				339,788
Senior Unsecured Notes
- Interest			25,625				25,625				25,625				25,625				12,813
- Principal			—				—				—				—				250,000
Total cash — pay interest			57,292				57,920				58,559				59,165				29,634
Total cash — pay principal			—				—				—				—				589,788
Total		$	57,292			$	57,920			$	58,559			$	59,165			$	619,422

Contingent Obligations

Earn-outs

The Company has one remaining earn-out commitment arising from its July 2007 LogCon Group acquisition. The maximum potential earn out is $100 thousand through July 2011; $100 thousand has already been earned and paid. Management believes any future LogCon Group earn-outs will not materially affect Alion’s cash flows, financial position or operating results.

Other Contingent obligations which will impact the Company’s cash flow

KSOP share repurchases and diversifications will affect Alion’s cash flow. Through September 2010, Alion spent a cumulative total of approximately $80.9 million to repurchase shares of its common stock to satisfy ESOP distribution requests from former employees and Plan beneficiaries. In 2008, the Company changed its prior practice of immediately paying out all distribution requests in full and began paying ESOP beneficiaries over the five-year distribution period permitted by ERISA and the terms of the Plan. Alion intends to continue this practice for the foreseeable future in part to offset the cash flow effects of annual employee diversification requests and to meet certain debt covenant restrictions Management estimates that cash flow benefits from using a five-year payout cycle will diminish over the next two years. The table below lists current and prior year share repurchases.

		Number of
		Shares								Total Value
Date		Repurchased				Share Price				Purchased
December 2008			233			$	38.35			$	9
March 2009			189,038			$	38.35			$	7,250
April 2009			122			$	34.30			$	4
May 2009			38			$	34.30			$	1
July 2009			100			$	34.30			$	3
July 2009			127			$	38.35			$	5
August 2009			178			$	34.30			$	6
September 2009			55,282			$	34.30			$	,896
December 2009			745			$	34.50			$	26
March 2010			218,408			$	34.50			$	7,535
April 2010			52			$	28.00			$	1
May 2010			108			$	28.00			$	3
June 2010			62,875			$	28.00			$	1,760
July 2010			145			$	28.00			$	4
August 2010			89			$	28.00			$	2
September 2010			209			$	28.00			$	6
Total			527,749							$	18,511

Alion management believes cash flow from operations and cash available under current and anticipated revolving credit facilities should provide sufficient capital to fulfill current business plans and fund working capital needs for at least the next 24 months. Management believes that because Alion has been able to manage its obligations without having had to access its revolving credit facility for the past six months that over the next 24 four months the Company will likely have access to its revolver as and when necessary. Because the financial covenants in Alion’s existing debt agreements are less restrictive than the principal financial covenants in the Term B Senior Credit Agreement were, Management believes it is more likely than not that the Company will be able to meet its financial covenants and maintain access to its revolver,

Alion intends to focus on organic growth, margin improvement and process improvement. Management expects to continue improving cash flow from operations through careful cash management and more efficient business practices overall. Although Alion expects to have positive cash flow from operations, it will need to generate significant additional revenue beyond current levels and earn net income in order to repay principal and interest on the Senior Secured Notes and Senior Unsecured Notes, and to meet ESOP repurchase and diversification obligations.

The indentures governing the Senior Secured Notes and the Senior Unsecured Notes allow Alion to make certain permitted acquisitions, and if the Company identifies suitable candidates it intends to use available financing to make permitted acquisitions. Alion will need to refinance some, if not all, its senior debt prior to maturity in November 2014 and February 2015. The Company is uncertain whether it will be able to refinance these obligations or if refinancing terms will be favorable. If we are unable to refinance our senior debt, we will not have sufficient cash from operations to satisfy all our obligations. If plans or assumptions change, if assumptions prove inaccurate, if we consummate additional or larger investments in or acquisitions of other companies than are currently planned, if we experience unexpected costs or competitive pressures, or if existing cash and projected cash flow from operations prove insufficient, we may need to obtain additional financing sooner than we expect. We intend only to enter into new financing or refinancing Management considers advantageous. However, despite the improving state of the credit markets, we cannot be certain sources of financing will be available in the future, or, if available, that financing terms would be favorable.

The following table summarizes the contractual and other long-term debt obligations the Company is legally obligated to pay. The table does not include income tax obligations as we do not expect to have to pay taxes for at least the next five years.

		Payments Due by Fiscal Year (In thousands)
		Total				2011				2012				2013				2014				2015				Thereafter
Contractual Obligations:
Long-term debt including principal and interest		$	852,358			$	57,292			$	57,920			$	58,559			$	59,165			$	619,422			$	—
Lease Obligations			129,251				27,676				24,081				22,098				15,443				15,292				24,661
Total contractual obligations		$	981,609			$	84,968			$	82,001			$	80,657			$	74,608			$	634,714			$	24,661

Off-Balance Sheet Financing Arrangements

The Company accounts for operating leases entered into in the routine course of business in accordance with ASC 840 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

Alion’s revenue comes from delivering technology services under three types of contracts. Some contracts provide for reimbursement of costs plus fees; others are fixed-price or time-and-material type contracts. The Company recognizes revenue when a contract has been executed, the contract price is fixed or determinable, delivery of services or products has occurred and collectibility of the contract price is considered reasonably assured.

Alion 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. Alion uses various performance measures under the percentage of completion method to recognize revenue for fixed-price contracts. Estimating contract costs at completion and recognizing revenue appropriately involve significant management estimates. Actual costs may differ from estimated costs and affect estimated profitability and timing of revenue recognition. From time to time, facts develop that require Alion to revise estimated total costs or expected revenue. Alion records the cumulative effect of revised estimates in the period in which the facts requiring revised estimates become known. Alion recognizes the full amount of anticipated losses on any contract in the period a loss becomes known. For each of the periods presented, the cumulative effects of revised estimates were immaterial to the Company’s financial performance.

Federal government contracts are subject to periodic funding by the contracting agency customer. A customer may fund a contract at inception or incrementally throughout the period of performance as services are provided. If Alion determines contract funding is not probable, it defers revenue recognition until realization is probable. Federal government contract costs are subject to government audit and adjustment via negotiation with government representatives. The government considers Alion a major contractor and maintains an office on site to perform various audits. The government has audited the Company’s claimed costs through fiscal year 2004. Indirect rates have been negotiated and settled through fiscal year 2004. Settlement had no material adverse effect on the Company’s operating results or cash flows. DCAA is currently auditing the Company’s indirect cost proposals for fiscal 2005 and 2006. The Company has submitted incurred cost proposals for all fiscal years through 2009 and plans to submit its current year proposal in March 2011. The Company has recorded revenue on federal government contracts in amounts it expects to realize.

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

The Company generates software-related revenue from licensing software and providing services. Because professional services are essential to the functionality of the solutions Alion sells, the Company applies the percentage of completion method in Accounting Standards Codification (ASC) 605 — Revenue Recognition to recognize software-related revenue.

Goodwill and Intangible Assets

Alion assigns the purchase price it pays to acquire the stock or assets of an entity to the net assets acquired based on the estimated fair value of the assets acquired. Goodwill is the purchase price in excess of the estimated fair value of the tangible net assets and separately identified intangible assets acquired. Purchase price allocations for acquisitions involve significant estimates and management judgments may be adjusted during the purchase price allocation period. There are no acquisitions with open measurement periods.

The Company accounts for goodwill and other intangible assets in accordance with the provisions of ASC 350, Intangibles, Goodwill and Other Assets. Alion is required to review goodwill at least annually for impairment or, more frequently if events and circumstances indicate goodwill might be impaired. The Company performs its annual review at the end of each fiscal year. Alion is required to recognize an impairment loss to the extent that its goodwill carrying amount exceeds fair value. Evaluating any impairment to goodwill involves significant management estimates. To date, these annual reviews have resulted in no adjustments.

The Company operates in one segment and tests goodwill at the reporting unit level. Management has identified three reporting units for the purpose of testing goodwill for impairment. The reporting units are based on administrative organizational structure and the availability of discrete financial information. Each reporting unit provides a similar range of scientific, engineering and analytical services to departments and agencies of the U.S. government and commercial customers. The Company employs a reasonable, supportable and consistent method to assign goodwill to reporting units expected to benefit from the synergies arising from acquisitions. Alion determines reporting unit goodwill in a manner similar to the way it determines goodwill in a purchase allocation by using fair value to determine reporting unit “purchase price”, assets, liabilities and goodwill. Reporting unit residual fair value after this allocation is the implied fair value of reporting unit goodwill. The Company’s reporting units remained consistent in structure for all periods presented. From September 2008 through September 2010, Alion recognized $50 thousand in additional goodwill for contingent consideration from a prior acquisition and allocated this change based on current reporting unit structure.

The Company performs its own independent analysis to determine whether goodwill is potentially impaired. Management performs discounted cash flow and market-multiple-based analyses to estimate the enterprise fair value of Alion and its reporting units and the fair value of reporting unit goodwill in order to test goodwill for potential impairment. Management independently determines the rates and assumptions it uses to perform its goodwill impairment analysis. It compares forecast revenue to contract backlog and proposal backlog to assess the probability of future contracts and revenue and to evaluate the recoverability of goodwill. September 2010 contract backlog was approximately eight times trailing twelve month revenue.

Alion’s cash flow analysis depends on several significant management inputs and assumptions. Management uses observable inputs, rates and assumptions consistent with those used by the independent third party to prepare the valuation report for the ESOP Trustee. Management’s cash flow analysis includes the following significant inputs and assumptions: estimated future revenue and revenue growth; estimated future operating margins and EBITDA; observable market multiples for comparable companies; and a discount rate consistent with a market-based weighted average cost of capital. Management includes EBITDA in its analysis in order to use publicly available valuation data.

In the Company’s most recent impairment testing, market multiples for trailing twelve month EBITDA for comparable companies (publicly traded professional services government contractors) ranged from a low of 7.5 to a high of 11.1, with a median value of 8.1. Market multiples for trailing twelve month revenue ranged from a low of 0.61 to a high of 0.76, with a median value of 0.71. Management used median market multiples and a weighted average cost of capital rate of 12.5% derived from market-based inputs, the tax-effected interest cost of Alion’s outstanding debt and a hypothetical market participant capital structure. Management estimates future years’ EBITDA based on Alion’s historical adjusted EBITDA as a percentage of revenue. Consistent with industry norms, Management estimated future revenue would grow 7%-10% annually. Prior year market multiples for trailing twelve month EBITDA for comparable professional services government contractors ranged from a low of 9.0 to a high of 12.7, with a median value of 10.4. Prior year market multiples for trailing twelve month revenue ranged from a low of 0.76 to a high of 1.22, with a median value of 0.99. The prior year weighted average cost of capital rate was 12.5% derived from market-based inputs, the tax-effected interest cost of Alion’s outstanding debt and a hypothetical market participant capital structure. There were no changes to the methods used to evaluate goodwill in prior periods. Changes in one or more inputs could materially alter the calculation of Alion’s enterprise fair value and thus the Company’s determination of whether its goodwill is potentially impaired. A hypothetical 10% increase or decrease in the weighted average cost of capital rate at September 30, 2010 would have produced a corresponding approximate 5% decrease or increase in estimated enterprise value. At September 30, 2010, market-multiple based enterprise value was not materially different from discounted cash flow enterprise value.

Management reviews the Company’s internally computed enterprise fair value to confirm the reasonableness of the Company’s analysis and compares the results of its independent analysis with the results of the independent third party valuation report prepared for the ESOP Trustee. Management compares each reporting unit’s carrying amount to its estimated fair value. If a reporting unit’s carrying value exceeds its estimated fair value, the Company compares the reporting unit’s goodwill carrying amount with the corresponding implied fair value of its goodwill. If the carrying amount of reporting unit goodwill exceeds its fair value, the Company recognizes an impairment loss to the extent that the carrying amount of goodwill exceeds implied fair value.

Alion completed its most recent goodwill impairment analysis in the fourth quarter of fiscal year 2010 and concluded no goodwill impairment existed as of September 30, 2010. As of September 30, 2010, the estimated fair value of each reporting unit substantially exceeded its carrying value and enterprise value. Given the results of the Company’s impairment testing under step one; it is unlikely that a reasonably likely change in assumptions would have triggered an impairment. A hypothetical 10% decrease in fair value would not have resulted in impairment to goodwill for any reporting unit or triggered the need to perform additional step two analyses for any reporting unit. There were no significant events in the year ended September 30, 2010, that indicated impairment to Alion’s $398.9 million of goodwill as of September 30, 2010.

Alion amortizes intangible assets as it consumes their economic benefit over the assets’ estimated useful lives. As of September 30, 2010, the Company had a recorded net intangible asset balance of approximately $17.7 million, composed primarily of purchased contracts from the JJMA and Anteon contract acquisitions.

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

Redeemable Common Stock

There is no public market for Alion’s redeemable common stock and therefore no observable price for its equity, individually or in the aggregate. The ESOP Trust holds all the Company’s outstanding common stock. Under certain circumstances, ESOP beneficiaries can require the ESOP Trust to distribute the value of their beneficial interests. The Internal Revenue Code (IRC) and ERISA require the Company to offer ESOP participants who receive Alion common stock, a liquidity put right. The put right requires the Company to purchase distributed shares at any time during two put option periods at then current fair market value. Common stock distributed by the ESOP Trust is subject to a right of first refusal. Prior to any subsequent transfer, the shares must first be offered to the Company and then to the ESOP Trust. Eventual redemption of shares of Alion common stock as a result of distributions is outside the Company’s control; therefore, Alion classifies its outstanding shares of redeemable common stock as a liability.

At each reporting date Alion is required to increase or decrease the reported value of its outstanding common stock to reflect its estimated redemption value. Management estimates the value of this liability in part by considering the most recent price at which the Company was able to sell shares to the ESOP Trust (current share price times total shares issued and outstanding). In its fiduciary capacity the ESOP Trustee is independent of the Company and its management. Consistent with its fiduciary responsibilities, the ESOP Trustee retains an independent third party valuation firm to assist it in determining the fair market value (share price) at which the Trustee may acquire or dispose of investments in Alion common stock. The Audit and Finance Committee of Alion’s Board of Directors reviews the reasonableness of the liability Management has determined is appropriate for the Company to recognize in its financial statements for outstanding redeemable common stock. The Audit and Finance Committee considers various factors in its review, including, in part, the most recent valuation report and the share price selected by the ESOP Trustee.

Alion records changes in the reported value of its outstanding common stock through an offsetting charge or credit to accumulated deficit. The Company decreased its liability for redeemable common stock by approximately $41.1 million for the year ended September 30, 2010. The accumulated deficit at September 30, 2010 included $49.1 million for changes in the Company’s share redemption liability. Outstanding redeemable common stock had an aggregate fair value of approximately $150.8 million as of September 30, 2010.

Recently Issued Accounting Pronouncements

Accounting Standards Update 2009-13 Revenue Recognition — Multiple Deliverable Revenue Arrangements (ASU 2009-13) was issued in October 2009 and updates Accounting Standards Codification (ASC) 605 — Revenue Recognition. ASU 2009-13 removes the objective-and-reliable-evidence-of-fair-value criterion from the separation criteria used to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting; replaces references to “fair value” with “selling price” to distinguish from the fair value measurements required under the “Fair Value Measurements and Disclosures” guidance; provides a hierarchy that entities must use to estimate the selling price; eliminates the use of the residual method for allocation; and expands the ongoing disclosure requirements. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010, and can be applied prospectively or retrospectively. We are currently evaluating the effect, if any, that adopting ASU 2009-13 will have on our consolidated financial position and results of operations.

Accounting Standards Update 2009-14 Certain Revenue Arrangements That Include Software Elements (ASU 2009-14) was issued in October 2009 and updates ASC 985 — Software — Revenue Recognition. ASU 2009-14 clarifies which accounting guidance should be used to measure and allocate revenue for arrangements that contain both tangible products and software, where the software is more than incidental to the tangible product as a whole. ASU 2009-14 is effective for fiscal years beginning on or after June 15, 2010 and applies to arrangements entered into or materially modified on or after that date. We are currently evaluating the effect, if any, that adopting ASU 2009-14 will have on our consolidated financial position and results of operations.

Item 7A.		Quantitative and Qualitative Disclosures About Market Risk

Interest rate risk

We face interest rate risk for periodic borrowings on our $25.0 million senior revolving credit facility. Outstanding balances, if any, bear interest at a variable rate based on Credit Suisse’s prime rate plus a maximum spread of 500 basis points. Variable rates increase the risk that interest charges could increase materially if both market interest rates and outstanding balances were to increase. The Senior Secured Notes and the Senior Unsecured Notes are fixed-rate obligations. Other than the current revolving credit facility, Alion has currently has no variable rate debt. We do not use derivatives for trading purposes. We invest excess cash in short-term, investment grade, and interest-bearing securities.

Foreign currency risk

International contract expenses and revenues are U.S. dollar-denominated. Alion does not believe operations are subject to material risks from currency fluctuations.

Risk associated with value of Alion common stock

Changes in the fair market value of Alion’s stock affect the Company’s estimated KSOP share repurchase obligations and stock-based compensation obligations for stock appreciation rights. Several factors affect the timing and amount of these obligations, including: the number of employees who seek to redeem shares of Alion stock following termination of employment, and the number of employees who exercise stock appreciation rights during any particular time period.

Item 8.		Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm			45
Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 2010 and 2009			46
Consolidated Statements of Operations for the years ended September 30, 2010, 2009 and 2008			47
Consolidated Statements of Redeemable Common Stock, Common Stock Warrants, and Accumulated Deficit for the years ended September 30, 2010, 2009, and 2008			48
Consolidated Statements of Cash Flows for the years ended September 30, 2010, 2009, and 2008			49
Notes to Consolidated Financial Statements			50
Consolidated Financial Statement Schedule
Schedule II — Valuation and Qualifying Accounts			106