**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

**(Mark One)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**Forthe quarterly period ended December 29, 2006**

**or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**Forthe transition period from         to**

**CommissionFile Number: 333-127343**

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**DYNCORPINTERNATIONAL LLC**(Exactname of registrant as specified in its charter)

| **Delaware**                    |   | ** ** |   | **52-2287126**      |
|---------------------------------|--------|------------|--------|---------------------|
| (State or other jurisdiction of |   |       |   | (I.R.S. Employer    |
| incorporation or organization)  |   |       |   | Identification No.) |

 

**3190 Fairview Park Drive, Suite 700, FallsChurch, Virginia 22042(571) 722-0210**(Address, including zip code, andtelephone number, including area code,of registrant’s principal executive offices)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   Yes o No x

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check one):

| Large accelerated filer  o |   | Accelerated filer  o |   | Non-accelerated filer x |
|---------------------------------|--------|---------------------------|--------|------------------------------|

 

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

Theregistrant has one class of member units. As of February 12, 2007, DynCorpInternational Inc. held 100% of the member units.

 

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**DYNCORPINTERNATIONAL LLC**

**TABLEOF CONTENTS**

|                                         | ** ** | ** **                                                                                                                                   | ** ** | **Page** |
|-----------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I.  FINANCIAL INFORMATION** |       |                                                                                                                                         |
| Item  1.                                |       | Financial  Statements                                                                                                                        |       |     |
|                                    |       | Condensed Consolidated Balance  Sheets—December 29, 2006 (unaudited) and March 31, 2006                                       |       | 1        |
|                                    |       | Condensed Consolidated Statements of Income—Three and  Nine Months Ended December 29, 2006 and December 30, 2005  (unaudited) |       | 2        |
|                                    |       | Condensed Consolidated Statements of Cash Flows—Nine  Months Ended December 29, 2006 and December 30, 2005 (unaudited)        |       | 3        |
|                                    |       | Condensed Consolidated Statements of Member’s  Equity—Nine Months Ended December 29, 2006 (unaudited)                         |       | 4        |
|                                    |       | Notes to Condensed Consolidated Financial Statements  (unaudited)                                                                            |       | 5        |
| Item 2.                                 |       | Management’s Discussion and Analysis of Financial  Condition and   Results of Operations                                                |       | 23       |
| Item 3.                                 |       | Quantitative and Qualitative Disclosures About Market  Risk                                                                                  |       | 38       |
| Item  4.                                |       | Controls  and Procedures                                                                                                                     |       | 38       |
| **PART II.  OTHER INFORMATION**    |       |                                                                                                                                         |
| Item  1.                                |       | Legal Proceedings                                                                                                                            |       | 39       |
| Item  1A.                               |       | Risk Factors                                                                                                                                 |       | 39       |
| Item 2.                                 |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                                                                 |       | 39       |
| Item 3.                                 |       | Defaults Upon Senior Securities                                                                                                              |       | 40       |
| Item 4.                                 |       | Submission of Matters to a Vote of Security Holders                                                                                          |       | 40       |
| Item  5.                                |       | Other Information                                                                                                                            |       | 40       |
| Item 6.                                 |       | Exhibits                                                                                                                                     |       | 40       |

 

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**PART I—FINANCIALINFORMATION**

**ITEM 1.**                FINANCIALSTATEMENTS

**DYNCORPINTERNATIONAL LLC**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(Inthousands, except per share data)**
|                                                                                                                                                        | ** ** | **December 29,  2006** | ** ** | **March 31,  2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                                                                                                                                             | ** ** | **(Unaudited)**             | ** ** | ** **               | ** ** |
| **Assets**                                                                                                                                             |       |                        |       |                     |       |   |   |
| Current assets:                                                                                                                                        |       |                        |       |                     |       |   |   |
| Cash and cash equivalents                                                                                                                              |       |                        | $          | 55,336                   |       |   | $ | 20,573 |   |
| Receivables, net of allowances for doubtful accounts  of $2,728 and $8,479 at December 29, 2006 and March 31, 2006,  respectively            |       |                        | 446,735    |                     |       | 437,947 |   |
| Other receivables                                                                                                                                      |       |                        | 1,893      |                     |       | 2,248 |   |
| Prepaid expenses and other current assets                                                                                                              |       |                        | 49,495     |                     |       | 43,733 |   |
| Deferred tax asset                                                                                                                                     |       |                        | 7,491      |                     |       | 795 |   |
| Total current assets                                                                                                                                   |       |                        | 560,950    |                     |       | 505,296 |   |
| Property and equipment at cost, less accumulated  depreciation of $2,649 and $1,296 at December 29, 2006 and  March 31, 2006, respectively   |       |                        | 11,238     |                     |       | 8,769 |   |
| Other assets:                                                                                                                                          |       |                        |       |                     |       |   |   |
| Goodwill                                                                                                                                               |       |                        | 420,180    |                     |       | 420,180 |   |
| Tradename                                                                                                                                              |       |                        | 18,318     |                     |       | 18,318 |   |
| Customer-related intangibles, net of accumulated  amortization of $72,750 and $43,471 at December 29, 2006 and  March 31, 2006, respectively |       |                        | 217,631    |                     |       | 246,910 |   |
| Deferred financing costs, net of accumulated  amortization of $5,428 and $3,261 at December 29, 2006 and  March 31, 2006, respectively       |       |                        | 14,955     |                     |       | 17,469 |   |
| Other intangibles, net of accumulated amortization of  $6,450 and $3,671 at December 29, 2006 and March 31, 2006,  respectively              |       |                        | 6,743      |                     |       | 7,453 |   |
| Deferred income taxes                                                                                                                                  |       |                        | 12,938     |                     |       | 11,518 |   |
| Other assets                                                                                                                                           |       |                        | 1,918      |                     |       | 3,176 |   |
| Total other assets                                                                                                                                     |       |                        | 692,683    |                     |       | 725,024 |   |
| Total assets                                                                                                                                           |       |                        | $          | 1,264,871                |       |   | $ | 1,239,089 |   |
| **Liabilities  and Member’s Equity**                                                                                                              |       |                        |       |                     |       |   |   |
| Current liabilities:                                                                                                                                   |       |                        |       |                     |       |   |   |
| Current portion of long-term debt                                                                                                                      |       |                        | $          | 3,450                    |       |   | $ | 2,588 |   |
| Current portion of other long-term liabilities                                                                                                         |       |                        | 301        |                     |       | — |   |
| Accounts payable and accrued expenses                                                                                                                  |       |                        | 125,936    |                     |       | 143,668 |   |
| Accrued payroll and employee costs                                                                                                                     |       |                        | 78,876     |                     |       | 65,586 |   |
| Other accrued liabilities                                                                                                                              |       |                        | 55,240     |                     |       | 33,845 |   |
| Income taxes payable                                                                                                                                   |       |                        | 8,357      |                     |       | 8,280 |   |
| Total current liabilities                                                                                                                              |       |                        | 272,160    |                     |       | 253,967 |   |
| Long-term debt—less current portion                                                                                                               |       |                        | 628,407    |                     |       | 658,963 |   |
| Other long-term liabilities                                                                                                                            |       |                        | 5,742      |                     |       | — |   |
| Commitments and  contingencies                                                                                                                         |       |                        |       |                     |       |   |   |
| Member’s equity:                                                                                                                                  |       |                        |       |                     |       |   |   |
| Member’s units, 100 outstanding                                                                                                                   |       |                        | 315,220    |                     |       | 298,914 |   |
| Retained earnings                                                                                                                                      |       |                        | 43,570     |                     |       | 27,463 |   |
| Accumulated other comprehensive loss                                                                                                                   |       |                        | (228       | )                        |       | (218 | ) |
| Total member’s equity                                                                                                                             |       |                        | 358,562    |                     |       | 326,159 |   |
| Total liabilities  and member’s equity                                                                                                            |       |                        | $          | 1,264,871                |       |   | $ | 1,239,089 |   |

 

See notes to condensed consolidated financial statements.

1

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**DYNCORPINTERNATIONAL LLC**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME**

**FORTHE THREE AND NINE MONTHS ENDED DECEMBER 29, 2006 AND DECEMBER 30, 2005**

**(Inthousands)**
|                                                                              | ** ** | **For the Three  Months Ended** | ** ** | **For the Nine  Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                   | ** ** | **Dec. 29,  2006**                        | ** ** | **Dec. 30,  2005**                       | ** ** | **Dec. 29,  2006** | ** ** | **Dec. 30,  2005** | ** ** |
| ** **                                                                   | ** ** | **(unaudited)**                                | ** ** | **(unaudited)**                               | ** ** |
| Revenues                                                                     |       | $                                              | 517,539    |                                          | $          | 553,561 |   | $ | 1,529,944 |   | $ | 1,418,245 |   |
| Costs of services (excluding depreciation and  amortization disclosed below) |       | 449,680                                        |       | 498,482                                       |       | 1,343,447 |   | 1,262,074 |   |
| Selling, general  and administrative                                         |       | 24,949                                         |       | 21,013                                        |       | 82,906 |   | 59,874 |   |
| Depreciation and  amortization                                               |       | 10,656                                         |       | 10,563                                        |       | 33,005 |   | 32,763 |   |
| Operating income                                                             |       | 32,254                                         |       | 23,503                                        |       | 70,586 |   | 63,534 |   |
| Other expense  (income):                                                     |       |                                           |       |                                          |       |   |   |   |   |
| Interest expense                                                             |       | 14,554                                         |       | 14,595                                        |       | 44,057 |   | 42,278 |   |
| Loss on debt extinguishment                                                  |       | —                                         |       | —                                        |       | 3,484 |   | — |   |
| (Income) loss from joint ventures                                            |       | (1,000                                         | )          | 40                                            |       | (1,323 | ) | 181 |   |
| Interest income                                                              |       | (534                                           | )          | (112                                          | )          | (1,094 | ) | (166 | ) |
| Income before  income taxes                                                  |       | 19,234                                         |       | 8,980                                         |       | 25,462 |   | 21,241 |   |
| Provision for  income taxes                                                  |       | 7,018                                          |       | 3,389                                         |       | 9,355 |   | 7,553 |   |
| Net income                                                                   |       | $                                              | 12,216     |                                          | $          | 5,591 |   | $ | 16,107 |   | $ | 13,688 |   |

 

See notes to condensed consolidated financial statements.

2

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**DYNCORPINTERNATIONAL LLC**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**FORTHE NINE MONTHS ENDED DECEMBER 29, 2006 AND DECEMBER 30, 2005**

**(Inthousands)**
|                                                                                    | ** ** | **For the Nine   Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **Dec. 29,  2006**                             | ** ** | **Dec. 30,  2005** | ** ** |
| ** **                                                                         | ** ** | **(unaudited)**                                     | ** ** |
| **Cash flows from operating  activities:**                                         | ** ** |                                                | ** ** | ** ** |   | ** ** | ** ** |
| Net income                                                                         |       |                                                | $          | 16,107 |   |   | $ | 13,688 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                                |       |   |   |   |   |
| Depreciation and amortization                                                      |       |                                                | 34,654     |   |   | 33,390 |   |
| Premium paid on redemption of senior subordinated  notes                           |       |                                                | 2,657      |   |   | — |   |
| Deferred financing cost amortization                                               |       |                                                | 3,154      |   |   | 2,141 |   |
| (Recovery) provision for losses on accounts  receivable                            |       |                                                | (4,679     | ) |   | 683 |   |
| Income from equity joint ventures                                                  |       |                                                | (951       | ) |   | 81 |   |
| Deferred taxes                                                                     |       |                                                | (8,116     | ) |   | (6,187 | ) |
| Compensation expense related to Class B equity  participation                 |       |                                                | 1,471      |   |   | 998 |   |
| Changes in  current assets and liabilities:                                        |       |                                                |       |   |   |   |   |
| Accounts receivable                                                                |       |                                                | (3,754     | ) |   | 30,862 |   |
| Prepaid expenses and other current assets                                          |       |                                                | (167       | ) |   | (3,058 | ) |
| Accounts payable and other accrued liabilities                                     |       |                                                | 12,008     |   |   | (23,283 | ) |
| Income taxes payable                                                               |       |                                                | 100        |   |   | 4,847 |   |
| Net cash provided by operating activities                                          |       |                                                | 52,484     |   |   | 54,162 |   |
| **Cash  flows from investing activities:**                                         | ** ** |                                                | ** ** | ** ** |   | ** ** | ** ** |
| Purchase of property and equipment                                                 |       |                                                | (3,679     | ) |   | (1,338 | ) |
| Proceeds from sale of property and equipment                                       |       |                                                | —     |   |   | 11 |   |
| Payment for computer software upgrade                                              |       |                                                | (2,069     | ) |   | (2,153 | ) |
| Other assets                                                                       |       |                                                | 374        |   |   | (58 | ) |
| Net cash used in investing activities                                              |       |                                                | (5,374     | ) |   | (3,538 | ) |
| **Cash  flows from financing activities:**                                         | ** ** |                                                | ** ** | ** ** |   | ** ** | ** ** |
| Net transfers from parent company                                                  |       |                                                | 17,907     |   |   | — |   |
| Payments on acquisition debt                                                       |       |                                                | (29,694    | ) |   | (2,587 | ) |
| Borrowings related to prepaid insurance, net                                       |       |                                                | 2,737      |   |   | — |   |
| Payments on deferred financing costs                                               |       |                                                | (640       | ) |   | (1,225 | ) |
| Premium paid on redemption of senior subordinated  notes                           |       |                                                | (2,657     | ) |   | — |   |
| Payments on credit facility                                                        |       |                                                | —     |   |   | (35,000 | ) |
| Purchase of interest rate cap                                                      |       |                                                | —     |   |   | (483 | ) |
| Net cash used in financing activities                                              |       |                                                | (12,347    | ) |   | (39,295 | ) |
| Net increase in  cash and cash equivalents                                         |       |                                                | 34,763     |   |   | 11,329 |   |
| Cash and cash  equivalents, beginning of period                                    |       |                                                | 20,573     |   |   | 13,474 |   |
| Cash and cash  equivalents, end of period                                          |       |                                                | $          | 55,336 |   |   | $ | 24,803 |   |

 

See notes to condensed consolidated financial statements.

3

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**DYNCORPINTERNATIONAL LLC**

**CONDENSEDCONSOLIDATED STATEMENTS OF MEMBER’S EQUITY**

**FORTHE NINE MONTHS ENDED DECEMBER 29, 2006**

**(Inthousands)**

**(Unaudited)**
|                                                                      | ** ** | **Member’s  Units** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------|------------|------------------------|------------|---------------------------------------------|------------|-----------|------------|
| Balance at  March 31, 2006                                      |       | $                        | 298,914    |                   | $          | 27,463                                      |       |      | $          | (218 | ) |   | $ | 326,159 |   |
| Comprehensive income:                                                |       |                     |       |                   |       |                                        |       |      |       |   |   |
| Net income                                                           |       |                     |       | 16,107                 |       |                                        | —     |      |       | 16,107 |   |
| Interest rate cap                                                    |       |                     |       | —                 |       |                                        | (41        | )         |       | (41 | ) |
| Currency translation adjustment                                      |       |                     |       | —                 |       |                                        | 31         |      |       | 31 |   |
| Comprehensive  income                                                |       |                     |       | 16,107                 |       |                                        | (10        | )         |       | 16,097 |   |
| Contribution from parent                                             |       | 14,835                   |       | —                 |       |                                        | —     |      |       | 14,835 |   |
| Compensation expense related to Class B equity  interests  |       | 1,471                    |       | —                 |       |                                        | —     |      |       | 1,471 |   |
| Balance at  December 29, 2006                                   |       | $                        | 315,220    |                   | $          | 43,570                                      |       |      | $          | (228 | ) |   | $ | 358,562 |   |

 

See notes to condensed consolidated financial statements.

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**DYNCORP INTERNATIONAL LLC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share data)**

**Note 1—Descriptionof Business and Organization, Basis of Presentation and Principles ofConsolidation**

*Description ofBusiness and Organization*

DynCorp International LLC and its subsidiaries (the “Company”),provide defense and technical services and government outsourced solutionsprimarily to U.S. government agencies throughout the United States andinternationally. Key offerings include aviation services, such as maintenanceand related support, as well as base maintenance/operations and personal andphysical security services. Primary customers include the U.S. Departments ofDefense and State, but also include other government agencies, foreigngovernments and commercial customers.

On February 11, 2005, Computer SciencesCorporation and DynCorp, the Company’s former parent, sold the Company toDynCorp International Inc. (the “Successor Parent”), an entity controlled byThe Veritas Capital Fund II, L.P. and its affiliates (“Veritas Capital”). Theprimary reason for the acquisition of the Company by the Successor Parent (the “2005Acquisition”) and the most significant factor contributing to the goodwillvalue is the Company’s ability to leverage its infrastructure and managementexpertise in addressing the government outsourcing trend. All significant intercompanybalances and transactions were eliminated.

On May 9, 2006, the Successor Parent consummatedan equity offering of 25,000 shares of its Class A common stock, parvalue $0.01 per share, at a price of $15.00 per share (the “EquityOffering”), less the underwriters’ discount of 6% per share. On May 4,2006, the Successor Parent’s Class A common stock listed on the New YorkStock Exchange under the symbol “DCP.” The gross proceeds from the Equity Offering of $375,000, together withcash on hand, were used: (i) to redeem all of the Successor Parent’soutstanding preferred stock, of which $222,823 in stated amount, includingaccrued and unpaid dividends thereon, was outstanding as of May 9, 2006; (ii) topay a special Class B distribution in the amount of $100,000, representinga return of capital of $95,861 to DIV Holding LLC, the holder of the SuccessorParent’s common stock; (iii) to redeem $27,968 of the Company’s seniorsubordinated notes on June 8, 2006; (iv) to pay prepayment penaltiesof $8,374, $5,717 of which represented prepayment penalties on the SuccessorParent’s preferred stock and $2,657 of which represented prepayment penaltieson the Company’s senior subordinated notes; and (v) to pay transactionexpenses of approximately $35,000, including an underwriters’ commission of$22,500, a fee of $5,000 to Veritas Capital and $7,500 of miscellaneous feesand expenses related to the Equity Offering.

During the third quarterof fiscal year 2007, the Company renamed its two reporting segments as follows:(i) International Technical Services changed to Government Services; and (ii) FieldTechnical Services changed to Maintenance and Technical Support Services. Seenote 13 for a description service offerings in the two reporting segments.

*Basis of Presentation*

The condensed consolidated financial statementsinclude the accounts of the Company and its domestic and foreign subsidiaries. Thesecondensed consolidated financial statements have been prepared by the Company,without audit, pursuant to U.S. generally accepted accounting principles (“GAAP”)for interim financial information and with the instructions to Form 10-Qand Article 10 of Regulation S-X. Certain information and footnotedisclosures normally included in financial statements prepared in 

5

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**DYNCORP INTERNATIONAL LLC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (In thousands, except per share data)**

accordance with GAAP havebeen condensed or omitted pursuant to such rules and regulations. However,the Company believes that all disclosures are adequate to make the informationpresented not misleading. These condensed consolidated financial statements shouldbe read in conjunction with the Company’s audited consolidated financialstatements and the related notes thereto included in the Company’s AnnualReport (File No. 333-127343) on Form 10-K, filed with theSecurities and Exchange Commission (the “SEC”) on June 29, 2006.

In the opinion of management, all adjustmentsnecessary to fairly present the Company’s financial position at December 29,2006 and March 31, 2006, the results of operations for the three and ninemonths ended December 29, 2006 and December 30, 2005, and cash flowsfor the nine months ended December 29, 2006 and December 30, 2005,have been included. The results of operations for the three and nine monthsended December 29, 2006 are not necessarily indicative of the results tobe expected for the full fiscal year or for any future periods. The Companyuses estimates and assumptions required for preparation of the financialstatements. The estimates are primarily based on historical experience andbusiness knowledge and are revised as circumstances change. However, actualresults could differ from the estimates.

The Company reports itsresults on a 52/53 week fiscal year with the fiscal year ending on the Fridayclosest to March 31. The three months ended December 29, 2006 was a13-week period from September 30, 2006 to December 29, 2006. Thethree months ended December 30, 2005 was a 13-week period from October 1,2005 to December 30, 2005. The nine months ended December 29, 2006was a 39-week period from April 1, 2006 to December 29, 2006. Thenine months ended December 30, 2005 was a 39-week period from April 2,2005 to December 30, 2005.

*Principles ofConsolidation*

All intercompany transactions and balances have beeneliminated in consolidation. The Company has no active majority-owned subsidiaries.Investments in which the Company owns a 20% to 50% ownership interest areaccounted for by the equity method. These investments are in business entitiesin which the Company does not have control, but has the ability to exercisesignificant influence over operating and financial policies. The Company has noinvestments in business entities of less than 20% ownership interest.

Thefollowing table sets forth the Company’s ownership in joint ventures andcompanies that are not consolidated into the Company’s financial statements asof December 29, 2006 and are accounted for by the equity method. For allof the entities listed below, the Company has the right to elect half of theboard of directors (the “Board of Directors”) or other management body. Economicrights are indicated by the ownership percentages listed below.

| Dyn Al-Rushaid Services  LLC           |   | 50.0 | % |
|----------------------------------------|--------|------|---|
| DynCorp-Hiberna Ltd.                   |   | 50.0 | % |
| DynEgypt LLC                           |   | 50.0 | % |
| DynPuertoRico  Corporation             |   | 49.9 | % |
| Contingency Response  Services LLC     |   | 45.0 | % |
| Partnership for  Temporary Housing LLC |   | 40.0 | % |
| Babcock DynCorp Limited                |   | 40.0 | % |

 

6

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**DYNCORP INTERNATIONAL LLC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (In thousands, except per share data)**

 

Thefollowing table sets forth the Company’s ownership in a joint venture that isconsolidated into the Company’s financial statements as of December 29,2006. For the entity listed below, the Company has the right to elect half ofthe Board of Directors or other management body.

| Global Linguist  Solutions LLC |   | 51.0 | % |
|--------------------------------|--------|------|---|

 

*Recent AccountingPronouncements*

In September 2006, the SEC issued StaffAccounting Bulletin No. 108 (“SAB108”), “*Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements*,” to address diversity in practice in quantifyingfinancial statement misstatements. SAB No. 108 requires that we quantifymisstatements based on their impact on each of our financial statements andrelated disclosures. SAB No. 108 is effective as of the end of fiscal2007, allowing a one-time transitional cumulative effect adjustment to retainedearnings as of August 27, 2006 for errors that were not previously deemedmaterial, but are material under the guidance in SAB No. 108. The Companyis currently evaluating the impact SAB No. 108 will have on itsconsolidated financial statements.

In September 2006, the Financial AccountingStandards Board (the “FASB”) issued Statement of Financial Accounting Standard(“SFAS”) No. 157, “*Fair Value Measurements*.”  SFAS No. 157 defines fair value,establishes a framework for measuring fair value under GAAP, and expandsdisclosures about fair value measurements. This statement does not require anynew fair value measurements; rather, it applies under other accountingpronouncements that require or permit fair value measurements. The provisionsof this statement are to be applied prospectively as of the beginning of thefiscal year in which this statement is initially applied, with any transitionadjustment recognized as a cumulative-effect adjustment to the opening balanceof retained earnings. This statement is effective for financial statementsissued for fiscal years beginning after November 15, 2007, and interimperiods within those fiscal years. The Company is currently evaluating theimpact of adopting SFAS No. 157 on its consolidated financial statements.

In July 2006, the FASB issued FASB InterpretationNo. 48, “*Accounting for Uncertainty in Income Taxes—aninterpretation of FASB Statement No. 109*” (“FIN 48”). FIN 48clarifies the accounting and reporting for income taxes recognized inaccordance with SFAS No. 109, “*Accounting for IncomeTaxes*.”  This interpretationprescribes a comprehensive model for the financial statement recognition,measurement, presentation and disclosure of uncertain tax positions taken orexpected to be taken in income tax returns. The requirements of FIN 48 areeffective for fiscal periods beginning after December 15, 2006. TheCompany is currently evaluating the impact of FIN 48 on its consolidatedfinancial statements.

On May 18, 2006, the State of Texas passed a billreplacing the current franchise tax with a new margin tax that will go intoeffect on January 1, 2008. The Company estimates that the new margin taxwill not have a significant impact on tax expense or deferred tax assets andliabilities.

In May 2005, the FASBissued SFAS No. 154, “*Accounting Changes andError Corrections*—*a replacement of APBOpinion No. 20 and FASB Statement No. 3*.”  SFAS No. 154 provides guidance on theaccounting for, and reporting of, accounting changes and error corrections. Itestablishes, unless 

7

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**DYNCORP INTERNATIONAL LLC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (In thousands, except per share data)**

impracticable,retrospective application as the required method for reporting a change inaccounting principle in the absence of explicit transition requirementsspecific to the newly adopted accounting principle. SFAS No. 154 alsoprovides guidance for determining whether retrospective application of a changein accounting principle is impracticable and for reporting such a change whenretrospective application is impracticable. The provisions of SFAS No. 154are effective for accounting changes and corrections of errors made in fiscalperiods beginning after December 15, 2005. The adoption of SFAS No. 154did not have any effect on the Company’s consolidated financial statements.

**Note 2—Receivables**

Receivablesconsist of the following:

| ** **                   | ** ** | **Dec. 29,  2006** | ** ** | **March 31,  2006** | ** ** |
|------------------------------|------------|-------------------------|------------|--------------------------|------------|
| Billed                       |       | $                       | 213,256    |                     | $          | 188,458 |   |
| Unbilled                     |       | 233,479                 |       | 248,994                  |       |
| Unbilled—related  party |       | —                  |       | 495                      |       |
|                         |       | $                       | 446,735    |                     | $          | 437,947 |   |

 

Unbilled receivablesconsist of costs and fees billable on contract completion or other specifiedevents, the majority of which is expected to be billed and collected withinsixty days. Unbilled receivables include revenue recognized on projects forwhich the Company has been requested by the customer to begin work under a newcontract or extend work under an existing contract, and for which formalcontracts or contract modifications have not been executed at the end of thequarter. At December 29, 2006 and March 31, 2006, unbilledreceivables included $29,210 and $31,303, respectively, related to this type ofunbilled receivable balance. In addition, unbilled receivables includes amountsrelated to contract retentions that are billed when the Company has negotiatedfinal indirect rates with the U.S. government and, once billed, are subject toaudit and approval by outside third parties. Consequently, the timing ofcollection of retention balances of $626 and $10 as of December 29, 2006and March 31, 2006, respectively, is outside the Company’s control. Basedon the Company’s historical experience, the majority of the retention balanceis expected to be collected beyond one year.

**Note 3—OtherIntangible Assets and Other Assets**

Asummary of amortizable intangible assets is as follows:

| ** **                          | ** ** | **December 29, 2006**              | ** ** |
|-------------------------------------|------------|----------------------------------------------|------------|
| ** **                          | ** ** | **Weighted-  Average  Amortization  Period** | ** ** | **Gross  Carrying Value** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Customer-related intangible  assets |       |                                         | 8.5        |   |   |   | $ | 290,381 |   |   |   | $ | (72,750 | ) |   | $ | 217,631 |   |
| Deferred  financing cost            |       |                                         | 7.0        |   |   |   | 20,383 |   |   |   | (5,428 | ) |   | 14,955 |   |
| Other                               |       |                                         | 4.2        |   |   |   | 13,193 |   |   |   | (6,450 | ) |   | 6,743 |   |
|                                |       |                                         |       |   |   |   | $ | 323,957 |   |   |   | $ | (84,628 | ) |   | $ | 239,329 |   |

 

8

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**DYNCORP INTERNATIONAL LLC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (In thousands, except per share data)**

 

| ** **                          | ** ** | **March 31, 2006**                 | ** ** |
|-------------------------------------|------------|----------------------------------------------|------------|
| ** **                          | ** ** | **Weighted-  Average  Amortization  Period** | ** ** | **Gross  Carrying Value** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Customer-related  intangible assets |       |                                         | 8.5        |   |   |   | $ | 290,381 |   |   |   | $ | (43,471 | ) |   | $ | 246,910 |   |
| Deferred  financing cost            |       |                                         | 7.1        |   |   |   | 20,730 |   |   |   | (3,261 | ) |   | 17,469 |   |
| Other                               |       |                                         | 4.1        |   |   |   | 11,124 |   |   |   | (3,671 | ) |   | 7,453 |   |
|                                |       |                                         |       |   |   |   | $ | 322,235 |   |   |   | $ | (50,403 | ) |   | $ | 271,832 |   |

 

Amortization expense for customer-related and otherintangibles was $10,353 and $10,009 for the three months ended December 29,2006 and December 30, 2005, respectively. Amortization expense for customer-relatedand other intangibles was $32,062 and $31,143 for the nine months ended December 29,2006 and December 30, 2005, respectively. Estimated amortization relatedto intangible assets at December 29, 2006 for fiscal years 2007 through2011 is as follows: $11,050, $42,756, $39,972, $39,580 and $35,407,respectively.

Deferred financing cost is amortized through interestexpense. Amortization related to deferred financing costs was $812 and $821 forthe three months ended December 29, 2006 and December 30, 2005,respectively. Amortization related to deferred financing costs was $2,327 and$2,141 for the nine months ended December 29, 2006 and December 30,2005, respectively.

Asummary of other assets is as follows:

| ** **               | ** ** | **Dec. 29,  2006** | ** ** | **March 31,  2006** | ** ** |
|--------------------------|------------|-------------------------|------------|--------------------------|------------|
| Other assets:            |       |                    |       |                     |       |   |   |
| Investment in affiliates |       | $                       | 1,547      |                     |       | $ | 911 |   |   |
| Deferred offering costs  |       | —                  |       |                     | 1,940      |   |   |
| Other                    |       | 371                     |       |                     | 325        |   |   |
|                     |       | $                       | 1,918      |                     |       | $ | 3,176 |   |   |

 

**Note 4—Cash Flows**

Cash payments for interest on indebtedness were $28,241and $35,918 for the nine months ended December 29, 2006 andDecember 30, 2005, respectively. Net cash payments for income taxes were$17,588 and $8,883 for the nine months ended December 29, 2006 andDecember 30, 2005, respectively. The Company had non-cash investing activitiesof $819 related to property and equipment purchases that were accrued atDecember 29, 2006. In addition, the Company had non-cash leaseholdimprovements of $3,015 related to one lease at December 29, 2006.

9

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**DYNCORP INTERNATIONAL LLC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (In thousands, except per share data)**

**Note 5—Derivatives**

Derivative financial instruments are recognized aseither assets or liabilities in the balance sheet and carried at fair value. Gainsor losses on derivatives designated as cash flow hedges are initially reportedas a component of other comprehensive income and later classified into earningsin the period in which the hedged item also affects earnings.

The Company entered intoan interest rate cap effective May 4, 2005 and paid a premium of $483. Theinterest rate cap has the effect of placing a ceiling on the interest expensethe Company could incur on $172,500 of variable debt indexed to the LondonInterbank Offered Rate at 6.5% plus the applicable floating spread (2.25% at December 29,2006) as defined by the Company’s senior secured credit facility agreement. Theinterest rate cap has been designated by the Company as a cash flow hedge. Asof December 29, 2006, the fair value of the interest rate cap was $11,which was recorded in the accompanying condensed consolidated balance sheet inother assets with the reduction in fair value, net of tax, recorded in equityas other comprehensive loss.

**Note 6—SignificantChanges in Indebtedness**

Thetable below presents significant changes in the amounts of senior subordinatednotes and similar debt:

| ** **                         | ** ** | **9.5% Senior  Subordinated** | ** ** | **Senior Secured  Credit Facility** | ** ** | ** **   | ** ** |
|------------------------------------|------------|------------------------------------|------------|-----------------------------------------------|------------|--------------|------------|
| ** **                         | ** ** | **Notes**                          | ** ** | **Term Loan**                            | ** ** | **Revolver** | ** ** | **Total** | ** ** |
| Balance at  March 31, 2006    |       |                               | $          | 320,000                                       |       |         |       | $ | 341,551 |   |   |   | $ | — |   |   | $ | 661,551 |   |
| Payments                           |       |                               | (27,968    | )                                             |       |         | (1,726     | ) |   |   | — |   |   | (29,694 | ) |
| Balance at  December 29, 2006 |       |                               | $          | 292,032                                       |       |         |       | $ | 339,825 |   |   |   | $ | — |   |   | $ | 631,857 |   |

 

On June 9, 2006, in connection with the SuccessorParent’s Equity Offering, the Company redeemed $27,968 of the $320,000aggregate principal amount of the senior subordinated notes. The Company alsopaid $834 in accrued interest through the redemption date and a prepaymentpenalty of $2,657 related to the senior subordinated notes.

In connection with the Successor Parent’s EquityOffering, the Company recognized an $827 loss related to the write-off of aportion of the previously capitalized loan cost for the senior subordinatednotes.

On June 28, 2006, the Company, entered into asecond amendment and waiver of the Company’s senior secured credit facility,dated February 11, 2005, as amended on January 9, 2006. The secondamendment and waiver provided for a senior secured credit facility of $431,551,representing a $90,000 revolver and a $341,551 outstanding term loan. Thesecond amendment and waiver also provided for the following, among otherthings: (i) decreased the interest rate spread applicable to the term loanunder the Company’s senior secured credit facility; (ii) permits theCompany to request an increase in its revolving credit facility by an aggregateamount of up to $30,000, subject to the Company obtaining commitments fromexisting and/or new lenders; (iii) increases the amount of capitalexpenditures permitted under the Company’s senior secured credit facility from$4,000 per fiscal year to $8,000 per fiscal year; (iv) increases 

10

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**DYNCORP INTERNATIONAL LLC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (In thousands, except per share data)**

the amount of capitalizedleases permitted under the Company’s senior secured credit facility from$10,000 per fiscal year to $25,000 per fiscal year; (v) allows for thepayment of dividends and the repurchase of the Company’s capital stock in theamount of $10,000, plus, if the Company’s leverage ratio (as defined in thesenior secured credit facility) is below 3.25:1.00, 25% of the Company’s excesscash flow (as defined in the senior secured credit facility) for each fiscalyear; and (vi) provides for the first excess cash flow payment, as definedby the senior secured credit facility, to commence on the Company’s fiscal yearthat ends on March 30, 2007.

In November 2006, theCompany obtained additional commitments from two new lenders which increasedthe revolving credit facility to $103,000. On December 29, 2006, theCompany had $93,899 available under the senior secured credit facility. Thisamount gives effect to $9,101 in outstanding letters of credit as of December 29,2006.

**Note 7—Class BEquity Participation**

During fiscal year ended March 31, 2006, certainmembers of management and the outside directors were granted a participatinginterest in the profits through a plan that granted them Class B interestsin an affiliate, DIV Holding LLC. DIV Holding LLC conducts no operations andwas established for the primary purpose of holding the equity of the Company. AtDecember 29, 2006, the aggregate individual grants were approximately 5.2%of the Class B interests of DIV Holding LLC. Pursuant to the terms of theoperating agreement governing DIV Holding LLC, the holders of Class Binterests are entitled to receive up to 7.5% of all distributions made by DIVHolding LLC after the holders of the Class A interests in DIV Holding LLChave received a return of their invested capital, provided that the holders ofthe Class A interests have received an 8.0% per annum internal rateof return (compounded annually) on their invested capital. The Class Binterests are subject to a five-year vesting schedule with any unvestedinterest reverting to the holders of Class A interests in the event the Class Binterests are forfeited or repurchased. The fair value of the Class Binterests granted to certain members of management and the outside directorswas determined to be $8,494 as of the effective date of each grant. Inaccordance with SFAS No. 123(R) “*Share-Based Payment*,”the Company records compensation expense based on the fair value as of theeffective date of each grant and commensurate with its graded vesting schedules.For the nine months ended December 29, 2006, the Company recognizednon-cash compensation expense of $1,471.

Assumingeach grant fully vests, the Company will recognize additional non-cashcompensation expense as follows:

| **FY 2007** | ** ** | **FY 2008** | ** ** | **FY 2009** | ** ** | **FY 2010** | ** ** | **FY 2011** | ** ** |
|------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| $658             |       | $2,065           |       | $1,195           |       |             | $          | 567              |       |   | $120 |   |
|                  |            |                  |            |                  |            |                  |            |                  |            |  |  |  |

 

**Note 8—Commitments,Contingencies and Litigation**

*Commitments*

The Company has operating leases for the use ofcertain property and equipment. Operating leases are noncancelable, cancelableonly by the payment of penalties or cancelable upon one month’s notice. Alllease payments are based on the lapse of time but include, in some cases,payments for insurance, maintenance and property taxes. There are no purchaseoptions on operating leases at favorable terms, but 

11

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**DYNCORP INTERNATIONAL LLC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (In thousands, except per share data)**

most leases have one ormore renewal options. Certain leases on real estate property are subject toannual escalations for increases in utilities and property taxes. Lease rentalexpense amounted to $6,862 and $19,124 for the three months ended December 29,2006 and December 30, 2005, respectively. Lease rental expense amounted to$39,232 and $39,544 for the nine months ended December 29, 2006 and December 30,2005, respectively.

Minimumfixed rentals required for the next five years and thereafter under operatingleases in effect at December 29, 2006 are as follows:

| **Fiscal Year** | ** ** | ** ** | ** ** | **Real Estate** | ** ** | **Equipment** | ** ** |
|----------------------|------------|------------|------------|----------------------|------------|---------------|------------|
| 2007                 |       |       | $          | 951                  |       |          |       | $ | 211 |   |   |
| 2008                 |       |       | 3,465      |                 |       |          | 751        |   |   |
| 2009                 |       |       | 2,432      |                 |       |          | 55         |   |   |
| 2010                 |       |       | 2,186      |                 |       |          | —     |   |   |
| 2011                 |       |       | 2,186      |                 |       |          | —     |   |   |
| Thereafter           |       |       | 12,023     |                 |       |          | —     |   |   |
|                 |       |       | $          | 23,243               |       |          |       | $ | 1,017 |   |   |

 

The Company has nosignificant long-term purchase agreements with service providers.

*Contingencies*

The primary financialinstruments that potentially subject the Company to concentrations of creditrisk are accounts receivable. Departments and agencies of the U.S. federalgovernment account for all but minor portions of the Company’s customer base,thereby minimizing credit risk. Furthermore, the Company continuously reviewsall accounts receivable and records provisions for doubtful accounts as needed.

*Litigation*

The Company and its subsidiaries and affiliates areinvolved in various lawsuits and claims that have arisen in the normal courseof business. In most cases, the Company has denied, or believes the Company hasa basis to deny, liability. The Company has recorded its best estimate of theaggregate liability that will result from these matters and believes that thesematters are adequately reserved. While it is not possible to predict withcertainty the outcome of litigation, it is the opinion of the Company’smanagement, based in part upon opinions of counsel, insurance in force and thefacts currently known, that liabilities in excess of those recorded, if any,arising from such matters would not have a material adverse effect on theresults of operations, consolidated financial condition or liquidity of theCompany over the long term.

In addition, the Company is occasionally the subjectof investigations by various agencies of the U.S. government. Suchinvestigations, whether related to U.S. government contracts or conducted forother reasons, could result in administrative, civil or criminal liabilities,including repayments, fines or penalties being imposed upon the Company, orcould lead to suspension or debarment from future U.S. government contracting. Inmanagement’s opinion, there are no outstanding issues of this nature at December 29,2006 

12

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**DYNCORP INTERNATIONAL LLC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (In thousands, except per share data)**

that will have a materialadverse effect on the Company’s consolidated financial condition, results ofoperations or liquidity.

On January 30, 2007, the Special InspectorGeneral for Iraq Reconstruction (SIGIR) issued a report on Company contractnumber S-LMAQM-04-C-0030, Task Order 0338, concerning theIraqi Police Training Program. Among other items, the report raises questionsabout the Company’s work under Task Order 0338 to establish a residential campin Baghdad to house training personnel. Specifically, the SIGIR reportrecommends that the Director, Office of Acquisition Management, U.S. Departmentof State (“State Department”), seek reimbursement from the Company of $4.2million paid by the State Department for work that the SIGIR maintains was notcontractually authorized. In addition, the SIGIR report recommends that theState Department request the Defense Contract Audit Agency to review twoCompany invoices totaling $19.1 million. In management’s opinion and based onfacts currently known, the above described matters raised in the SIGIR reportwill not have a material adverse effect on the Company’s consolidated financialcondition, results of operations or liquidity.

On September 11, 2001, a class action lawsuitseeking $100,000 on behalf of approximately 10,000 citizens of Ecuador wasfiled against the Company and several of its former affiliates in the U.S.District Court for the District of Columbia. The action alleges personalinjury, property damage and wrongful death as a consequence of the spraying ofnarcotic plant crops along the Colombian border adjacent to Ecuador. The sprayingoperations are conducted under a Department of State contract in cooperationwith the Colombian government. The terms of the Department of State contractprovide that the Department of State will indemnify the Company againstthird-party liabilities arising out of the contract, subject to availablefunding. The Company is also entitled to indemnification by Computer SciencesCorporation in connection with this lawsuit, subject to certain limitations. Additionally,any damage award would have to be apportioned between the other defendants andthe Company.

On December 4, 2006, a lawsuit was served, andamended on December 29, 2006, on behalf of 1,663 citizens of theEcuadorian provinces of Esmeraldes and Sucumbios, seeking unspecified monetarydamages, against DynCorp International LLC and several of its formeraffiliates, in the U.S. District Court for the Southern District of Florida.The action alleges personal injury, various counts of negligence, trespass,battery, assault, intentional infliction of emotional distress, violations ofthe Alien Tort Claims Act, and various violations of international law, as aconsequence of the spraying of narcotic plant crops along the Colombian borderadjacent to Ecuador. The spraying operations are the same operations which arethe subject of the above-mentioned litigation and are conducted under aDepartment of State contract in cooperation with the Colombian government. Asmentioned above, the terms of the Department of State contract provide that theDepartment of State will indemnify DynCorp International LLC againstthird-party liabilities arising out of the contract, subject to availablefunding.

On December 29, 2006, a lawsuit was served onbehalf of the Providence of Sucumbios in Ecuador, seeking unspecified monetarydamages against DynCorp International LLC and several of its former affiliatesin the U.S. District Court for the Southern District of Florida. The actionalleges violations of Ecuadorian law, international law, and the statutes andcommon law of Florida, including negligence, trespass, and nuisance, as aconsequence of the spraying of narcotic plant crops along the Colombian borderadjacent to Ecuador. The spraying operations are the same operations which arethe subject of the litigation described in the immediately precedingparagraph.  The relevant Department ofState contract 

13

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**DYNCORP INTERNATIONAL LLC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (In thousands, except per share data)**

provides indemnificationto DynCorp International LLC against third-party liabilities arising out of thecontract, subject to available funding.

On May 29, 2003,Gloria Longest, a former accounting manager for the Company, filed suit againstthe Company under the False Claims Act and the Florida Whistleblower Statute,alleging that the Company submitted false claims to the government under theInternational Narcotics and Law Enforcement Affairs contract with theDepartment of State. The action, titled *U.S. ex rel. Longest v.DynCorp and DynCorp International LLC*, was filed in the U.S.District Court for the Middle District of Florida under seal. The case wasunsealed in 2005, and the Company learned of its existence on August 15,2005 when it was served with the complaint. After conducting an investigationof the allegations made by the plaintiff, the U.S. government did not join theaction. The complaint does not demand any specific monetary damages; however,in the event that a court decides against the Company in this lawsuit, thatresult could have a material adverse effect on the Company’s operatingperformance.

**Note 9—Guarantor/Non-GuarantorSupplemental Data**

As of December 29, 2006, the Company hadoutstanding $292,032 aggregate principal amount of senior subordinated notes. Thesesenior subordinated notes are fully and unconditionally guaranteed, jointly andseverally, on a senior subordinated unsecured basis by the followingsubsidiaries of the Company: (i) DTS Aviation Services LLC; (ii) DynCorpAerospace Operations LLC; (iii) DynCorp International Services LLC; (iv) DynMarine Services LLC; (v) Worldwide Recruiting and Staffing Services LLC(formerly known as DynCorp International of Nigeria LLC); (vi) Dyn MarineServices of Virginia LLC; (vii) Services International LLC; and (viii) WorldwideHumanitarian Services LLC.

The followingsupplemental condensed consolidating financial statements present:

1.                 The Company’sfinancial position at December 29, 2006 and March 31, 2006, theresults of operations for the three and nine months ended December 29,2006 and December 30, 2005, and cash flows for the nine months ended December 29,2006 and December 30, 2005.

2.                 DynCorpInternational LLC (the “Parent”), the combined Subsidiary Guarantors and thecombined Subsidiary Non-Guarantors account for their investments insubsidiaries using the equity method of accounting; therefore, the Parentcolumn reflects the equity income (loss) of its Subsidiary Guarantors and itsSubsidiary Non-Guarantors, both of which are also separately reflected in thestandalone Subsidiary Guarantors and Subsidiary Non-Guarantors columns. Additionally,the Subsidiary Guarantors column reflects the equity income (loss) of theParent’s Subsidiary Non-Guarantors, which are also separately reflected in thestandalone Subsidiary Non-Guarantors column.

3.                 Eliminationentries necessary to consolidate the Parent and all of its subsidiaries.

14

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**DYNCORP INTERNATIONAL LLC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (In thousands, except per share data)**

**DYNCORPINTERNATIONAL LLC AND SUBSIDIARIES**

**CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION**

**DECEMBER 29,2006**

**(Unaudited)**
|                                                                          | ** ** | **Parent** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| **ASSETS**                                                               |       |       |       |                       |       |                           |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Current assets:                                                          |       |       |       |                       |       |                           |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                               |       | $          | 30,862     |                       |       | $                              | 5,491      |             |       |             | $          | 18,983 |   |   |   | $ | — |   |   |   | $ | 55,336 |   |   |
| Receivables, net                                                         |       | 410,243    |       |                       | 40,800     |                           |       |             | (2,415     | )                |       |   | — |   |   |   | 448,628 |   |   |
| Prepaid expenses and  other current assets                               |       | 41,952     |       |                       | 15,028     |                           |       |             | 6          |             |       |   | — |   |   |   | 56,986 |   |   |
| Total current assets .                                                   |       | 483,057    |       |                       | 61,319     |                           |       |             | 16,574     |             |       |   | — |   |   |   | 560,950 |   |   |
| Property and equipment,  net                                             |       | 7,034      |       |                       | 3,669      |                           |       |             | 535        |             |       |   | — |   |   |   | 11,238 |   |   |
| Other assets:                                                            |       |       |       |                       |       |                           |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Goodwill                                                                 |       | 398,559    |       |                       | 21,621     |                           |       |             | —     |             |       |   | — |   |   |   | 420,180 |   |   |
| Tradename                                                                |       | 18,318     |       |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | 18,318 |   |   |
| Customer-related  intangibles, net                                       |       | 204,060    |       |                       | 13,571     |                           |       |             | —     |             |       |   | — |   |   |   | 217,631 |   |   |
| Other intangibles, net                                                   |       | 6,428      |       |                       | 315        |                           |       |             | —     |             |       |   | — |   |   |   | 6,743 |   |   |
| Investment in  subsidiaries                                              |       | 16,796     |       |                       | 451        |                           |       |             | —     |             |       |   | (17,247 | ) |   |   | — |   |   |
| Deferred financing  costs, net                                           |       | 14,955     |       |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | 14,955 |   |   |
| Other assets                                                             |       | 14,825     |       |                       | 31         |                           |       |             | —     |             |       |   | — |   |   |   | 14,856 |   |   |
| Intercompany receivables                                                 |       | 21,887     |       |                       | —     |                           |       |             | 34,797     |             |       |   | (56,684 | ) |   |   | — |   |   |
| Total other assets                                                       |       | 695,828    |       |                       | 35,989     |                           |       |             | 34,797     |             |       |   | (73,931 | ) |   |   | 692,683 |   |   |
| Total assets                                                             |       | $          | 1,185,919  |                       |       | $                              | 100,977    |             |       |             | $          | 51,906 |   |   |   | $ | (73,931 | ) |   |   | $ | 1,264,871 |   |   |
| **LIABILITIES AND MEMBER’S EQUITY**                                 |       |       |       |                       |       |                           |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Current liabilities:                                                     |       |       |       |                       |       |                           |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Current portion of  long-term debt         |       | $          | 3,450      |                       |       | $                              | —     |             |       |             | $          | — |   |   |   | $ | — |   |   |   | $ | 3,450 |   |   |
| Current portion of other  long-term liabilities                          |       | 301        |       |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | 301 |   |   |
| Accounts payable and  accrued expenses                              |       | 112,335    |       |                       | 13,580     |                           |       |             | 21         |             |       |   | — |   |   |   | 125,936 |   |   |
| Accrued payroll and  employee costs                  |       | 50,978     |       |                       | (283       | )                              |       |             | 28,181     |             |       |   | — |   |   |   | 78,876 |   |   |
| Other accrued expenses                                                   |       | 18,300     |       |                       | 13,073     |                           |       |             | 23,867     |             |       |   | — |   |   |   | 55,240 |   |   |
| Income taxes                                                             |       | 7,844      |       |                       | 963        |                           |       |             | (450       | )                |       |   | — |   |   |   | 8,357 |   |   |
| Total current  liabilities                                               |       | 193,208    |       |                       | 27,333     |                           |       |             | 51,619     |             |       |   | — |   |   |   | 272,160 |   |   |
| Long-term debt—less  current portion       |       | 628,407    |       |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | 628,407 |   |   |
| Other long-term  liabilities                                             |       | 5,742      |       |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | 5,742 |   |   |
| Intercompany payables                                                    |       | —     |       |                       | 56,683     |                           |       |             | —     |             |       |   | (56,683 | ) |   |   | — |   |   |
| Member’s equity                                                     |       | 358,562    |       |                       | 16,961     |                           |       |             | 287        |             |       |   | (17,248 | ) |   |   | 358,562 |   |   |
| Total liabilities and member’s equity      |       | $          | 1,185,919  |                       |       | $                              | 100,977    |             |       |             | $          | 51,906 |   |   |   | $ | (73,931 | ) |   |   | $ | 1,264,871 |   |   |

 

15

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**DYNCORP INTERNATIONAL LLC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (In thousands, except per share data)**

**DYNCORPINTERNATIONAL LLC AND SUBSIDIARIES**

**CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION**

**MARCH 31,2006**
|                                                                          | ** ** | **Parent** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| **ASSETS**                                                               |       |       |       |                       |       |                           |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Current assets:                                                          |       |       |       |                       |       |                           |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents .                                             |       | $          | 7,567      |                       |       | $                              | 10,749     |             |       |             | $          | 2,257 |   |   |   | $ | — |   |   |   | $ | 20,573 |   |   |
| Receivables, net .                                                       |       | 417,727    |       |                       | 22,296     |                           |       |             | 172        |             |       |   | — |   |   |   | 440,195 |   |   |
| Prepaid expenses and  other current assets                               |       | 43,547     |       |                       | 754        |                           |       |             | 227        |             |       |   | — |   |   |   | 44,528 |   |   |
| Total current assets .                                                   |       | 468,841    |       |                       | 33,799     |                           |       |             | 2,656      |             |       |   | — |   |   |   | 505,296 |   |   |
| Property and equipment,  net .                                           |       | 5,016      |       |                       | 3,266      |                           |       |             | 487        |             |       |   | — |   |   |   | 8,769 |   |   |
| Other assets:                                                            |       |       |       |                       |       |                           |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Goodwill                                                                 |       | 398,559    |       |                       | 21,621     |                           |       |             | —     |             |       |   | — |   |   |   | 420,180 |   |   |
| Tradename                                                                |       | 18,318     |       |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | 18,318 |   |   |
| Customer-related  intangibles, net                                       |       | 233,339    |       |                       | 13,571     |                           |       |             | —     |             |       |   | — |   |   |   | 246,910 |   |   |
| Other intangibles, net .                                                 |       | 7,138      |       |                       | 315        |                           |       |             | —     |             |       |   | — |   |   |   | 7,453 |   |   |
| Investment in  subsidiaries .                                            |       | 9,653      |       |                       | 215        |                           |       |             | (1         | )                |       |   | (9,867 | ) |   |   | — |   |   |
| Deferred financing  costs, net .                                         |       | 17,469     |       |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | 17,469 |   |   |
| Other assets                                                             |       | 14,694     |       |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | 14,694 |   |   |
| Intercompany receivables                                                 |       | 20,659     |       |                       | —     |                           |       |             | 22,274     |             |       |   | (42,933 | ) |   |   | — |   |   |
| Total other assets .                                                     |       | 719,829    |       |                       | 35,722     |                           |       |             | 22,273     |             |       |   | (52,800 | ) |   |   | 725,024 |   |   |
| Total assets .                                                           |       | $          | 1,193,686  |                       |       | $                              | 72,787     |             |       |             | $          | 25,416 |   |   |   | $ | (52,800 | ) |   |   | $ | 1,239,089 |   |   |
| **LIABILITIES AND MEMBER’S EQUITY**                                 |       |       |       |                       |       |                           |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Current liabilities:                                                     |       |       |       |                       |       |                           |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Current portion of  long-term debt         |       | $          | 2,588      |                       |       | $                              | —     |             |       |             | $          | — |   |   |   | $ | — |   |   |   | $ | 2,588 |   |   |
| Accounts payable and  accrued expenses                              |       | 143,595    |       |                       | 73         |                           |       |             | —     |             |       |   | — |   |   |   | 143,668 |   |   |
| Accrued payroll and  employee costs .                     |       | 26,632     |       |                       | 14,251     |                           |       |             | 24,703     |             |       |   | — |   |   |   | 65,586 |   |   |
| Other accrued expenses                                                   |       | 27,548     |       |                       | 5,749      |                           |       |             | 548        |             |       |   | — |   |   |   | 33,845 |   |   |
| Income taxes                                                             |       | 8,201      |       |                       | 77         |                           |       |             | 2          |             |       |   | — |   |   |   | 8,280 |   |   |
| Total current  liabilities                                               |       | 208,564    |       |                       | 20,150     |                           |       |             | 25,253     |             |       |   | — |   |   |   | 253,967 |   |   |
| Long-term debt—less  current portion       |       | 658,963    |       |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | 658,963 |   |   |
| Intercompany payables                                                    |       | —     |       |                       | 42,932     |                           |       |             | —     |             |       |   | (42,932 | ) |   |   | — |   |   |
| Member’s equity                                                     |       | 326,159    |       |                       | 9,705      |                           |       |             | 163        |             |       |   | (9,868 | ) |   |   | 326,159 |   |   |
| Total liabilities and member’s equity      |       | $          | 1,193,686  |                       |       | $                              | 72,787     |             |       |             | $          | 25,416 |   |   |   | $ | (52,800 | ) |   |   | $ | 1,239,089 |   |   |

 

16

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**DYNCORP INTERNATIONAL LLC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (In thousands, except per share data)**

**DYNCORPINTERNATIONAL LLC AND SUBSIDIARIES**

**CONDENSED CONSOLIDATING STATEMENT OF OPERATIONSINFORMATION**

**FORTHE THREE MONTHS ENDED DECEMBER 29, 2006**

**(Unaudited)**
|                                                                              | ** ** | **Parent** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| Revenues                                                                     |       | $          | 466,905    |                       |       | $                              | 50,634     |             |       |             | $          | 88,996 |   |   |   | $ | (88,996 | ) |   |   | $ | 517,539 |   |   |
| Costs of services  (excluding depreciation and amortization disclosed below) |       | 402,804    |       |                       | 46,654     |                           |       |             | 89,218     |             |       |   | (88,996 | ) |   |   | 449,680 |   |   |
| Selling, general and  administrative                                         |       | 22,974     |       |                       | 2,002      |                           |       |             | (27        | )                |       |   | — |   |   |   | 24,949 |   |   |
| Depreciation and  amortization                                               |       | 10,632     |       |                       | —     |                           |       |             | 24         |             |       |   | — |   |   |   | 10,656 |   |   |
| Operating income                                                             |       | 30,495     |       |                       | 1,978      |                           |       |             | (219       | )                |       |   | — |   |   |   | 32,254 |   |   |
| Interest expense                                                             |       | 14,554     |       |                       |       |                           |       |             | —     |             |       |   | — |   |   |   | 14,554 |   |   |
| Income on joint ventures                                                     |       | (1,000     | )          |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | (1,000 | ) |   |
| Interest income                                                              |       | (533       | )          |                       | (1         | )                              |       |             | —     |             |       |   | — |   |   |   | (534 | ) |   |
| Equity in income of  subsidiaries                                            |       | (1,433     | )          |                       | (103       | )                              |       |             | —     |             |       |   | 1,536 |   |   |   | — |   |   |
| Income (loss) before  income taxes                                           |       | 18,907     |       |                       | 2,082      |                           |       |             | (219       | )                |       |   | (1,536 | ) |   |   | 19,234 |   |   |
| Provision for income  taxes                                                  |       | 6,691      |       |                       | 278        |                           |       |             | 49         |             |       |   | — |   |   |   | 7,018 |   |   |
| Net income                                                                   |       | $          | 12,216     |                       |       | $                              | 1,804      |             |       |             | $          | (268 | ) |   |   | $ | (1,536 | ) |   |   | $ | 12,216 |   |   |

 

**DYNCORPINTERNATIONAL LLC AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATIONFOR THE THREE MONTHS ENDED DECEMBER 30, 2005(Unaudited)**
|                                                                              | ** ** | **Parent** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| Revenues                                                                     |       | $          | 487,789    |                       |       | $                              | 65,772     |             |       |             | $          | 50,942 |   |   |   | $ | (50,942 | ) |   |   | $ | 553,561 |   |   |
| Costs of services (excluding  depreciation and amortization disclosed below) |       | 436,635    |       |                       | 61,974     |                           |       |             | 50,815     |             |       |   | (50,942 | ) |   |   | 498,482 |   |   |
| Selling, general and  administrative                                         |       | 19,078     |       |                       | 1,935      |                           |       |             | —     |             |       |   | — |   |   |   | 21,013 |   |   |
| Depreciation and  amortization                                               |       | 10,545     |       |                       | —     |                           |       |             | 18         |             |       |   | — |   |   |   | 10,563 |   |   |
| Operating income                                                             |       | 21,531     |       |                       | 1,863      |                           |       |             | 109        |             |       |   | — |   |   |   | 23,503 |   |   |
| Interest expense                                                             |       | 14,595     |       |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | 14,595 |   |   |
| Interest income                                                              |       | (103       | )          |                       | (9         | )                              |       |             | —     |             |       |   | — |   |   |   | (112 | ) |   |
| Loss from joint venture                                                      |       | 40         |       |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | 40 |   |   |
| Equity in income of  subsidiaries                                            |       | (1,918     | )          |                       | (50        | )                              |       |             | —     |             |       |   | 1,968 |   |   |   | — |   |   |
| Income before income  taxes                                                  |       | 8,917      |       |                       | 1,922      |                           |       |             | 109        |             |       |   | (1,968 | ) |   |   | 8,980 |   |   |
| Provision for income  taxes                                                  |       | 3,326      |       |                       | —     |                           |       |             | 63         |             |       |   | — |   |   |   | 3,389 |   |   |
| Net income                                                                   |       | $          | 5,591      |                       |       | $                              | 1,922      |             |       |             | $          | 46 |   |   |   | $ | (1,968 | ) |   |   | $ | 5,591 |   |   |

 

17

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**DYNCORP INTERNATIONAL LLC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (In thousands, except per share data)**

**DYNCORPINTERNATIONAL LLC AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATIONFOR THE NINE MONTHS ENDED DECEMBER 29, 2006(Unaudited)**
|                                                                              | ** ** | **Parent** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| Revenues                                                                     |       | $          | 1,354,672  |                       |       | $                              | 175,272    |             |       |             | $          | 218,191 |   |   |   | $ | (218,191 | ) |   |   | $ | 1,529,944 |   |   |
| Costs of services  (excluding depreciation and amortization disclosed below) |       | 1,181,349  |       |                       | 162,472    |                           |       |             | 217,817    |             |       |   | (218,191 | ) |   |   | 1,343,447 |   |   |
| Selling, general and  administrative                                         |       | 77,590     |       |                       | 5,287      |                           |       |             | 29         |             |       |   | — |   |   |   | 82,906 |   |   |
| Depreciation and  amortization                                               |       | 32,930     |       |                       | —     |                           |       |             | 75         |             |       |   | — |   |   |   | 33,005 |   |   |
| Operating income                                                             |       | 62,803     |       |                       | 7,513      |                           |       |             | 270        |             |       |   | — |   |   |   | 70,586 |   |   |
| Interest expense                                                             |       | 44,057     |       |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | 44,057 |   |   |
| Loss on debt extinguishment                                                  |       | 3,484      |       |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | 3,484 |   |   |
| Income on joint ventures                                                     |       | (1,323     | )          |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | (1,323 | ) |   |
| Interest income                                                              |       | (1,085     | )          |                       | (9         | )                              |       |             | —     |             |       |   | — |   |   |   | (1,094 | ) |   |
| Equity in income of  subsidiaries                                            |       | (7,142     | )          |                       | (237       | )                              |       |             | —     |             |       |   | 7,379 |   |   |   | — |   |   |
| Income before income  taxes                                                  |       | 24,812     |       |                       | 7,759      |                           |       |             | 270        |             |       |   | (7,379 | ) |   |   | 25,462 |   |   |
| Provision for income  taxes                                                  |       | 8,705      |       |                       | 504        |                           |       |             | 146        |             |       |   | — |   |   |   | 9,355 |   |   |
| Net income                                                                   |       | $          | 16,107     |                       |       | $                              | 7,255      |             |       |             | $          | 124 |   |   |   | $ | (7,379 | ) |   |   | $ | 16,107 |   |   |

 

**DYNCORPINTERNATIONAL LLC AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATIONFOR THE NINE MONTHS ENDED DECEMBER 30, 2005(Unaudited)**
|                                                                              | ** ** | **Parent** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| Revenues                                                                     |       | $          | 1,244,711  |                       |       | $                              | 173,534    |             |       |             | $          | 155,732 |   |   |   | $ | (155,732 | ) |   |   | $ | 1,418,245 |   |   |
| Costs of services  (excluding depreciation and amortization disclosed below) |       | 1,099,878  |       |                       | 162,554    |                           |       |             | 155,374    |             |       |   | (155,732 | ) |   |   | 1,262,074 |   |   |
| Selling, general and  administrative                                         |       | 55,587     |       |                       | 4,286      |                           |       |             | 1          |             |       |   | — |   |   |   | 59,874 |   |   |
| Depreciation and  amortization                                               |       | 32,698     |       |                       | —     |                           |       |             | 65         |             |       |   | — |   |   |   | 32,763 |   |   |
| Operating income                                                             |       | 56,548     |       |                       | 6,694      |                           |       |             | 292        |             |       |   | — |   |   |   | 63,534 |   |   |
| Interest expense                                                             |       | 42,278     |       |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | 42,278 |   |   |
| Interest income                                                              |       | (154       | )          |                       | (12        | )                              |       |             | —     |             |       |   | — |   |   |   | (166 | ) |   |
| Loss from joint ventures                                                     |       | 181        |       |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | 181 |   |   |
| Equity in income of  subsidiaries                                            |       | (6,686     | )          |                       | (191       | )                              |       |             | —     |             |       |   | 6,877 |   |   |   | — |   |   |
| Income before income  taxes                                                  |       | 20,929     |       |                       | 6,897      |                           |       |             | 292        |             |       |   | (6,877 | ) |   |   | 21,241 |   |   |
| Provision for income  taxes                                                  |       | 7,241      |       |                       | 207        |                           |       |             | 105        |             |       |   | — |   |   |   | 7,553 |   |   |
| Net income                                                                   |       | $          | 13,688     |                       |       | $                              | 6,690      |             |       |             | $          | 187 |   |   |   | $ | (6,877 | ) |   |   | $ | 13,688 |   |   |

 

18

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**DYNCORP INTERNATIONAL LLC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (In thousands, except per share data)**

**DYNCORPINTERNATIONAL LLC AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATIONFOR THE NINE MONTHS ENDED DECEMBER 29, 2006(Unaudited)**
|                                                       | ** ** | **Parent** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|------------|------------|----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| Net cash provided by  (used in) operating activities  |       | $          | 41,301     |                       |       | $                              | (18,192    | )                |       |             | $          | 29,375 |   |   |   | $ | — |   |   |   | $ | 52,484 |   |   |
| **Cash flows from investing activities:**             | ** ** | ** ** | ** ** |                       |       |                           |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Purchases of property and  equipment                  |       | (2,737     | )          |                       | (818       | )                              |       |             | (124       | )                |       |   | — |   |   |   | (3,679 | ) |   |
| Other assets                                          |       | (1,695     | )          |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | (1,695 | ) |   |
| Net cash used in  investing activities                |       | (4,432     | )          |                       | (818       | )                              |       |             | (124       | )                |       |   | — |   |   |   | (5,374 | ) |   |
| **Cash flows from financing activities:**             | ** ** | ** ** | ** ** |                       |       |                           |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Net transfers from (to)  Parent                       |       | 16,680     |       |                       | 13,752     |                           |       |             | (12,525    | )                |       |   | — |   |   |   | 17,907 |   |   |
| Payment on credit  facility                           |       | (29,694    | )          |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | (29,694 | ) |   |
| Other financing  activities                           |       | (560       | )          |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | (560 | ) |   |
| Net cash (used in)  provided by financing activities  |       | (13,574    | )          |                       | 13,752     |                           |       |             | (12,525    | )                |       |   | — |   |   |   | (12,347 | ) |   |
| Net increase (decrease)  in cash and cash equivalents |       | 23,295     |       |                       | (5,258     | )                              |       |             | 16,726     |             |       |   | — |   |   |   | 34,763 |   |   |
| Cash and cash equivalents  at beginning of period     |       | 7,567      |       |                       | 10,749     |                           |       |             | 2,257      |             |       |   | — |   |   |   | 20,573 |   |   |
| Cash and cash equivalents at end of  period           |       | $          | 30,862     |                       |       | $                              | 5,491      |             |       |             | $          | 18,983 |   |   |   | $ | — |   |   |   | $ | 55,336 |   |   |

 

**DYNCORPINTERNATIONAL LLC AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATIONFOR THE NINE MONTHS ENDED DECEMBER 30, 2005(Unaudited)**
|                                                                     | ** ** | **Parent** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| Net cash provided by  operating activities                          |       | $          | 50,933     |                       |       | $                              | (5,762     | )                |       |             | $          | 8,991 |   |   |   | $ | — |   |   |   | $ | 54,162 |   |   |
| **Cash flows from investing activities:**                           | ** ** | ** ** | ** ** |                       |       |                           |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Purchases of property and  equipment                                |       | (940       | )          |                       | (339       | )                              |       |             | (59        | )                |       |   | — |   |   |   | (1,338 | ) |   |
| Other assets                                                        |       | (2,200     | )          |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | (2,200 | ) |   |
| Net cash used in  investing activities                              |       | (3,140     | )          |                       | (339       | )                              |       |             | (59        | )                |       |   | — |   |   |   | (3,538 | ) |   |
| **Cash flows from financing activities:**                           | ** ** | ** ** | ** ** |                       |       |                           |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Net transfers from (to)  Parent                                     |       | 545        |       |                       | 7,389      |                           |       |             | (7,934     | )                |       |   | — |   |   |   | — |   |   |
| Payments on credit  facility                                        |       | (35,000    | )          |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | (35,000 | ) |   |
| Payments on acquisition  debt                                       |       | (2,587     | )          |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | (2,587 | ) |   |
| Payment of deferred  financing costs                                |       | (1,225     | )          |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | (1,225 | ) |   |
| Purchase of interest rate  cap                                      |       | (483       | )          |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | (483 | ) |   |
| Net cash used in  financing activities                              |       | (38,750    | )          |                       | 7,389      |                           |       |             | (7,934     | )                |       |   | — |   |   |   | (39,295 | ) |   |
| Net increase in cash and  cash equivalents                          |       | 9,043      |       |                       | 1,288      |                           |       |             | 998        |             |       |   | — |   |   |   | 11,329 |   |   |
| Cash and cash equivalents  at beginning of period    |       | 10,531     |       |                       | 1,423      |                           |       |             | 1,520      |             |       |   | — |   |   |   | 13,474 |   |   |
| Cash and cash equivalents at end of  period                         |       | $          | 19,574     |                       |       | $                              | 2,711      |             |       |             | $          | 2,518 |   |   |   | $ | — |   |   |   | $ | 24,803 |   |   |

 

19

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**DYNCORP INTERNATIONAL LLC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (In thousands, except per share data)**

**Note 10—SegmentInformation**

The Company is organized into two reporting segments.During the third quarter of fiscal year 2007, the Company renamed its tworeporting segments as follows: (i) International Technical Services toGovernment Services (“GS”); and (ii) Field Technical Services to Maintenanceand Technical Support Services (“MTSS”). MTSS primarily offers aviation services, including maintenance andmodifications, training, aftermarket logistics support, avionics upgrades,field installations, and aircraft operations and training. GS primarily offersbase maintenance/operations and personal and physical security services. TheCompany provides services domestically and in foreign countries under contractswith the U.S. government and some foreign customers. The risks associated withthe Company’s foreign operations relating to foreign currency fluctuation andpolitical and economic conditions in foreign countries have not had asignificant negative impact on the Company. The Company operates principallywithin a regulatory environment subject to governmental contracting andaccounting requirements, including Federal Acquisition Regulations, CostAccounting Standards and audits by various U.S. federal agencies.

The Company’s MTSS operating segment provideslong-term aviation services and engineering and logistics support, ranging fromdaily fleet maintenance to extensive modification and overhauls on aircraft,weapons systems and support equipment. MTSS generates revenue under long-termcontracts that are typically three to ten years in duration. Based on revenues,Contract Field Teams is the most significant program in the MTSS operatingsegment. The Company and its predecessors have participated in this program for54 consecutive years. This program deploys highly mobile, quick-response fieldteams to customer locations worldwide to supplement the Company’s customers’ workforce,including generally providing mission support to aircraft and weapons systemsin addition to depot-level repair.

The Company’s GS operating segment primarily providesoutsourced law enforcement training, drug eradication, global logistics, base operationsand personal and physical security services to government and commercialcustomers in foreign jurisdictions. The GS operating segment has witnessedstrong growth as a part of the Department of State’s outsourced law enforcementtraining in the Middle East. The Company was awarded a new Civilian Policecontract, which expanded the existing Civilian Police program in place since1994. As of September 29, 2006, the Company had deployed civilian policeofficers from the United States to two countries to train and offer logisticssupport to the local police and assist them with infrastructure andreconstruction.

The DynCorp International Home Office componentrepresents assets not included in a reporting segment and is primarilycomprised of the following: (i) severance-related costs; (ii) bonusespaid to certain members of management related to our Successor Parent’s EquityOffering; (iii) deferred compensation expense related to the Class Bequity interest; and (iv) income from joint ventures.

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**DYNCORP INTERNATIONAL LLC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (In thousands, except per share data)**

The tablebelow presents selected financial information for the respective periods, forthe two reportable segments and for financial items that cannot be allocated toeither operating segment:
|                                                     | ** ** | **Maintenance  And Technical  Support  Services** | ** ** | **Government  Services** | ** ** | **DynCorp  International  Home Office** | ** ** | **Total** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------|------------|----------------------------------------------|------------|-----------|------------|
| For the Three Months  Ended December 29, 2006: |       |                                                   |       |                     |       |                                         |       |      |       |   |   |   |   |   |   |
| Revenues                                            |       |                                                   | $          | 179,838                  |       |                                         |       | $         | 337,701    |   |   |   | $ | — |   |   | $ | 517,539 |   |
| Earnings before interest and taxes                  |       |                                                   | 272        |                     |       |                                         | 34,361     |      |       |   | (845 | ) |   | 33,788 |   |
| Depreciation and amortization                       |       |                                                   | 3,398      |                     |       |                                         | 7,690      |      |       |   | 51 |   |   | 11,139 |   |
| For the Three  Months Ended December 30, 2005: |       |                                                   |       |                     |       |                                         |       |      |       |   |   |   |   |   |   |
| Revenues                                            |       |                                                   | $          | 179,592                  |       |                                         |       | $         | 373,969    |   |   |   | $ | — |   |   | $ | 553,561 |   |
| Earnings before interest and taxes                  |       |                                                   | 3,635      |                     |       |                                         | 20,654     |      |       |   | (714 | ) |   | 23,575 |   |
| Depreciation and  amortization                      |       |                                                   | 2,563      |                     |       |                                         | 7,540      |      |       |   | 672 |   |   | 10,775 |   |

 
|                                                    | ** ** | **Maintenance  And Technical  Support  Services** | ** ** | **Government  Services** | ** ** | **DynCorp  International  Home Office** | ** ** | **Total** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------|------------|----------------------------------------------|------------|-----------|------------|
| For the Nine Months  Ended December 29, 2006: |       |                                                   |       |                     |       |                                         |       |      |       |   |   |   |   |
| Revenues                                           |       |                                                   | $          | 528,029                  |       |                                         | $          | 1,001,915 |       |   | $ | — |   |   | $ | 1,529,944 |   |
| Earnings before interest and taxes                 |       |                                                   | 7,444      |                     |       | 72,537                                       |       |      | (6,978     | ) |   | 73,003 |   |
| Depreciation and amortization                      |       |                                                   | 9,376      |                     |       | 23,192                                       |       |      | 2,086      |   |   | 34,654 |   |
| Assets                                             |       |                                                   | 331,731    |                     |       | 843,704                                      |       |      | 89,436     |   |   | 1,264,871 |   |
| For the Nine  Months Ended December 30, 2005: |       |                                                   |       |                     |       |                                         |       |      |       |   |   |   |   |
| Revenues                                           |       |                                                   | $          | 521,963                  |       |                                         | $          | 896,282   |       |   | $ | — |   |   | $ | 1,418,245 |   |
| Earnings before interest and taxes                 |       |                                                   | 17,156     |                     |       | 47,033                                       |       |      | (670       | ) |   | 63,519 |   |
| Depreciation and  amortization                     |       |                                                   | 8,400      |                     |       | 23,175                                       |       |      | 1,815      |   |   | 33,390 |   |

 

The Company evaluates segment performance basedprimarily on the non-GAAP measure of earnings before interest and taxes (“EBIT”),which includes the effects of corporate expense allocations. EBIT is a non-GAAPmeasure that includes operating income, interest income and income (loss) fromjoint ventures. Items that the Company does not include in EBIT are interestexpense and income taxes, each of which the Company evaluates on a consolidatedlevel. The Company’s management believes EBIT is a useful measurement of theCompany’s performance because it provides information that can be used toevaluate the effectiveness of the Company’s business from an operationalperspective, exclusive of the costs to finance those activities and exclusiveof income taxes, neither of which is directly relevant to the efficiency ofthose operations.

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**DYNCORP INTERNATIONAL LLC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (In thousands, except per share data)**

EBITshould not be considered an alternative to, or a more meaningful indicator ofthe Company’s operating performance than, operating income or net income asdetermined in accordance with GAAP. In addition, EBIT may not be comparable toa similarly titled measure of another company. A reconciliation of earningsbefore interest and taxes to net income is as follows:

| ** **                          | ** ** | **For the Three   Months Ended** | ** ** | **For the Nine   Months Ended** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                          | ** ** | **Dec. 29,  2006**                              | ** ** | **Dec. 30,  2005**                             | ** ** | **Dec. 29,  2006** | ** ** | **Dec. 30,  2005** | ** ** |
| Earnings before  interest and taxes |       | $                                                    | 33,788     |                                                | $          | 23,575 |   | $ | 73,003 |   | $ | 63,519 |   |
| Interest expense                    |       | 14,554                                               |       | 14,595                                              |       | 44,057 |   | 42,278 |   |
| Loss on debt  extinguishment        |       | —                                               |       | —                                              |       | 3,484 |   | — |   |
| Provision for  income taxes         |       | 7,018                                                |       | 3,389                                               |       | 9,355 |   | 7,553 |   |
| Net income                          |       | $                                                    | 12,216     |                                                | $          | 5,591 |   | $ | 16,107 |   | $ | 13,688 |   |

 

* * * * *

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**ITEM 2.**             MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

References to the “Company,”“us” or “we” refer to DynCorp International LLC and its wholly ownedsubsidiaries. The following discussion and analysis of the Company’s financialcondition and results of operations should be read in conjunction with thefinancial statements and the notes thereto contained elsewhere in this report. Certaininformation contained in the discussion and analysis set forth below includes forward-lookingstatements that involve risks and uncertainties.

**Special NoteRegarding Forward-Looking Statements**

This Quarterly Report on Form 10-Qcontains various forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended  (the “Exchange Act”). Forward-lookingstatements, written, oral or otherwise made, represent the Company’sexpectation or belief concerning future events. Forward-looking statementsinvolve risks and uncertainties. Without limiting the foregoing, the words “believes,”“thinks,” “anticipates,” “plans,” “expects” and similar expressions areintended to identify forward-looking statements. The Company cautions thatthese statements are further qualified by important economic, competitive,governmental and technological factors that could cause our business, strategyor actual results or events to differ materially, or otherwise, from those inthe forward-looking statements, including, without limitation, changes in thedemand for services that the Company provides; additional work awarded underthe Civilian Police and International Narcotics and Law Enforcement contracts;pursuit of new commercial business in the United States and abroad;  activities of competitors; changes insignificant operating expenses; changes in availability of capital; generaleconomic and business conditions in the United States; acts of war or terroristactivities; variations in performance of financial markets; estimates ofcontract values; anticipated revenues from indefinite delivery, indefinitequantity contracts; expected percentages of future revenues represented byfixed-price and time-and-materials contracts; and statements covering ourbusiness strategy, those described in “Risk Factors” and other risks detailedfrom time to time in the Company’s reports filed with the SEC. Accordingly,such forward-looking statements do not purport to be predictions of futureevents or circumstances and therefore there can be no assurance that anyforward-looking statement contained herein will prove to be accurate. TheCompany assumes no obligation to update the forward-looking statements.

**Overview**

*Company Background*

We provide specializedmission-critical outsourced technical services to civilian and militarygovernment agencies. Our specific global expertise is in law enforcementtraining and support, security services, base operations and aviation servicesand operations. We also provide logistics support for all of our services. Ourpredecessors have provided services to numerous U.S. government departments andagencies since 1951. We operated as a separate subsidiary of Computer SciencesCorporation from March 2003 until February 2005. On February 11,2005, Computer Sciences Corporation and DynCorp sold our Company to DynCorpInternational Inc., a newly formed entity controlled by Veritas Capital (the “2005Acquisition”).

*Segments*

During the third quarterof fiscal year 2007, the Company renamed its two reporting segments as follows:(i) International Technical Services changed to Government Services (“GS”);and (ii) Field Technical Services changed to Maintenance and TechnicalSupport Services (“MTSS”).

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**Backlog and NewOrders**

We track contracted backlog in order to assess ourcurrent business development effectiveness and to assist us in forecasting ourfuture business needs and financial performance. Backlog consists of orders andpriced options under our contracts. We define contracted backlog as theestimated value of contract modifications received from customers that have notbeen recognized as revenue. Our backlog consists of funded and unfunded amounts.Funded backlog is based upon amounts actually appropriated by a customer forpayment of goods and services less actual revenue recorded as of themeasurement date under that appropriation. Unfunded backlog is the actualdollar value of unexercised contract options. Most of our U.S. governmentcontracts allow the customer the option to extend the period of performance ofa contract for a period of one or more years. These options may be exercised atthe sole discretion of the customer. Historically, it has been our experiencethat the customer has exercised contract options.

Firm funding for our contracts is usually made foronly one year at a time, with the remainder of the years under the contractexpressed as a series of one-year options. As is the case with the base periodof our U.S. government contracts, option periods are subject to theavailability of funding for contract performance. The U.S. government islegally prohibited from ordering work under a contract in the absence offunding. Our historical experience has been that the government generally hasfunded the option periods of our contracts.

New orders represent new contracts, or additional workadded under the existing contracts, received during the periods presentedbelow.

Thefollowing table sets forth our contracted backlog and new orders (dollars inmillions) as of the dates indicated:

| ** **       | ** ** | **Dec. 30,  2005** | ** ** | **March 31,  2006** | ** ** | **Dec. 29,  2006** | ** ** |
|------------------|------------|-------------------------|------------|--------------------------|------------|-------------------------|------------|
| Funded backlog   |       | $                       | 1,053      |                     |       | $                       | 1,024      |   |   | $ | 1,248 |   |
| Unfunded backlog |       | 1,639                   |       |                     | 1,617      |                    |       | 4,553 |   |
| Total backlog    |       | $                       | 2,692      |                     |       | $                       | 2,641      |   |   | $ | 5,801 |   |

 

In December 2006, the Company, through a jointventure named Global Linguist Solutions LLC, was awarded a contract formanagement of translation and interpretation services in support of OperationIraqi Freedom. The five-year contract, with a maximum value of$4.645 billion, was awarded by the Intelligence and Security Command. Weare the managing partner of the joint venture with a 51% ownership interest andwill consolidate the joint venture in our financial statements. The funded andunfunded amount related to this program of $49.0 million and$3.3 billion, respectively, has been included in the table above as of December 29,2006. However, the incumbent of these services has filed a formal protest withthe Government Accountability Office (the “GAO”), thereby delaying thecommencement of the contract. The GAO has until April 2, 2007 to decidewhether the awards process was fair. Our backlog and estimated remainingcontract value metrics may require future adjustment depending on the outcomeof the protest.

Neworders represent new contracts, or additional work added under existingcontracts, received during the periods presented below (dollars in millions).

| ** ** | ** ** | **For the  Nine Months  Ended  Dec. 30, 2005** | ** ** | **Fiscal Year  Ended  March 31, 2006** | ** ** | **For the  Nine Months  Ended  Dec. 29, 2006** | ** ** |
|------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| New orders |       |                                                               | $          | 2,070                                                 |       |                                                               |       | $ | 2,568 |   |   |   | $ | 4,696 |   |   |
|            |            |                                                                    |            |                                                       |            |                                                                    |            |  |  |  |  |  |  |  |  |  |

 

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**Estimated RemainingContract Value**

Thefollowing table sets forth our estimated remaining contract value (dollars inmillions) as of the dates indicated:

| ** **                          | ** ** | **For the  Nine Months  Ended  Dec. 30, 2005** | ** ** | **Fiscal Year  Ended  March 31, 2006** | ** ** | **For the  Nine Months  Ended  Dec. 29, 2006** | ** ** |
|-------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| Estimated  remaining contract value |       |                                                               | $6,135     |                                                  |       |                                                               | $          | 5,727 |   |   |   | $8,944 |   |   |
|                                     |            |                                                                    |            |                                                       |            |                                                                    |            |  |  |  |  |  |  |  |

 

Our estimated remainingcontract value represents the backlog plus management’s estimate of futurerevenues under indefinite delivery, indefinite quantity contracts that have notbeen funded, or award term periods that have not yet been earned. These futurerevenues would be our estimate of revenue that would occur from the end ofcurrently funded task orders until the end of the indefinite delivery,indefinite quantity contracts. Our estimated remaining contract value is basedon our experience under contracts, and we believe our estimates are reasonable.However, there can be no assurance that our existing contracts will result inactual revenues in any particular period or at all. These amounts could vary oreven change significantly depending upon government policies, governmentbudgets, appropriations and the outcome of protested contract awards.

**Results ofOperations**

Thefollowing table (dollars in thousands) sets forth, for the periods indicated,our historical results of operations:
|                                                                              | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                   | ** ** | **Dec. 29,  2006**                            | ** ** | **% of  Revenue**                            | ** ** | **Dec. 30,  2005** | ** ** | **% of  Revenue** | ** ** | **Dec. 29,  2006** | ** ** | **% of  Revenue** | ** ** | **Dec. 30,  2005** | ** ** | **% of  Revenue** | ** ** |
| Revenues:                                                                    |       |                                               |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Government Services                                                          |       | $                                                  | 337,701    |                                              |       | 65.3 | % |   | $ | 373,969 |   |   | 67.6 | % |   | $ | 1,001,915 |   |   | 65.5 | % |   | $ | 896,282 |   |   | 63.2 | % |   |
| Maintenance and Technical Support Services                         |       | 179,838                                            |       |                                              | 34.7       |   |   | 179,592 |   |   | 32.4 |   |   | 528,029 |   |   | 34.5 |   |   | 521,963 |   |   | 36.8 |   |   |
| Total revenues                                                               |       | 517,539                                            |       |                                              | 100.0      | % |   | 553,561 |   |   | 100.0 | % |   | 1,529,944 |   |   | 100.0 | % |   | 1,418,245 |   |   | 100.0 | % |   |
| Costs of services (excluding depreciation and  amortization disclosed below) |       | 449,680                                            |       |                                              | 86.9       |   |   | 498,482 |   |   | 90.1 |   |   | 1,343,447 |   |   | 87.8 |   |   | 1,262,074 |   |   | 89.0 |   |   |
| Selling, general and administrative expenses                                 |       | 24,949                                             |       |                                              | 4.8        |   |   | 21,013 |   |   | 3.8 |   |   | 82,906 |   |   | 5.4 |   |   | 59,874 |   |   | 4.2 |   |   |
| Depreciation and amortization                                                |       | 10,656                                             |       |                                              | 2.1        |   |   | 10,563 |   |   | 1.9 |   |   | 33,005 |   |   | 2.2 |   |   | 32,763 |   |   | 2.3 |   |   |
| Total costs and expenses                                                     |       | 485,285                                            |       |                                              | 93.8       |   |   | 530,058 |   |   | 95.8 |   |   | 1,459,358 |   |   | 95.4 |   |   | 1,354,711 |   |   | 95.5 |   |   |
| Interest expense                                                             |       | 14,554                                             |       |                                              | 2.8        |   |   | 14,595 |   |   | 2.6 |   |   | 44,057 |   |   | 2.9 |   |   | 42,278 |   |   | 3.0 |   |   |
| Loss on debt extinguishment                                                  |       | —                                             |       |                                              | —     |   |   | — |   |   | — |   |   | 3,484 |   |   | 0.2 |   |   | — |   |   | — |   |   |
| (Income) loss from joint ventures                                            |       | (1,000                                             | )          |                                              | (0.2       | ) |   | 40 |   |   | 0.0 |   |   | (1,323 | ) |   | (0.1 | ) |   | 181 |   |   | 0.0 |   |   |
| Interest income                                                              |       | (534                                               | )          |                                              | (0.1       | ) |   | (112 | ) |   | 0.0 |   |   | (1,094 | ) |   | (0.1 | ) |   | (166 | ) |   | 0.0 |   |   |
| Income before taxes                                                          |       | 19,234                                             |       |                                              | 3.7        |   |   | 8,980 |   |   | 1.6 |   |   | 25,462 |   |   | 1.7 |   |   | 21,241 |   |   | 1.5 |   |   |
| Provision for income taxes                                                   |       | 7,018                                              |       |                                              | 1.4        |   |   | 3,389 |   |   | 0.6 |   |   | 9,355 |   |   | 0.6 |   |   | 7,553 |   |   | 0.5 |   |   |
| Net income                                                                   |       | $                                                  | 12,216     |                                              |       | 2.3 | % |   | $ | 5,591 |   |   | 1.0 | % |   | $ | 16,107 |   |   | 1.1 | % |   | $ | 13,688 |   |   | 1.0 | % |   |

 

***Three Months Ended December 29, 2006 Compared ToThree Months Ended December 30, 2005***

*Consolidated*

*Revenues.*   Totalrevenues decreased from $553.6 million for the three months ended December 30,2005 to $517.5 million for the three months ended December 29, 2006,a decrease of $36.1 million or 6.5%. For the three months ended December 29,2006 and December 30, 2005, approximately 44%, 36% and 20% andapproximately 27%, 38% and 35% of our revenues were derived from fixed-price,time-and-materials, and cost-reimbursement contracts, respectively.

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Revenues from our GS segment decreased from$374.0 million for the three months ended December 30, 2005 to$337.7 million for the three months ended December 29, 2006, adecrease of $36.3 million or 9.7%. The GS revenue decrease was primarilydriven by the conclusion of protective services previously provided in Israel,Haiti, Afghanistan and central Iraq. This reduction of services decreasedrevenues for the three months ended December 29, 2006 by$29.8 million, when compared to the three months ended December 30,2005. Additional factors that contributed to the decrease in revenues are:(i) the ending of services provided in support of Hurricane Katrina reliefefforts; and (ii) completion of helicopter refurbishment and upgrades insupport of U.S. drug eradication efforts in Afghanistan.

Revenues from our MTSS segment increased from$179.6 million for the three months ended December 30, 2005 to$179.8 million for the three months ended December 29, 2006, anincrease of $0.2 million or 0.1%. The increased MTSS revenue was primarilydriven by: (i) services provided to the U.S. Air Force under the C-21Contractor Logistics Support program; and (ii) increased maintenance ofmilitary equipment returning from Iraq and Afghanistan. Partially offsettingthe revenue increase was a decrease in U.S. government funding for the ArmyPrepositioned Stocks Afloat program and the conclusion of the Fort Hooddomestic aviation contract in July 2006.

*Costsof services.**  *Costsof services are comprised of direct labor, direct material, subcontractorcosts, other direct costs and overhead. Other direct costs include travel,supplies and other miscellaneous costs. Costs of services decreased from$498.5 million for the three months ended December 30, 2005 to$450.0 million for the three months ended December 29, 2006, adecrease of $48.5 million or 9.7%. As a percentage of revenue, costs ofservices decreased from 90.1% in the three months ended December 30, 2005to 86.9% for the three months ended December 29, 2006. The factorscontributing to the decrease in cost of services as a percentage of revenuewere: (i) a higher mix of fixed-price and time-and-material contracts inthe current quarter; (ii) improved profitability under fixed-pricecontracts within our GS segment resulting from strong operational performanceand contract changes; and (iii) a contract modification for construction effortsin Afghanistan completed in earlier periods.

*Selling, general and administrative expenses.*   Selling, general and administrative expenses primarily relate tofunctions such as management, legal, financial accounting, contracts andadministration, human resources, management information systems, purchasing andbusiness development. Selling, general and administrative expenses for thethree months ended December 30, 2005 were $21.0 million and increasedto $24.9 million for the three months ended December 29, 2006, anincrease of $3.9 million or 18.6%. In addition, as a percentage ofrevenue, selling, general and administrative expenses increased from 3.8% forthe three months ended December 30, 2005 to 4.8% for the three monthsended December 29, 2006. Factors contributing to higher selling, generaland administrative expenses for the three months ended December 29, 2006include: (i) an increase of $2.4 million in business developmentcosts; (ii) an increase of $0.8 million in legal costs; and (iii) anincrease of $1.0 million in severance expense related to the departure ofa senior executive.

*Depreciationand amortization.**  *Depreciationand amortization increased slightly from $10.6 million for the threemonths ended December 30, 2005 to $10.7 million for the three monthsended December 29, 2006.

*Interestexpense.**  *Interestexpense was $14.6 million for the three months ended December 30,2005 and December 29, 2006. The interest expense incurred relates to oursenior secured credit facility, revolving credit facility, senior subordinatednotes and amortization of deferred financing fees. Interest expense hasremained consistent compared to the same period last year despite an increasein variable interest rates applicable to the senior secured credit facility. Partiallyoffsetting the higher interest rate in interest expense was lower interestincurred on the senior subordinated notes, which have a fixed interest rate of9.5%, due to the partial redemption in connection with our Successor Parent’sEquity Offering.

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*Income tax expense.**  *We had income tax expense for the threemonths ended December 29, 2006 of $7.0 million, an increase of$3.6 million from income tax expense of $3.4 million for the threemonths ended December 30, 2005. The increase is primarily the result ofhigher income before tax as compared to the three months ended December 30,2005.

***Results by Segment***

We evaluate segment performance based primarily on thenon-GAAP measure of EBIT, which includes the effects of corporate expenseallocations. EBIT is a non-GAAP measure that includes operating income, otherincome and income (loss) from joint ventures. Items that we do not include inEBIT are interest expense and income taxes, each of which we evaluate on aconsolidated level. We believe EBIT is a useful measurement of our performancebecause it provides information that can be used to evaluate the effectivenessof our businesses from an operational perspective, exclusive of the costs tofinance those activities and exclusive of income taxes, neither of which isdirectly relevant to the efficiency of those operations.

EBIT should not be considered an alternative to, or amore meaningful indicator of our operating performance than, operating incomeor net income as determined in accordance with GAAP. In addition, our EBIT maynot be comparable to a similarly titled measure of another company.

Thefollowing table (dollars in thousands) sets forth earnings before interest andtaxes for our GS and MTSS operating segments, both in dollars and as apercentage of segment specific revenue, for the three months ended December 29,2006, compared to the three months ended December 30, 2005.
|                                            | ** ** | **For the Three Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                 | ** ** | **December 29, 2006**                    | ** ** | **December 30, 2005** | ** ** |
| Earnings before interest  and taxes        |       |                                               |       |   |   |   |   |   |   |
| Government Services                        |       | $                                                  | 34,361     |   | 10.2 | % | $ | 20,654 |   | 5.5 | % |
| Maintenance and Technical Support Services |       | 272                                                |       | 0.2 | % | 3,635 |   | 2.0 | % |
| Other(1)                                   |       | (845                                               | )          | NA |   | (714 | ) | NA |   |
| Consolidated                               |       | $                                                  | 33,788     |   | 6.5 | % | $23,575 |   | 4.3 | % |
|                                            |            |                                                    |            |  |  |  |  |  |  |  |  |

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(1)                For the three months ended December 29,2006, other consists of: (i) severance costs; (ii) joint ventureincome or loss; and (iii) compensation expense related to Class Bequity participation not allocated to a specific segment. For the three monthsended December 30, 2006, other primarily consists of joint venture incomeor loss and compensation expense related to Class B equity participationnot allocated to a specific segment.

*Government Services*

*Earnings before interestand taxes.*   Earnings before interest and taxesfor the three months ended December 29, 2006 were $34.4 million, anincrease of $13.7 million, or 66.2%, from $20.7 million for the threemonths ended December 30, 2005. The GS increase was primarily driven bythe following operating factors: (i) increased international policeliaison officers in Iraq and Afghanistan; (ii) improved execution fromfixed price contracts such as the Civilian Police and International Narcoticsand Law Enforcement Air-Wing (“Air-Wing”) programs; and (iii) increasedlogistic support services under the Africa Peacekeeping program with theDepartment of State. In addition, GS’s earnings before interest and taxesduring the quarter benefited from $4.4 million from a contract modification forconstruction efforts in Afghanistan completed in earlier periods. Partiallyoffsetting the higher earnings before interest and taxes was lowerprofitability in our Worldwide Personal Protection Services programs due tocompletion of task orders in Israel, Haiti, Afghanistan and central Iraq andincreased business development costs of $2.4 million. Earnings beforeinterest and taxes as a percentage of revenue for the three months ended December 29,2006 and December 30, 2005 was 10.2% and 5.5%, respectively.

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*Maintenance andTechnical Support Services*

*Earnings before interestand taxes.**  *Earningsbefore interest and taxes for the three months ended December 29, 2006were $0.3 million, a decrease of $3.3 million, or 91.7%, from $3.6 millionfor the three months ended December 30, 2005. The MTSS decrease wasprimarily driven by: (i)  operating losses from delivering services to theU.S. Army under the Life Cycle Contractor Support and the AH-1/UH-1programs; and (ii) increased general and administrative costs of $1.5million. Partially offsetting the lower earnings before interest and taxes wasimproved profitability on our Contract Field Teams program. This programbenefited from maintenance and repair activities performed on militaryequipment returning from Iraq and Afghanistan. Earnings before interest andtaxes as a percentage of revenue for the three months ended December 29,2006 and December 30, 2005 was 0.2% and 2.0%, respectively.

***Nine Months Ended December 29, 2006 Compared ToNine Months Ended December 30, 2005***

*Consolidated*

*Revenues.*   Totalrevenues increased from $1,418.2 million for the nine months ended December 30,2005 to $1,529.9 million for the nine months ended December 29, 2006,an increase of $111.7 million or 7.9%. For the nine months ended December 29,2006 and December 30, 2005, approximately 42%, 36% and 22% andapproximately 27%, 38% and 35% of our revenues were derived from fixed-price,time-and-materials, and cost-reimbursement contracts, respectively.

Revenues from our GS segment increased from$896.3 million for the nine months ended December 30, 2005 to $1,001.9 millionfor the nine months ended December 29, 2006, an increase of $105.6 millionor 11.8%. The Air-Wing program increased $65.4 million. The Department ofState awarded our current contract under the Air-Wing program during May 2005.As part of the new contract, we successfully transitioned many of theactivities under this program from cost-reimbursement to fixed-price. Thefactors contributing to higher revenues include increased eradication effortsin South America, combined with increased activity in Afghanistan providingaviation support to the ground eradication effort under the Civilian Policeprogram. Our Civilian Police program contributed $52.5 million to theincrease in revenues. The Civilian Police program benefited from an increasednumber of international police liaison officers deployed in Iraq andAfghanistan, compared to the nine months ended December 30, 2005. Inaddition, while supporting the Iraq effort, we benefited from operations andmaintenance support efforts, as well as additional procurement activities. TheLogistics Support programs revenue increased by $36.4 million, compared tothe nine months ended December 30, 2005. The increase within the LogisticsSupport programs is primarily due to the added work under the Africa Peacekeepingcontract with the Department of State. The factors contributing to increasedrevenues were partially offset by a reduction in services under the WorldwidePersonal Protective Services program. We concluded four task orders under whichwe provided personal security services in Israel, Haiti, Afghanistan andcentral Iraq. The concluded task orders contributed a decrease in revenues forthe nine months ended December 29, 2006 of $68.2 million, compared tothe nine months ended December 30, 2005.

Revenues from our MTSS segment increased from$522.0 million for the nine months ended December 30, 2005 to$528.0 million for the nine months ended December 29, 2006, anincrease of $6.0 million or 1.1%. The MTSS increase was primarily drivenby an increase in personnel and level of effort under the Contract Field Teamprogram of $19.1 million and increased domestic aviation services providedto the U.S. Air Force under the C-21 Contractor Logistics Support programand Andrews contract of $19.6 million. Partially offsetting the higherrevenue was the Army Prepositioned Stocks Afloat program, which decreased by$17.7 million mainly due to the U.S. government reducing its funding. Inaddition, the Fort Hood contract under the Domestic Aviation program ended in July 2006,which resulted in a $16.6 million decrease in revenues.

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*Costsof services.**  *Costsof services are comprised of direct labor, direct material, subcontractorcosts, other direct costs and overhead. Other direct costs include travel,supplies and other miscellaneous costs. Costs of services increased from$1,262.1 million for the nine months ended December 30, 2005 to$1,343.4 million for the nine months ended December 29, 2006, anincrease of $81.3 million or 6.4%. Despite recognizing operating costs inexcess of contract funding to complete a base camp in Iraq in the secondquarter of fiscal 2007 and the suspension of the ARAMCO security contract witha customer in Saudi Arabia, costs of services as a percentage of revenuedecreased from 89.0% for the nine months ended December 30, 2005 to 87.8%for the nine months ended December 29, 2006. Factors that contributed tothe decrease as a percent of revenue were: (i) continued strongperformance of fixed-price task orders under the Civilian Police and Air-Wingprograms; (ii) improved contract mix resulting from a larger proportion ofhigher-margin fixed-price and time-and-materials contracts; and (iii) acontract modification for construction efforts in Afghanistan completed inearlier periods.

*Selling,general and administrative expenses.**  *Selling, general and administrativeexpenses primarily relate to functions such as management, legal, financialaccounting, contracts and administration, human resources, managementinformation systems, purchasing and business development. Selling, general andadministrative expenses for the nine months ended December 30, 2005 were$60.0 million and increased to $82.9 million for the nine monthsended December 29, 2006, an increase of $22.9 million or 38.2%. Inaddition, as a percentage of revenue, selling, general and administrativeexpenses increased from 4.2% for the nine months ended December 30, 2005to 5.4% for the nine months ended December 29, 2006. Factors contributingto higher selling, general and administrative expenses for the nine monthsended December 29, 2006 include: (i) an increase of $9.5 millionin business development costs; (ii) an increase of $8.5 million incorporate administrative costs, primarily the result of developing thesefunctions as an independent company; (iii) an increase of $5.7 millionin severance-related costs from the departure of senior executives; (v) anincrease of $1.6 million in legal costs; and (vi) $0.8 millionincrease for bonuses paid to certain members of management related to ourSuccessor Parent’s Equity Offering. Offsetting the increase in selling, generaland administrative expenses was a benefit of $4.7 million related to areduction in bad debt expense.

*Depreciationand amortization.**  *Depreciationand amortization increased slightly from $32.8 million for the nine monthsended December 30, 2005 to $33.0 million for the nine months ended December 29,2006, an increase of $0.2 million, or 0.6%.

*Interestexpense.**  *Interestexpense increased from $42.3 million for the nine months ended December 30,2005 to $44.1 million for the nine months ended December 29, 2006. Theinterest expense incurred relates to our senior secured credit facility,revolving credit facility, senior subordinated notes and amortization ofdeferred financing fees. The increase is due to the higher interest expenserelated to the senior secured credit facility from increasing variable interestrates during the nine months ended December 29, 2006. Partially offsettingthe higher variable rate interest expense was lower interest incurred on thesenior subordinated notes, which have a fixed interest rate of 9.5%, due to thepartial redemption in connection with our Successor Parent’s Equity Offering.

*Loss ondebt extinguishment.**  *Inconjunction with our Successor Parent’s Equity Offering in May 2006, weincurred: (i) a premium of $2.7 million related to the redemption ofa portion of our senior subordinated notes; and (iii) the write-off of$0.8 million in deferred financing costs associated with the earlyretirement of a portion of our senior subordinated notes.

*Income tax expense.**  *We had income tax expense for the ninemonths ended December 29, 2006 of $9.4 million, an increase of$1.8 million from income tax expense of $7.6 million for the ninemonths ended December 30, 2005. The increase is primarily the result ofhigher income before tax as compared to the three months ended December 30,2005.

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***Results by Segment***

We evaluate segment performance based primarily on thenon-GAAP measure of EBIT, which includes the effects of corporate expenseallocations. EBIT is a non-GAAP measure that includes operating income, otherincome and income (loss) from joint ventures. Items that we do not include inEBIT are interest expense and income taxes, each of which we evaluate on aconsolidated level. We believe EBIT is a useful measurement of our performancebecause it provides information that can be used to evaluate the effectivenessof our businesses from an operational perspective, exclusive of the costs tofinance those activities and exclusive of income taxes, neither of which isdirectly relevant to the efficiency of those operations.

EBIT should not be considered an alternative to, or amore meaningful indicator of our operating performance than, operating incomeor net income as determined in accordance with GAAP. In addition, our EBIT maynot be comparable to a similarly titled measure of another company.

Thefollowing table (dollars in thousands) sets forth earnings before interest andtaxes for our GS and MTSS operating segments, both in dollars and as apercentage of segment specific revenue, for the nine months endedDecember 29, 2006, compared to the nine months ended December 30,2005.
|                                            | ** ** | **For the Nine Months Ended** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                 | ** ** | **December 29, 2006**                   | ** ** | **December 30, 2005** | ** ** |
| Earnings before interest  and taxes        |       |                                              |       |   |   |   |   |   |   |
| Government Services                        |       | $                                                 | 72,537     |   | 7.2 | % | $ | 47,033 |   | 5.2 | % |
| Maintenance and Technical Support Services |       | 7,444                                             |       | 1.4 | % | 17,156 |   | 3.3 | % |
| Other(1)                                   |       | (6,978                                            | )          | NA |   | (670 | ) | NA |   |
| Consolidated                               |       | $                                                 | 73,003     |   | 4.8 | % | $ | 63,519 |   | 4.5 | % |

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(1)                For the nine months ended December 29, 2006, otherconsists of: (i) severance costs; (ii) joint venture income or loss;and (iii) compensation expense related to Class B equityparticipation not allocated to a specific segment. For the nine months endedDecember 30, 2005, other primarily consists of joint venture income orloss and management retention bonuses and compensation expense related toClass B equity participation not allocated to a specific segment.

*Government Services*

*Earnings before interestand taxes.*   Earnings before interest andtaxes for the nine months ended December 29, 2006 were $72.5 million,an increase of $25.5 million, or 54.3%, from $47.0 million for thenine months ended December 30, 2005. The GS increase was primarily drivenby: (i) improved profitability on fixed-price task orders under theCivilian Police and Air-Wing programs due to strong performance and favorablecontract changes; (ii) increased logistic support services under theAfrica Peacekeeping program with the Department of State. In addition, GS’searnings before interest and taxes for the current year benefited $4.4 millionfrom a contract modification for construction efforts in Afghanistan completed inearlier periods. Partially offsetting the higher earnings before interest andtaxes were: (i) costs in excess of contract funding to complete theconstruction of a base camp in Iraq for the Department of State; (ii) chargesrelated to the suspension of a security contract with a customer located inSaudi Arabia; (iii) lower profitability in our Worldwide PersonalProtection Services programs due to completion of task orders in Israel, Haiti,Afghanistan and central Iraq; and (iv) increased general andadministrative costs of $6.8 million to support the growth of GS segment,corporate administrative and business development costs, net of $4.3 millionrelated to a reduction in bad debt expense. Earnings before interest and taxesas a percentage of revenue for the nine months ended December 29, 2006 andDecember 30, 2005 was 7.2% and 5.2%, respectively.

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*Maintenance andTechnical Support Services*

*Earnings before interestand taxes.**  *Earningsbefore interest and taxes for the nine months ended December 29, 2006 were$7.4 million, a decrease of $9.8 million, or 57.0%, from$17.2 million for the nine months ended December 30, 2005. Thedecrease was primarily driven by: (i) operating losses from deliveringservices to the U.S. Army under the Life Cycle Contractor Support and AH-1/UH-1programs; and (ii) increased general and administrative costs of $10.7 millionresulting from corporate administrative and business development functions. Partiallyoffsetting the lower earnings before interest and taxes was improved profitabilityon our Contract Field Teams program. This program benefited from maintenanceand repair activities performed on military equipment returning from Iraq andAfghanistan. Earnings before interest and taxes as a percentage of revenue forthe nine months ended December 29, 2006 and December 30, 2005 was1.4% and 3.3%, respectively.

**Liquidity andCapital Resources**

Thefollowing table sets forth cash flow data for the periods indicated therein(dollars in thousands):

| ** **                                  | ** ** | **For the Nine Months Ended** | ** ** |
|---------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                  | ** ** | **December 29,  2006**                       | ** ** | **December 30,  2005** | ** ** |
| Net cash provided  by operating activities  |       |                                              | $          | 52,484 |   |   |   | $ | 54,162 |   |   |
| Net cash  used in investing activities |       |                                              | (5,374     | ) |   |   | (3,538 | ) |   |
| Net cash used in  financing activities      |       |                                              | (12,347    | ) |   |   | (39,295 | ) |   |

 

*Cash Flows*

**OperatingActivities.****  **Cash andcash equivalents as of December 29, 2006 were $55.3 million comparedto $24.8 million as of December 30, 2005. Net cash provided byoperating activities for the nine months ended December 29, 2006 was$52.5 million, while net cash provided by operating activities for thenine months ended December 30, 2005 was $54.2 million. The ninemonths ended December 29, 2006 experienced unfavorable timing of cashcollections, which resulted in a use of cash of $3.8 million. In addition,operating cash flow during the nine months ended December 29, 2006included a payment of special cash bonuses subsequent to our Successor’s ParentEquity Offering of $3.125 million in the aggregate to our executiveofficers and certain other members of management. These bonuses rewardedmanagement for their efforts in connection with the successful consummation ofour Successor’s Parent Equity Offering. During the nine months ended December 29,2006, operating cash flow benefited from accounts payable and accrued liabilityactivities related to the timing of payroll processing, timing of interestpayments and customer advances. The timing for payroll processing, interestpayments and customer advances can vary from quarter to quarter. Operating cashflow for the nine months ended December 30, 2005 reflected high cashcollections, which resulted in a $30.9 million source of cash. Partiallyoff setting the collection activity was significant vendor payments. Tradeaccounts payable increased during the period leading up to the 2005 Acquisitiononly to result in payment during the nine months ended December 30, 2005.

**InvestingActivities.****  **Net cashused in investing activities was $5.4 million and $3.5 million forthe nine months ended December 29, 2006 and December 30, 2005,respectively. For the nine months ended December 29, 2006 and December 30,2005, the primary use of cash was to purchase property and equipment.

**FinancingActivities.****  **Net cashused in financing activities was $12.3 million and $39.3 million forthe nine months ended December 29, 2006 and December 30, 2005,respectively. The cash used in financing activities during the nine monthsended December 29, 2006 included: (i) net proceeds from our SuccessorParent of $17.9 million; (ii) partial redemption of seniorsubordinated notes of $28.8 million, including 

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accrued interest and (iii) otherfinancing activities of $0.6 million. The cash used in financingactivities during the nine months ended December 30, 2005 was due to the$35.0 million repayment of borrowings under our revolving credit facility,the $2.6 million scheduled repayment of our bank note borrowings, the$1.2 million payment of offering expenses and the $0.5 millionpurchase of an interest rate cap that limits our exposure to upward movementsin variable rate debt.

Based on our current levelof operations, we believe our cash flow from operations and our available borrowingsunder our senior secured credit facility will be adequate to meet our liquidityneeds for at least the next twelve months. However, servicing our indebtednesswill require a significant amount of cash. Our ability to generate sufficientcash depends on numerous factors beyond our control and we cannot be assuredthat our business will generate sufficient cash flow from operations, or thatfuture borrowings will be available to us under our senior secured creditfacility in an amount sufficient to enable us to repay our indebtedness,including the senior subordinated notes, or to fund our other liquidity needs.

*Equity Offering*

On May 9, 2006, ourSuccessor Parent consummated an Equity Offering of 25,000,000 shares ofits Class A common stock, par value $0.01 per share, at a price of$15.00 per share. The gross proceeds from the Equity Offering of$375.0 million, together with cash on hand, were used: (i) to redeemall of our Successor Parent’s outstanding preferred stock, of which$222.8 million in stated amount, including accrued and unpaid dividendsthereon, was outstanding as of May 9, 2006; (ii) to pay a special Class Bdistribution in the amount of $100.0 million, representing a return ofcapital of $95.9 million to DIV Holding LLC, the holder of our SuccessorParent’s common stock; (iii) to redeem $28.0 million of our seniorsubordinated notes on June 8, 2006; (iv) to pay prepayment penaltiesof $8.4 million, $5.7 million of which represented prepaymentpenalties on our Successor Parent’s preferred stock and $2.7 million ofwhich represented prepayment penalties on our senior subordinated notes; and (v) topay transaction expenses of approximately $35.0 million, including anunderwriters’ commission of $22.5 million, a fee of $5.0 million toVeritas Capital and $7.5 million of miscellaneous fees and expensesrelated to the Equity Offering.

*Debt and OtherObligations*

Our senior secured credit facility contains financialcovenants, including a minimum interest coverage ratio and a maximum total debtto EBITDA ratio, and places certain restrictions on our ability to make capitalexpenditures. These financial ratios include a minimum interest coverage ratioand a leverage ratio. The interest coverage ratio is the ratio of EBITDA (asdefined in our senior revolving credit facility) to cash interest expense fortrailing quarters. The minimum interest coverage ratio increases from 2:1 to3.2:1.0 during the term of the senior secured credit facility. The requiredinterest coverage ratio for the third quarter of fiscal 2007 is 2.2 to 1.0. Themaximum leverage coverage ratio decreases from 6:1 to 3:1 during the term ofthe senior secured credit facility. The required leverage coverage ratio forthe third quarter of fiscal 2007 is 5.25 to 1.0. At December 29, 2006, wehad an interest coverage ratio and leverage coverage ratio of 2.98:1.00 and 3.88:1.00,respectively. The senior secured credit facility also restricts the maximumamount of our capital expenditures during each year of the senior securedcredit facility. Capital expenditures are expenditures that are required byGAAP to be included in the “purchase of property and equipment.”  Our senior secured credit facility is securedby substantially all of our assets and the assets of our domestic subsidiaries,by a pledge of all of the capital stock of our domestic subsidiaries and by 65%of the capital stock of our first tier foreign subsidiaries. The initialborrowings thereunder are subject to customary closing conditions.

On January 9, 2006,we entered into a first amendment and waiver of our senior secured creditfacility. The first amendment and waiver increased the revolving commitmentunder our senior secured credit facility by $15.0 million to$90.0 million, which includes an increase in the sub-limit for letters ofcredit 

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equal tothe same amount. The first amendment and waiver also permitted us to: (i) paya transaction fee to Veritas Capital related to our Successor Parent’s EquityOffering of up to $10.0 million; (ii) pay a distribution to theholders of our Successor Parent’s Class B common stock in an amount equalto the sum of (x) $100.0 million plus (y) the proceeds, if any,of the underwriters’ over-allotment option, net of discount and estimatedoffering expenses; (iii) redeem all of our Successor Parent’s thencurrently outstanding preferred stock; and (iv) redeem up to$65.0 million of the $320.0 million aggregate principal amount of thesenior subordinated notes. The first amendment and waiver waived therequirement in the senior secured credit facility that we use 50% of the netcash proceeds from our Successor Parent’s Equity Offering to prepay loans underthe senior secured credit facility and/or permanently reduce the revolvingcommitments.

On June 28, 2006, theCompany, through its operating company, DynCorp International LLC, entered intoa second amendment and waiver of our senior secured credit facility, dated February 11,2005. The second amendment and waiver provided for a senior secured creditfacility of $431.6 million, representing a $90.0 million revolver anda $341.6 million outstanding term loan. The maturity date of the amendedsenior secured credit facility remains unchanged. The second amendment andwaiver also provided for the following, among other things: (i) decreasedthe interest rate applicable to the term loan under our senior secured creditfacility; (ii) permits us to request an increase in our revolving creditfacility by an aggregate amount of up to $30.0 million, subject to theCompany obtaining commitments from existing and/or new lenders; (iii) increasesthe amount of capital expenditures permitted under our senior secured creditfacility from $4.0 million per fiscal year to $8.0 million per fiscalyear; (iv) increases the amount of capitalized leases permitted under oursenior secured credit facility from $10.0 million per fiscal year to$25.0 million per fiscal year; (v) allows for the payment ofdividends and the repurchase of our capital stock in the amount of$10.0 million plus, if our leverage ratio (as defined in our seniorsecured credit facility) is below 3.25:1.00, 25% of our excess cash flow (asdefined in our senior secured credit facility) for each fiscal year; and (vi) providesfor the first excess cash flow payment, as defined by the senior secured creditfacility, to commence on our fiscal year that ends on March 30, 2007.

In November 2006, the Company obtained additionalcommitments from two new lenders which increased the revolving credit facilityto $103,000. On December 29, 2006, the Company had $93,899 available underthe senior secured credit facility. This amount gives effect to $9,101 inoutstanding letters of credit as of December 29, 2006.

As of December 29,2006, we had $631.9 million of indebtedness, including the senior subordinatednotes and excluding interest accrued thereon, of which $339.8 million wassecured.

*Other Long-Term Liabilities*

Other long-termliabilities includes $2.5 million of tenant improvement concessionspertaining to the Company’s lease of one of its facilities. The lease will beamortized over the life of the lease as prescribed by SFAS No. 13, “*Accounting for Leases*,” and FASB Technical Bulletin 88-1,“*Issues Relating to Accounting for Leases*.”In addition, other long-term liabilities include $3.2 million for futureexpected payments to employees required by a foreign jurisdiction in the eventof unilateral termination.

*Off-Balance Sheet Arrangements*

As of December 29,2006, other than the operating leases discussed in note 8 to the condensed consolidatedfinancial statements, we had no off-balance sheet arrangements.

**Critical Accounting Policies**

Our discussion andanalysis of our financial condition and results of operations are based uponour consolidated financial statements, which are prepared in accordance withGAAP. The preparation of these financial statements in accordance with GAAPrequires management to make estimates and assumptions 

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thataffect the reported amounts of assets and liabilities and the disclosure ofcontingencies at the date of the financial statements as well as the reportedamounts of revenues and expenses during the reporting period. Managementevaluates these estimates and assumptions on an ongoing basis, including thoserelating to revenue recognition and cost estimation on long-term contracts,allowance for doubtful accounts, determination of goodwill and customer-relatedintangible assets, goodwill impairment, accounting for contingencies andlitigation and accounting for income taxes. Our estimates and assumptions havebeen prepared on the basis of the most current available information. Theresults of these estimates form the basis for making judgments about thecarrying values of assets and liabilities that are not readily apparent fromother sources. Actual results could materially differ from these estimatesunder different assumptions and conditions.

We have several criticalaccounting policies that are important to the portrayal of our financialcondition and results of operations and that require management’s mostdifficult, subjective and complex judgments. Typically, the circumstances thatmake these judgments complex and difficult have to do with making estimatesabout the effect of matters that are inherently uncertain. Our criticalaccounting estimates are as noted below.

*Revenue Recognition and Cost Estimation on Long-TermContracts*

We provide our servicesunder fixed-price, time-and-materials and cost-reimbursement contracts. Theform of contract, rather than the type of service offering, is the primarydeterminant of revenue recognition. Revenues are recognized when persuasiveevidence of an arrangement exists, services or products have been provided tothe client, the sales price is fixed or determinable and collectibility isreasonably assured.

Revenue on fixed-pricecontracts is generally recognized ratably over the contract period, measured byeither output or input methods appropriate to the services or products provided.For example, “output measures” can include period of service, such as foraircraft fleet maintenance, and units delivered or produced, such as aircraftfor which modification has been completed. “Input measures” can include acost-to-cost method, such as for procurement-related services.

Revenue on fixed-priceconstruction or production-type contracts, when they occur, is recognized onthe basis of the estimated percentage of completion. Progress towardscompletion is typically measured based on achievement of specified contractmilestones, when available, or based on costs incurred as a proportion ofestimated total costs. Profit in a given period is reported at the expectedprofit margin to be achieved on the overall contract. This method can result inthe deferral of costs or profit on these contracts. Management regularlyreviews project profitability and underlying estimates. Revisions to theestimates at completion are reflected in results of operations as a change inaccounting estimate in the period in which the facts that give rise to therevision become known by management. Revenue on fixed-price contracts that havea duration of less than six months is recognized on the completed contractmethod. Work in progress is classified as a component of inventory.

We provide for anticipated losses on contracts by acharge to income during the period in which the losses are first identified. Amountsbilled but not yet recognized as revenue under certain types of contracts aredeferred. Unbilled receivables are stated at estimated realizable value. Contractcosts on U.S. government contracts, including indirect costs, are subject toaudit and adjustment by negotiations between us and government representatives.Substantially all of our indirect contract costs have been agreed upon through2004. Contract revenues on U.S. government contracts have been recorded inamounts that are expected to be realized upon final settlement.

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Contract costs are expensed as incurred, except asdescribed above and on certain other production-type fixed-price contracts,where costs are deferred until such time that associated revenue is recognized.

Client contracts mayinclude the provision of more than one of our services. For revenuearrangements with multiple deliverables, revenue recognition includes theproper identification of separate units of accounting and the allocation ofrevenue across all elements based on relative fair values.

Many of our contracts are time-and-materials or fixedhourly/daily rate contracts. For these contracts, revenue is recognized eachmonth based on actual hours/days charged to the program during that monthmultiplied by the fixed hourly/daily rate in the contract for the type of laborcharged. Any material or other direct charges are recognized as revenue basedon the actual direct cost plus Defense Contract Management Agency-approvedindirect rates.

Cost-reimbursement typecontracts can be either cost plus fixed fee, or cost plus award fee. Revenuerecognition for these two contract types is very similar. In both cases,revenue is based on actual direct cost plus Defense Contract ManagementAgency-approved indirect rates. In the case of cost plus fixed fee, the fixedfee is recognized based on the ratio of the fixed fee for the contract to thetotal estimated cost of the contract. In the case of cost plus award feecontracts, the fee is made up of two components, base fee and award fee. Basefee is recognized in the same manner as the fee on cost plus fixed feecontracts. The award fee portion is recognized based on an average of the lasttwo award fee periods or award experience for similar contracts for newcontracts that lack specific experience.

*Allowance for DoubtfulAccounts*

We establish allowance fordoubtful accounts against specific billed receivables based upon the latestinformation available to determine whether invoices are ultimately collectible.Such information includes the historical trends of write-offs and recovery ofpreviously written-off accounts, the financial strength of the respectivecustomer and projected economic and market conditions. The evaluation of thesefactors involves subjective judgments, and changes in these factors may cause amisstatement of our accounts receivable, which could significantly impact ourconsolidated financial statements by incurring bad debt expense. Given that weprimarily serve the U.S. government, we believe the risk to be relatively lowthat a misstatement of accounts receivable would have a material impact on ourfinancial results.

*Determination ofGoodwill and Customer-Related Intangible Assets*

In accordance with SFAS No. 141, “*Business Combinations*,”**the2005 Acquisition was accounted for using the purchase method of accounting. Thismethod requires estimates to determine the fair values of assets andliabilities acquired, including judgments to determine any acquired intangibleassets such as customer-related intangibles, internally developed technologyand tradename, as well as assessments of the fair value of tangible assets suchas property and equipment. Liabilities acquired include reserves for litigationand other contingency reserves established prior to, or at the time of,acquisition and require judgment in ascertaining a reasonable value as well.

Third-party valuation firms assisted management in theappraisal of certain assets and liabilities, but even those determinations werebased on significant estimates provided by us. For example, the value ultimatelyassigned to customer-related intangibles and internally developed technologywere determined by a third-party valuation firm as of the date of acquisition,based on estimates and judgments provided by us regarding expectations for theestimated future after-tax cash flows from those assets over their lives,including the probability of expected future contract renewals and sales, lessa cost-of-capital charge, all of which was discounted to present value. Ifactual future after-tax cash flows are significantly lower than our estimates,we may be required to record an impairment charge to write down theidentifiable intangible assets to their realizable values.

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The value assigned to the2005 Acquisition goodwill equaled the amount of the purchase price in excess ofthe sum of the amounts assigned to the identifiable acquired assets, bothtangible and intangible, less liabilities assumed. At December 29, 2006,we had goodwill of $420.2 million and identifiable intangible assets of$242.7 million.

*Goodwill andIntangible Impairment*

We review goodwill andintangible assets for impairment whenever events or changes in circumstancesindicate that the carrying amount of these assets may not be recoverable. Wealso review goodwill annually, during our fourth quarter, in accordance withSFAS No. 142, “*Goodwill and OtherIntangible Assets*.”  SFAS No. 142requires that goodwill be tested, at a minimum, annually for each reportingunit using a two-step process. A reporting unit is an operating segment, asdefined in paragraph 10 of SFAS No. 131, “*DisclosuresAbout Segments of an Enterprise and Related Information*,” or acomponent of an operating segment. The goodwill impairment test is a two-stepprocess that requires management to make judgments in determining whatassumptions to use in the calculation. Management judgments include, but arenot limited to, estimates for future sales, operating income, depreciation andamortization, income tax payments, working capital changes and capitalexpenditures, as well as expected growth rates for cash flows and long-terminterest rates. The first step of the process consists of estimating the fairvalue of each of the reporting units based on a discounted cash flow model andcomparing those estimated fair values with the carrying values, which includesthe allocated goodwill. If a potential impairment is identified, the secondstep is to measure the impairment loss by comparing the implied fair value ofgoodwill with the carrying value of goodwill of the reporting unit. The impliedfair value of goodwill is the residual fair value derived by deducting the fairvalue of a reporting unit’s identifiable assets and liabilities from itsestimated fair value calculated in step one. The impairment charge, if any,would represent the excess of the carrying amount of the reporting unit’sgoodwill over the implied fair value of its goodwill. A decline in estimatedfair value of a reporting unit could result in an impairment charge togoodwill, which could have a material adverse effect on our business, financialcondition and results of operations. We completed our impairment analysis ofgoodwill as of February 24, 2006, noting no indications of impairment forany of our reporting units. During the nine months ended December 29,2006, we recognized an impairment of approximately $0.6 million related to acustomer-related intangible for a loss of a contract in Saudi Arabia.

*Accounting forContingencies and Litigation*

We are subject to variousclaims and contingencies associated with lawsuits, insurance, tax and otherissues arising out of the normal course of business. The consolidated financialstatements reflect the treatment of claims and contingencies based on our viewof the expected outcome. We consult with legal counsel on issues related tolitigation and seek input from other experts and advisors with respect tomatters in the ordinary course of business. If the likelihood of an adverseoutcome is probable and the amount is estimable, we accrue a liability inaccordance with SFAS No. 5, “*Accounting forContingencies*.”  Significantchanges in the estimates or assumptions used in assessing the likelihood of anadverse outcome could have a material effect on our consolidated financialresults.

*Accounting forIncome Taxes*

Realization of our deferred tax assets is primarilydependent on future U.S. taxable income. SFAS No. 109, “*Accounting for Income Taxes*,” provides for the recognitionof deferred tax assets if realization of such assets is more likely than not. Asa result of recent U.S. operating results together with the Company’s forecastsof future pretax operating results, we believe that net deferred tax assets inthe amount of $20.4 million are realizable based on the “more likely thannot” standard required for recognition.

We are a U.S.-basedmultinational company subject to tax in multiple U.S. and foreign taxjurisdictions. The Company’s provision for income taxes is based on ajurisdictional mix of earnings, 

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statutoryrates and enacted tax rules. Significant judgment is required in determiningthe Company’s provision for income taxes and in evaluating its tax positions ona worldwide basis. The Company believes its tax position is consistent with thetax laws in the jurisdictions in which it conducts its business. It is possiblethat these positions may be challenged, which may have a significant impact onthe Company’s effective tax rate.

*Recent AccountingPronouncements*

In September 2006, the Securities and ExchangeCommission (“SEC”) issued Staff Accounting Bulletin No. 108 (“SAB 108”), “*Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements*,” to address diversity in practicein quantifying financial statement misstatements. SAB No. 108 requiresthat we quantify misstatements based on their impact on each of our financialstatements and related disclosures. SAB No. 108 is effective as of the endof fiscal 2007, allowing a one-time transitional cumulative effect adjustmentto retained earnings as of April 1, 2006 for errors that were notpreviously deemed material, but are material under the guidance in SAB No. 108.We are currently evaluating the impact SAB No. 108 will have on ourconsolidated financial statements.

In September 2006, the Financial AccountingStandards Board (the “FASB”) issued Statement of Financial Accounting Standards(“SFAS”) No. 157, “*Fair Value Measurements*.”  SFAS No. 157 defines fair value,establishes a framework for measuring fair value under GAAP, and expandsdisclosures about fair value measurements. This statement does not require anynew fair value measurements; rather, it applies under other accountingpronouncements that require or permit fair value measurements. The provisionsof this statement are to be applied prospectively as of the beginning of thefiscal year in which this statement is initially applied, with any transitionadjustment recognized as a cumulative-effect adjustment to the opening balanceof retained earnings. This statement is effective for financial statementsissued for fiscal years beginning after November 15, 2007, and interimperiods within those fiscal years. We are currently evaluating the impact ofadopting SFAS No. 157 on our consolidated financial statements.

In July 2006, the FASB issued FASB InterpretationNo. 48, “*Accounting for Uncertainty in Income Taxes—aninterpretation of FASB Statement No. 109*” (“FIN 48”). FIN 48clarifies the accounting and reporting for income taxes recognized inaccordance with SFAS No. 109, “*Accounting for IncomeTaxes*.”  This interpretationprescribes a comprehensive model for the financial statement recognition,measurement, presentation and disclosure of uncertain tax positions taken orexpected to be taken in income tax returns. The requirements of FIN 48 areeffective for fiscal periods beginning after December 15, 2006. We arecurrently evaluating the impact of FIN 48 on our consolidated financialstatements.

On May 18, 2006, the State of Texas passed a billreplacing the current franchise tax with a new margin tax that will go intoeffect on January 1, 2008. We estimate that the new margin tax will nothave a significant impact on tax expense or deferred tax assets andliabilities.

In May 2005, the FASBissued SFAS No. 154, “*Accounting Changes andError Corrections*—*a replacement of APBOpinion No. 20 and FASB Statement No. 3*.”  SFAS No. 154 provides guidance on theaccounting for, and reporting of, accounting changes and error corrections. Itestablishes, unless impracticable, retrospective application as the requiredmethod for reporting a change in accounting principle in the absence ofexplicit transition requirements specific to the newly adopted accountingprinciple. SFAS No. 154 also provides guidance for determining whetherretrospective application of a change in accounting principle is impracticableand for reporting such a change when retrospective application is impracticable.The provisions of SFAS No. 154 are effective for accounting changes andcorrections of errors made in fiscal periods beginning after December 15, 2005.The adoption of SFAS No. 154 did not have any effect on our consolidatedfinancial statements.

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**ITEM 3.**                QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been nomaterial changes in market risk from the information provided in Part II,Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in theCompany’s Annual Report on Form 10-K for the fiscal year ended March 31,2006, filed with the SEC on June 29, 2006.

**ITEM 4.**                CONTROLSAND PROCEDURES

***(a)******          Evaluation of Disclosure Controls andProcedures***

Our management, with the participation of our ChiefExecutive Officer and our Chief Financial Officer, has evaluated our disclosurecontrols and procedures (as such term is defined in Rules 13a-15(e) and15d-15(e) of the Exchange Act). Based on that evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded that, as of theend of the period covered by this report, our disclosure controls andprocedures were effective to ensure that information required to be disclosedin reports that we file or submit under the Exchange Act are: (1) recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms; and (2) accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate to allow timely decisions regarding required disclosure.

***(b)******           Changes in Internal Controls***

There have been no changes in our internal controlsover financial reporting that have occurred during our fiscal quarter ended December 29,2006 that have materially affected, or are reasonably likely to materiallyaffect, our internal controls over financial reporting.

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**PART II—OTHERINFORMATION**

**ITEM 1.**                LEGALPROCEEDINGS

On December 4, 2006, a lawsuit was served, andamended on December 29, 2006, on behalf of 1,663 citizens of theEcuadorian provinces of Esmeraldes and Sucumbios, seeking unspecified monetarydamages, against DynCorp International LLC and several of its former affiliates,in the U.S. District Court for the Southern District of Florida. The actionalleges personal injury, various counts of negligence, trespass, battery,assault, intentional infliction of emotional distress, violations of the AlienTort Claims Act, and various violations of international law, as a consequenceof the spraying of narcotic plant crops along the Colombian border adjacent toEcuador. The spraying operations are the same operations which are the subjectof the litigation discussed in note 11 to the condensed consolidated financialstatements and are conducted under a Department of State contract incooperation with the Colombian government. The terms of the Department of Statecontract provide that the Department of State will indemnify DynCorpInternational LLC against third-party liabilities arising out of the contract,subject to available funding.

On December 29, 2006, a lawsuit was served onbehalf of the Providence of Sucumbios in Ecuador, seeking unspecified monetarydamages against DynCorp International LLC and several of its former affiliatesin the U.S. District Court for the Southern District of Florida. The actionalleges violations of Ecuadorian law, international law, and the statutes andcommon law of Florida, including negligence, trespass, and nuisance, as aconsequence of the spraying of narcotic plant crops along the Colombian borderadjacent to Ecuador. The spraying operations are the same operations which arethe subject of the litigation described in the immediately precedingparagraph.  The relevant Department ofState contract provides indemnification to DynCorp International LLC againstthird-party liabilities arising out of the contract, subject to availablefunding.

On January 30, 2007, the Special InspectorGeneral for Iraq Reconstruction (SIGIR) issued a report on Company contractnumber S-LMAQM-04-C-0030, Task Order 0338, concerning theIraqi Police Training Program. Among other items, the report raises questionsabout the Company’s work under Task Order 0338 to establish a residential campin Baghdad to house training personnel. Specifically, the SIGIR reportrecommends that the Director, Office of Acquisition Management, U.S. Departmentof State (“State Department”), seek reimbursement from the Company of $4.2million paid by the State Department for work that the SIGIR maintains was notcontractually authorized. In addition, the SIGIR report recommends that theState Department request the Defense Contract Audit Agency to review twoCompany invoices totaling $19.1 million. In management’s opinion and based onfacts currently known, the above described matters raised in the SIGIR reportwill not have a material adverse effect on the Company’s consolidated financialcondition, results of operations or liquidity.

There have been no othermaterial changes in legal proceedings from those provided in Part I, Item3, “Legal Proceedings” in the Company’s Annual Report on Form 10-Kfor the fiscal year ended March 31, 2006, filed the SEC on June 29,2006.

**ITEM 1A.**        RISKFACTORS

There have been nomaterial changes in risk factors from those described in Part I, Item 1A, “RiskFactors” in the Company’s Annual Report on Form 10-K for the fiscalyear ended March 31, 2006, filed with the SEC on June 29, 2006.

**ITEM 2.**                UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

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**ITEM 3.**                DEFAULTSUPON SENIOR SECURITIES

None.

**ITEM 4.**                SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

**ITEM 5.**                OTHERINFORMATION

None.

**ITEM 6.**                EXHIBITS

Thefollowing exhibits are filed as part of, or incorporated by reference into,this Quarterly Report on Form 10-Q.
| Exhibit   Number | ** ** | **Description**                                                                                                     | ** ** | ** ** |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|------------|
| 3.1              |       | Amendment No. 5 to  the Amended and Restated Limited Liability Company Operating Agreement of DIV  Holding LLC |       | (A)        |
| 31.1*            |       | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002            |       |       |
| 31.2*            |       | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002            |       |       |
| 32.1*            |       | Certification of Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002            |       |       |
| 32.2*            |       | Certification of Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002            |       |       |

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*                    Filedherewith.

(A)       Previously filed as anexhibit to DynCorp International Inc.’s Form 8-K, filed with the SECon December 15, 2006 and incorporated herein by reference.

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**SIGNATURES**

Pursuantto the requirements of Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

|  | **DYNCORP INTERNATIONAL LLC**Date: February 12, 2007 |
|--|-----------------------------------------------------------|
|  | /s/ MICHAEL J. THORNE                                |
|  | Name:                                                     |   | Michael J. Thorne |
|  | Title:                                                    |   | Senior Vice President,  Chief Financial Officer  and Treasurer (principal financial and Duly  Authorized Officer) |

 

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