**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

| **(Mark One)**                                              |   | ** **                                                                                              |
|-------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------|
| **x**                                                       |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
| **For the quarterly period ended September 29,  2006** |
| **or**                                                      |
| o                                                           |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition period from         to**

**CommissionFile Number: 333-127343**

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**DYNCORP INTERNATIONAL LLC**

(Exact name of registrantas 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 350,Falls Church, Virginia 22042**

**(571) 722-0210**

(Address, including zipcode, and telephone number, including area code,of registrant’s principal executive offices)

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.    Yes  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 Exchange Act.(Check one):

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

 

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

The registrant has one class of member units. As ofNovember 5, 2006, DynCorp International Inc. held 100% of the memberunits.

 

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**DYNCORPINTERNATIONAL LLC**

**TABLE OF CONTENTS**

|                                         | ** ** | ** **                                                                                                                                        | **Page** |
|-----------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| **PART I.  FINANCIAL INFORMATION** |
|                                    | Item 1.    | Financial Statements                                                                                                                              |     |
|                                    |       | Condensed Consolidated Balance  Sheets—September 29, 2006 and March 31, 2006 (unaudited)                                           | 1        |
|                                    |       | Condensed Consolidated Statements of Operations—Three  and Six Months Ended September 29, 2006 and September 30, 2005  (unaudited) | 2        |
|                                    |       | Condensed Consolidated Statements of Cash Flows—Six  Months Ended September 29, 2006 and September 30, 2005 (unaudited)            | 3        |
|                                    |       | Condensed Consolidated Statements of Member’s  Equity—Six Months Ended September 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                                                                                                                   | 39       |
|                                    | Item 4.    | Submission of Matters to a Vote of Security Holders                                                                                               | 39       |
|                                    | Item  5.   | Other  Information                                                                                                                                | 39       |
|                                    | Item 6.    | Exhibits                                                                                                                                          | 39       |

 

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**PART I—FINANCIALINFORMATION**

**ITEM 1.   FINANCIALSTATEMENTS**

**DYNCORP INTERNATIONAL LLCCONDENSED CONSOLIDATED BALANCE SHEETS(In thousands, except per share data)(Unaudited)**

| ** **                                                                                                                                              | ** ** | **September 29,  2006** | ** ** | **March 31,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------|------------|
| **Assets**                                                                                                                                              |       |                         |       | ** **               |       | ** ** | ** ** |
| Current assets:                                                                                                                                         |       |                         |       |                     |       |   |   |
| Cash and cash equivalents                                                                                                                               |       |                         | $          | 80,439                   |       |   | $ | 20,573 |   |
| Receivables, net of allowances for doubtful accounts  of $3,428 and $8,479 at September 29, 2006 and March 31, 2006,  respectively            |       |                         | 415,967    |                     |       | 440,195 |   |
| Prepaid expenses and other current assets                                                                                                               |       |                         | 54,020     |                     |       | 43,733 |   |
| Deferred tax asset                                                                                                                                      |       |                         | 4,509      |                     |       | 795 |   |
| Total current assets                                                                                                                                    |       |                         | 554,935    |                     |       | 505,296 |   |
| Property and equipment at cost, less accumulated  depreciation of $2,134 and $1,296 at September 29, 2006 and  March 31, 2006, respectively   |       |                         | 11,561     |                     |       | 8,769 |   |
| Other assets:                                                                                                                                           |       |                         |       |                     |       |   |   |
| Goodwill                                                                                                                                                |       |                         | 420,180    |                     |       | 420,180 |   |
| Tradename                                                                                                                                               |       |                         | 18,318     |                     |       | 18,318 |   |
| Customer-related intangibles, net of accumulated  amortization of $63,267 and $43,471 at September 29, 2006 and  March 31, 2006, respectively |       |                         | 227,114    |                     |       | 246,910 |   |
| Deferred financing costs, net of accumulated  amortization of $4,616 and $3,261 at September 29, 2006 and  March 31, 2006, respectively       |       |                         | 15,656     |                     |       | 17,469 |   |
| Other intangibles, net of accumulated amortization of  $5,571 and $3,671 at September 29, 2006 and March 31, 2006, respectively               |       |                         | 6,939      |                     |       | 7,453 |   |
| Deferred income taxes                                                                                                                                   |       |                         | 14,413     |                     |       | 11,518 |   |
| Other assets                                                                                                                                            |       |                         | 2,149      |                     |       | 3,176 |   |
| Total other assets                                                                                                                                      |       |                         | 704,769    |                     |       | 725,024 |   |
| Total assets                                                                                                                                            |       |                         | $          | 1,271,265                |       |   | $ | 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                                                                                                                   |       |                         | 152,797    |                     |       | 143,668 |   |
| Accrued payroll and employee costs                                                                                                                      |       |                         | 76,693     |                     |       | 65,586 |   |
| Other accrued liabilities                                                                                                                               |       |                         | 56,609     |                     |       | 33,845 |   |
| Income taxes payable                                                                                                                                    |       |                         | 3,739      |                     |       | 8,280 |   |
| Total current liabilities                                                                                                                               |       |                         | 293,589    |                     |       | 253,967 |   |
| Long-term debt—less current portion                                                                                                                |       |                         | 629,270    |                     |       | 658,963 |   |
| Other long-term liabilities                                                                                                                             |       |                         | 2,563      |                     |       | — |   |
| Commitments and  contingencies                                                                                                                          |       |                         |       |                     |       |   |   |
| Member’s  equity:                                                                                                                                  |       |                         |       |                     |       |   |   |
| Member’s units, 100 outstanding                                                                                                                    |       |                         | 314,747    |                     |       | 298,914 |   |
| Retained earnings                                                                                                                                       |       |                         | 31,354     |                     |       | 27,463 |   |
| Accumulated other comprehensive loss                                                                                                                    |       |                         | (258       | )                        |       | (218 | ) |
| Total member’s equity                                                                                                                              |       |                         | 345,843    |                     |       | 326,159 |   |
| Total liabilities  and member’s equity                                                                                                             |       |                         | $          | 1,271,265                |       |   | $ | 1,239,089 |   |

 

See notes to condensed consolidated financial statements.

1

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**DYNCORP INTERNATIONAL LLCCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSFOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 29, 2006 AND SEPTEMBER 30, 2005(In thousands, except per share data)**

| ** **                                                                   | ** ** | **For the Three  Months Ended** | ** ** | **For the Six  Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                   | ** ** | **Sept. 29,  2006**                       | ** ** | **Sept. 30,  2005**                     | ** ** | **Sept. 29,  2006** | ** ** | **Sept. 30,  2005** | ** ** |
| ** **                                                                   | ** ** | **(unaudited)**                                | ** ** | **(unaudited)**                              | ** ** |
| Revenues                                                                     |       | $                                              | 474,721    |                                         | $          | 439,629 |   | $ | 1,012,405 |   | $ | 864,684 |   |
| Costs of services (excluding depreciation and  amortization disclosed below) |       | 423,433                                        |       | 385,002                                      |       | 893,767 |   | 763,592 |   |
| Selling, general  and administrative                                         |       | 30,552                                         |       | 19,702                                       |       | 57,957 |   | 38,861 |   |
| Depreciation and  amortization                                               |       | 11,212                                         |       | 11,515                                       |       | 22,349 |   | 22,200 |   |
| Operating income                                                             |       | 9,524                                          |       | 23,410                                       |       | 38,332 |   | 40,031 |   |
| Other expense  (income):                                                     |       |                                           |       |                                         |       |   |   |   |   |
| Interest expense                                                             |       | 14,689                                         |       | 13,855                                       |       | 29,503 |   | 27,684 |   |
| Loss on debt extinguishment                                                  |       | —                                         |       | —                                       |       | 3,484 |   | — |   |
| Loss (income) from joint ventures                                            |       | 123                                            |       | 73                                           |       | (323 | ) | 141 |   |
| Interest income                                                              |       | (410                                           | )          | (61                                          | )          | (560 | ) | (54 | ) |
| (Loss) income  before income taxes                                           |       | (4,878                                         | )          | 9,543                                        |       | 6,228 |   | 12,260 |   |
| Income tax (benefit)  provision                                              |       | (1,743                                         | )          | 3,524                                        |       | 2,337 |   | 4,163 |   |
| Net (loss) income                                                            |       | $                                              | (3,135     | )                                            | $          | 6,019 |   | $ | 3,891 |   | $ | 8,097 |   |

 

See notes to condensed consolidated financial statements.

2

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**DYNCORP INTERNATIONAL LLCCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE SIX MONTHS ENDED SEPTEMBER 29, 2006 AND SEPTEMBER 30, 2005(In thousands)**

| ** **                                                                         | ** ** | **For the Six Months Ended** | ** **               |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------|--------------------------|
| ** **                                                                         | ** ** | **Sept. 29,  2006**                         | ** **               | **Sept. 30,  2005** | ** ** |
| ** **                                                                         | ** ** | **(unaudited)**                                  | ** **               |
| **Cash flows from operating  activities:**                                         | ** ** |                                             | ** **               | ** ** |   |   | ** ** | ** ** |   |
| Net income                                                                         |       |                                             | $   3,891 |   |   |   | $   8,097 |   |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                             |                     |   |   |   |   |   |   |
| Depreciation and amortization                                                      |       |                                             | 23,515                   |   |   |   | 22,616 |   |   |
| Premium paid on redemption of senior subordinated  notes                           |       |                                             | 2,657                    |   |   |   | — |   |   |
| Deferred financing cost amortization                                               |       |                                             | 2,342                    |   |   |   | 1,320 |   |   |
| (Recovery) provision for losses on accounts  receivable                            |       |                                             | (4,563                   | ) |   |   | 350 |   |   |
| Income from equity joint ventures                                                  |       |                                             | (334                     | ) |   |   | 45 |   |   |
| Deferred taxes                                                                     |       |                                             | (6,609                   | ) |   |   | (442 | ) |   |
| Compensation expense related to Class B equity  participation                 |       |                                             | 999                      |   |   |   | — |   |   |
| Loss (gain) on disposition of assets                                               |       |                                             | 7                        |   |   |   | (1 | ) |   |
| Changes in current  assets and liabilities:                                        |       |                                             |                     |   |   |   |   |   |   |
| Accounts receivable                                                                |       |                                             | 28,791                   |   |   |   | 98,156 |   |   |
| Prepaid expenses and other current assets                                          |       |                                             | (4,599                   | ) |   |   | (2,640 | ) |   |
| Accounts payable and accruals                                                      |       |                                             | 30,931                   |   |   |   | (36,731 | ) |   |
| Income taxes payable                                                               |       |                                             | (4,522                   | ) |   |   | 1,002 |   |   |
| Net cash provided by operating activities                                          |       |                                             | 72,506                   |   |   |   | 91,772 |   |   |
| **Cash  flows from investing activities:**                                         | ** ** |                                             | ** **               | ** ** |   |   | ** ** | ** ** |   |
| Purchase of property and equipment                                                 |       |                                             | (2,671                   | ) |   |   | (697 | ) |   |
| Proceeds from sale of property and equipment                                       |       |                                             | —                   |   |   |   | 11 |   |   |
| Payment for computer software upgrade                                              |       |                                             | (1,386                   | ) |   |   | — |   |   |
| Other assets                                                                       |       |                                             | (363                     | ) |   |   | (1,283 | ) |   |
| Net cash used in investing activities                                              |       |                                             | (4,420                   | ) |   |   | (1,969 | ) |   |
| **Cash  flows from financing activities:**                                         | ** ** |                                             | ** **               | ** ** |   |   | ** ** | ** ** |   |
| Net transfers from parent company                                                  |       |                                             | 17,905                   |   |   |   | — |   |   |
| Payments on acquisition debt                                                       |       |                                             | (28,831                  | ) |   |   | (1,725 | ) |   |
| Borrowings related to prepaid insurance, net                                       |       |                                             | 5,892                    |   |   |   | — |   |   |
| Payments on deferred financing costs                                               |       |                                             | (529                     | ) |   |   | — |   |   |
| 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                                              |       |                                             | (8,220                   | ) |   |   | (37,208 | ) |   |
| Net increase in  cash and cash equivalents                                         |       |                                             | 59,866                   |   |   |   | 52,595 |   |   |
| Cash and cash  equivalents, beginning of period                                    |       |                                             | 20,573                   |   |   |   | 13,474 |   |   |
| Cash and cash  equivalents, end of period                                          |       |                                             | $80,439                  |   |   |   | $66,069 |   |   |

 

See notes to condensed consolidated financial statements.

3

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**DYNCORP INTERNATIONAL LLCCONDENSED CONSOLIDATED STATEMENTS OF MEMBER’S EQUITYFOR THE SIX MONTHS ENDED SEPTEMBER 29, 2006(In thousands)(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                                                     |       |                     |       | 3,891                  |       |                                        | —     |      |       | 3,891 |   |
| Interest rate cap                                              |       |                     |       | —                 |       |                                        | 2          |      |       | 2 |   |
| Currency translation adjustment                                |       |                     |       | —                 |       |                                        | (42        | )         |       | (42 | ) |
| Comprehensive  income                                          |       |                     |       | 3,891                  |       |                                        | (40        | )         |       | 3,851 |   |
| Contribution from parent                                       |       | 14,834                   |       | —                 |       |                                        | —     |      |       | 14,834 |   |
| Compensation expense related to Class B equity  interests |       | 999                      |       | —                 |       |                                        | —     |      |       | 999 |   |
| Balance at  September 29, 2006                            |       | $                        | 314,747    |                   | $          | 31,354                                      |       |      | $          | (258 | ) |   | $ | 345,843 |   |

 

See notes to condensed consolidated financial statements.

4

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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, theSuccessor Parent consummated an equity offering of 25,000 shares of its Class Acommon stock, par value $0.01 per share, at a price of $15.00 per share(the “Equity Offering”), 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.

*Basis ofPresentation*

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 accordancewith GAAP have been condensed or omitted pursuant to such rules andregulations. However, the Company believes that all disclosures are adequate tomake the information presented not misleading. These condensed consolidatedfinancial statements should be read in conjunction with the Company’s auditedconsolidated financial statements and the related notes thereto included in theCompany’s Annual 

5

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

Report (File No. 333-127343)on Form 10-K, filed with the Securities 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 September 29,2006 and March 31, 2006, the results of operations for the three and sixmonths ended September 29, 2006 and September 30, 2005, and cashflows for the six months ended September 29, 2006 and September 30,2005, have been included. The results of operations for the three and sixmonths ended September 29, 2006 are not necessarily indicative of theresults to be expected for the full fiscal year or for any future periods. TheCompany uses estimates and assumptions required for preparation of thefinancial statements. The estimates are primarily based on historicalexperience and business knowledge and are revised as circumstances change. However,actual results 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 September 29, 2006 was a13-week period from July 1, 2006 to September 29, 2006. Thethree months ended September 30, 2005 was a 13-week period from July 2,2005 to September 30, 2005. The six months ended September 29, 2006was a 26-week period from April 1, 2006 to September 29, 2006. Thesix months ended September 30, 2005 was a 26-week period from April 2,2005 to September 30, 2005.

*Principles ofConsolidation*

All intercompany transactions and balances have beeneliminated in consolidation. The Company has no active majority-ownedsubsidiaries. Investments in which the Company owns a 20% to 50% ownershipinterest are accounted for by the equity method. These investments are inbusiness entities in which the Company does not have control, but has theability to exercise significant influence over operating and financial policies.The Company has no investments in business entities of less than 20%.

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

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

*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 the Company toquantify misstatements based on their impact on each of its consolidatedfinancial statements and related disclosures. SAB No. 108 is effective asof the end of fiscal 2006, allowing a one-time transitional cumulative effectadjustment to retained earnings as of April 1, 2006 for errors that werenot previously deemed material, but are material under the guidance in SAB No. 108.The Company is currently evaluating the impact SAB No. 108 will have onits consolidated 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. 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 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 the Company’sconsolidated financial statements.

7

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

**Note 2—Receivables**

Receivablesconsists of the following:

| ** **                   | ** ** | **Sept. 29,  2006** | ** ** | **March 31,  2006** | ** ** |
|------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Billed                       |       | $                        | 173,602    |                     | $          | 188,458 |   |
| Unbilled                     |       | 241,024                  |       | 248,994                  |       |
| Unbilled—related  party |       | —                   |       | 495                      |       |
| Other receivables            |       | 1,341                    |       | 2,248                    |       |
|                         |       | $                        | 415,967    |                     | $          | 440,195 |   |

 

Unbilled receivablesconsists 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 includes 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 September 29, 2006 and March 31, 2006, unbilledreceivables included $23,056 and $31,303, respectively, related to this type ofunbilled receivables balance. In addition, unbilled receivables includesamounts related to contract retentions that are billed when the Company hasnegotiated final indirect rates with the U.S. government and, once billed, aresubject to audit and approval by outside third parties. Consequently, the timingof collection of retention balances of $1,419 and $10 as of September 29,2006 and 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:

| ** **                          | ** ** | **September 29, 2006**             | ** ** |
|-------------------------------------|------------|----------------------------------------------|------------|
| ** **                          | ** ** | **Weighted-  Average  Amortization  Period** | ** ** | **Gross  Carrying Value** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Customer-related  intangible assets |       |                                         | 8.5        |   |   |   | $ | 290,381 |   |   |   | $ | (63,267 | ) |   | $ | 227,114 |   |
| Deferred  financing cost            |       |                                         | 7.0        |   |   |   | 20,272 |   |   |   | (4,616 | ) |   | 15,656 |   |
| Other                               |       |                                         | 4.1        |   |   |   | 12,510 |   |   |   | (5,571 | ) |   | 6,939 |   |
|                                |       |                                         |       |   |   |   | $ | 323,163 |   |   |   | $ | (73,454 | ) |   | $ | 249,709 |   |

 

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 $10,567 and $10,015 for the three months ended September 29,2006 and September 30, 2005, respectively. Amortization expense forcustomer-related and other intangibles was $20,525 and $20,031 for the sixmonths ended September 29, 2006 and September 30, 2005, respectively.Deferred financing cost is amortized through interest expense. Amortizationrelated to deferred financing costs was $763 and $714 for the three monthsended September 29, 2006 and September 30, 2005, respectively. Amortizationrelated to deferred financing costs was $1,515 and $1,320 for the six monthsended September 29, 2006 and September 30, 2005, respectively. Estimatedamortization related to intangible assets at September 29, 2006 for fiscalyears 2007 through 2011 is as follows: $22,128, $42,366, $39,581, $39,271 and$35,378, respectively.

Asummary of other assets is as follows:

| ** **               | ** ** | **Sept. 29,  2006** | ** ** | **March 31,  2006** | ** ** |
|--------------------------|------------|--------------------------|------------|--------------------------|------------|
| Other assets:            |       |                     |       |                     |       |   |   |   |   |
| Investment in affiliates |       |                     | $          | 1,601                    |       |   |   | $ | 911 |   |   |
| Deferred offering costs  |       |                     | —     |                     |       |   | 1,940 |   |   |
| Other                    |       |                     | 548        |                     |       |   | 325 |   |   |
|                     |       |                     | $          | 2,149                    |       |   |   | $ | 3,176 |   |   |

 

**Note 4—Goodwill andTradename**

The Company operates in two principal operating segments,Field Technical Services (“FTS”) and International Technical Services (“ITS”).

The tradename of $18,318 is assigned to the reportablesegments as follows: FTS—$1,040 and ITS—$17,278. The tradename is not amortizedfor financial reporting purposes but is deductible for tax purposes.

The goodwill of $420,180is assigned to the reportable segments as follows: FTS—$100,314 and ITS—$319,866.The goodwill is not amortized for financial reporting purposes but isdeductible for tax purposes.

**Note 5—Cash Flows**

Cash payments for intereston indebtedness were $21,259 and $29,861 for the six months ended September 29,2006 and September 30, 2005, respectively. Net cash payments for incometaxes were 

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

$13,470and $3,552 for the six months ended September 29, 2006 and September 30,2005, respectively. The Company had non-cash investing activities of$1,554 related to property and equipment purchases that were accrued at September 29,2006. In addition, the Company had non-cash leasehold improvements of $3,015related to one lease at September 29, 2006.

**Note 6—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 September 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 September 29, 2006, the fair value of the interest rate cap was $14,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 7—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    | )                                             |       |         | (863       | ) |   |   | — |   |   | (28,831 | ) |
| Balance at  September 29, 2006 |       |                               | $          | 292,032                                       |       |         |       | $ | 340,688 |   |   |   | $ | — |   |   | $ | 632,720 |   |

 

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. TheCompany did not have an outstanding balance on the 

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

revolver on the date ofthe second amendment and waiver. The maturity date of the amended seniorsecured credit facility remains unchanged. The second amendment and waiver alsodoes the following, among other things: (i) decreases the interest ratespread applicable to the term loan under the Company’s senior secured creditfacility; (ii) permits the Company to request an increase in its revolvingcredit facility by an aggregate amount of up to $30,000, subject to the Companyobtaining commitments from existing and/or new lenders; (iii) increasesthe amount of capital expenditures permitted under the Company’s senior securedcredit facility from $4,000 per fiscal year to $8,000 per fiscal year; (iv) increasesthe amount of capitalized leases permitted under the Company’s senior securedcredit facility; (v) allows for the payment of dividends and therepurchase of the Company’s capital stock in the amount of $10,000, plus, ifthe leverage ratio (as defined in the senior secured credit facility) is below3.25:1.00, 25% of excess cash flow (as defined in the senior secured creditfacility) for each fiscal year; and (vi) provides for the first excesscash flow payment, as defined by the senior secured credit facility, tocommence on the Company’s fiscal year that ends on March 30, 2007.

On September 29,2006, the Company had $9,892 in outstanding letters of credit.

**Note 8—Class BEquity Participation**

During fiscal year ended March 31, 2006, certainmembers of management and the Successor Parent’s outside directors were granteda participating interest in the profits through a plan that granted themClass B interests in an affiliate, DIV Holding LLC. DIV Holding LLCconducts no operations and was established for the primary purpose of holdingthe equity of the Successor Parent. At September 29, 2006, the aggregateindividual grants were approximately 5.2% of the Class B interests of DIVHolding LLC. Pursuant to the terms of the operating agreement governing DIVHolding LLC, the holders of Class B interests are entitled to receive upto 7.5% of all distributions made by DIV Holding LLC after the holders of theClass A interests in DIV Holding LLC have received a return of theirinvested capital, provided that the holders of the Class A interests havereceived an 8.0% per annum internal rate of return (compounded annually)on their invested capital. The Class B interests are subject to afive-year vesting schedule with any unvested interest reverting to the holdersof Class A interests in the event the Class B interests are forfeitedor repurchased. The fair value of the Class B interests granted to certainmembers of management and the Successor Parent’s outside directors wasdetermined to be $7,625 as of the effective date of each grant. In accordancewith SFAS No. 123(R) “*Share-Based Payment*,”the Company records compensation expense based on the fair value andcommensurate with its graded vesting schedules. For the six months endedSeptember 29, 2006, the Company recognized non-cash compensation expenseof $999.

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

| **FY 2007** | ** ** | **FY 2008** | ** ** | **FY 2009** | ** ** | **FY 2010** | ** ** | **FY 2011** | ** ** |
|------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| $991             |       |             | $          | 1,574            |       |             |       | $                | 1,019      |   |   |   | $ | 517 |   |   |   | $ | 108 |   |   |
|                  |            |                  |            |                  |            |                  |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

11

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

**Note 9—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 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 $10,253 and $18,646 for the three months ended September 29,2006 and September 30, 2005, respectively. Lease rental expense amountedto $32,370 and $20,419 for the six months ended September 29, 2006 and September 30,2005, respectively.

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

| **Fiscal Year** | ** ** | ** ** | ** ** | **Real Estate** | ** ** | **Equipment** | ** ** |
|----------------------|------------|------------|------------|----------------------|------------|---------------|------------|
| 2007                 |       |       | $          | 1,901                |       |          |       | $ | 422 |   |   |
| 2008                 |       |       | 3,465      |                 |       |          | 751        |   |   |
| 2009                 |       |       | 2,432      |                 |       |          | 55         |   |   |
| 2010                 |       |       | 2,186      |                 |       |          | —     |   |   |
| 2011                 |       |       | 2,186      |                 |       |          | —     |   |   |
| Thereafter           |       |       | 12,023     |                 |       |          | —     |   |   |
|                 |       |       | $          | 24,193               |       |          |       | $ | 1,228 |   |   |

 

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 

12

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

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 September 29,2006 that will have a material adverse effect on the Company’s consolidatedfinancial condition, 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. Thespraying operations 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 the Companyagainst third-party liabilities arising out of the contract, subject toavailable funding. The Company is also entitled to indemnification by ComputerSciences Corporation in connection with this lawsuit, subject to certainlimitations. Additionally, any damage award would have to be apportionedbetween the other defendants and the Company.

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 the Departmentof 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.

**Note10—Guarantor/Non-Guarantor Supplemental Data**

As of September 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.

13

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

The followingsupplemental condensed consolidating financial statements present:

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

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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 BALANCE SHEET INFORMATIONSEPTEMBER 29, 2006(Unaudited)**

| ** **                                       | ** ** | **Parent** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------|------------|------------|------------|----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| **ASSETS**                                       | ** ** | ** ** | ** ** |                       | ** ** | ** **                     |       |             | ** ** | ** **       |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Current assets:                                  |       |       |       |                       |       | ** **                     |       |             |       |             |       |   |   |   |   |   |   | ** ** |   |
| Cash and cash equivalents                        |       | $          | 71,440     |                       |       | $                              | 5,792      | ** **       |       |             | $          | 3,207 |   |   |   | $ | — |   |   |   | $ | 80,439 | ** ** |   |
| Receivables, net                                 |       | 387,012    |       |                       | 28,789     | ** **                     |       |             | 166        |             |       |   | — |   |   |   | 415,967 | ** ** |   |
| Prepaid expenses and other current assets        |       | 42,964     |       |                       | 15,369     | ** **                     |       |             | 196        |             |       |   | — |   |   |   | 58,529 | ** ** |   |
| Total current  assets                            |       | 501,416    |       |                       | 49,950     | ** **                     |       |             | 3,569      |             |       |   | — |   |   |   | 554,935 | ** ** |   |
| Property and  equipment, net                     |       | 7,301      |       |                       | 3,824      | ** **                     |       |             | 436        |             |       |   | — |   |   |   | 11,561 | ** ** |   |
| Other assets:                                    |       |       |       |                       |       | ** **                     |       |             |       |             |       |   |   |   |   |   |   | ** ** |   |
| Goodwill                                         |       | 398,559    |       |                       | 21,621     | ** **                     |       |             | —     |             |       |   | — |   |   |   | 420,180 | ** ** |   |
| Tradename                                        |       | 18,318     |       |                       | —     | ** **                     |       |             | —     |             |       |   | — |   |   |   | 18,318 | ** ** |   |
| Customer-related intangibles, net                |       | 213,543    |       |                       | 13,571     | ** **                     |       |             | —     |             |       |   | — |   |   |   | 227,114 | ** ** |   |
| Other intangibles, net                           |       | 6,624      |       |                       | 315        | ** **                     |       |             | —     |             |       |   | — |   |   |   | 6,939 | ** ** |   |
| Investment in subsidiaries                       |       | 15,366     |       |                       | 349        | ** **                     |       |             | —     |             |       |   | (15,715 | ) |   |   | — | ** ** |   |
| Deferred financing costs, net                    |       | 15,656     |       |                       | —     | ** **                     |       |             | —     |             |       |   | — |   |   |   | 15,656 | ** ** |   |
| Other assets                                     |       | 16,562     |       |                       | —     | ** **                     |       |             | —     |             |       |   | — |   |   |   | 16,562 | ** ** |   |
| Intercompany receivables                         |       | 3,941      |       |                       | —     | ** **                     |       |             | 29,616     |             |       |   | (33,557 | ) |   |   | — | ** ** |   |
| Total other assets                               |       | 688,569    |       |                       | 35,856     | ** **                     |       |             | 29,616     |             |       |   | (49,272 | ) |   |   | 704,769 | ** ** |   |
| Total assets                                     |       | $          | 1,197,286  |                       |       | $                              | 89,630     | ** **       |       |             | $          | 33,621 |   |   |   | $ | (49,272 | ) |   |   | $ | 1,271,265 | ** ** |   |
| **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            |       | 141,259    |       |                       | 11,384     | ** **                     |       |             | 154        |             |       |   | — |   |   |   | 152,797 | ** ** |   |
| Accrued payroll and employee costs               |       | 50,234     |       |                       | 10,198     | ** **                     |       |             | 16,261     |             |       |   | — |   |   |   | 76,693 | ** ** |   |
| Other accrued expenses                           |       | 20,909     |       |                       | 18,647     | ** **                     |       |             | 17,053     |             |       |   | — |   |   |   | 56,609 | ** ** |   |
| Income taxes                                     |       | 3,457      |       |                       | 685        | ** **                     |       |             | (403       | )                |       |   | — |   |   |   | 3,739 | ** ** |   |
| Total current liabilities                        |       | 219,610    |       |                       | 40,914     | ** **                     |       |             | 33,065     |             |       |   | — |   |   |   | 293,589 | ** ** |   |
| Long-term  debt—less current portion        |       | 629,270    |       |                       | —     | ** **                     |       |             | —     |             |       |   | — |   |   |   | 629,270 | ** ** |   |
| Other long-term  liabilities                     |       | 2,563      |       |                       | —     | ** **                     |       |             | —     |             |       |   | — |   |   |   | 2,563 | ** ** |   |
| Intercompany  payables                           |       | —     |       |                       | 33,557     | ** **                     |       |             | —     |             |       |   | (33,557 | ) |   |   | — | ** ** |   |
| Member’s equity                             |       | 345,843    |       |                       | 15,159     | ** **                     |       |             | 556        |             |       |   | (15,715 | ) |   |   | 345,843 | ** ** |   |
| Total liabilities and  member’s equity      |       | $          | 1,197,286  |                       |       | $                              | 89,630     | ** **       |       |             | $          | 33,621 |   |   |   | $ | (49,272 | ) |   |   | $ | 1,271,265 | ** ** |   |

 

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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 BALANCE SHEET INFORMATIONMARCH 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 SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATIONFOR THE THREE MONTHS ENDED SEPTEMBER 29, 2006(Unaudited)**

| ** **                                                                   | ** ** | **Parent** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| Revenues                                                                     |       | $          | 415,586    |                       |       | $                              | 59,135     |             |       |             | $          | 63,298 |   |   |   | $ | (63,298 | ) |   |   | $ | 474,721 |   |   |
| Costs of services  (excluding depreciation and amortization disclosed below) |       | 368,726    |       |                       | 54,486     |                           |       |             | 63,519     |             |       |   | (63,298 | ) |   |   | 423,433 |   |   |
| Selling, general and  administrative                                         |       | 29,489     |       |                       | 1,526      |                           |       |             | (463       | )                |       |   | — |   |   |   | 30,552 |   |   |
| Depreciation and  amortization                                               |       | 11,374     |       |                       | (44        | )                              |       |             | (118       | )                |       |   | — |   |   |   | 11,212 |   |   |
| Operating income                                                             |       | 5,997      |       |                       | 3,167      |                           |       |             | 360        |             |       |   | — |   |   |   | 9,524 |   |   |
| Interest expense                                                             |       | 14,677     |       |                       | 12         |                           |       |             | —     |             |       |   | — |   |   |   | 14,689 |   |   |
| Loss on joint ventures                                                       |       | 123        |       |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | 123 |   |   |
| Other income                                                                 |       | (401       | )          |                       | (9         | )                              |       |             | —     |             |       |   | — |   |   |   | (410 | ) |   |
| Equity in (income) loss  of subsidiaries                                     |       | (3,378     | )          |                       | (54        | )                              |       |             | —     |             |       |   | 3,432 |   |   |   | — |   |   |
| (Loss) income before  income taxes                                           |       | (5,024     | )          |                       | 3,218      |                           |       |             | 360        |             |       |   | (3,432 | ) |   |   | (4,878 | ) |   |
| Provision for income  taxes                                                  |       | (1,889     | )          |                       | 98         |                           |       |             | 48         |             |       |   | — |   |   |   | (1,743 | ) |   |
| Net (loss) income                                                            |       | $          | (3,135     | )                          |       | $                              | 3,120      |             |       |             | $          | 312 |   |   |   | $ | (3,432 | ) |   |   | $ | (3,135 | ) |   |

 

**DYNCORPINTERNATIONAL LLC AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATIONFOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005(Unaudited)**

| ** **                                                                   | ** ** | **Parent** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| Revenues                                                                     |       | $          | 384,398    |                       |       | $                              | 55,231     |             |       |             | $          | 56,633 |   |   |   | $ | (56,633 | ) |   |   | $ | 439,629 |   |   |
| Costs of services  (excluding depreciation and amortization disclosed below) |       | 334,535    |       |                       | 50,574     |                           |       |             | 56,526     |             |       |   | (56,633 | ) |   |   | 385,002 |   |   |
| Selling, general and  administrative                                         |       | 18,457     |       |                       | 1,245      |                           |       |             | —     |             |       |   | — |   |   |   | 19,702 |   |   |
| Depreciation and  amortization                                               |       | 11,492     |       |                       | —     |                           |       |             | 23         |             |       |   | — |   |   |   | 11,515 |   |   |
| Operating income                                                             |       | 19,914     |       |                       | 3,412      |                           |       |             | 84         |             |       |   | — |   |   |   | 23,410 |   |   |
| Interest expense                                                             |       | 13,855     |       |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | 13,855 |   |   |
| Loss on joint ventures                                                       |       | 73         |       |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | 73 |   |   |
| Other income                                                                 |       | (61        | )          |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | (61 | ) |   |
| Equity in (income) loss  of subsidiaries                                     |       | (3,466     | )          |                       | (54        | )                              |       |             | —     |             |       |   | 3,520 |   |   |   | — |   |   |
| Income before income taxes                                                   |       | 9,513      |       |                       | 3,466      |                           |       |             | 84         |             |       |   | (3,520 | ) |   |   | 9,543 |   |   |
| Provision for income  taxes                                                  |       | 3,494      |       |                       | —     |                           |       |             | 30         |             |       |   | — |   |   |   | 3,524 |   |   |
| Net income                                                                   |       | $          | 6,019      |                       |       | $                              | 3,466      |             |       |             | $          | 54 |   |   |   | $ | (3,520 | ) |   |   | $ | 6,019 |   |   |

 

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 SIX MONTHS ENDED SEPTEMBER 29, 2006(Unaudited)**

| ** **                                                                   | ** ** | **Parent** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| Revenues                                                                     |       | $          | 887,767    |                       |       | $                              | 124,638    |             |       |             | $          | 129,195 |   |   |   | $ | (129,195 | ) |   |   | $ | 1,012,405 |   |   |
| Costs of services  (excluding depreciation and amortization disclosed below) |       | 778,545    |       |                       | 115,818    |                           |       |             | 128,599    |             |       |   | (129,195 | ) |   |   | 893,767 |   |   |
| Selling, general and  administrative                                         |       | 54,616     |       |                       | 3,285      |                           |       |             | 56         |             |       |   | — |   |   |   | 57,957 |   |   |
| Depreciation and   amortization                                              |       | 22,298     |       |                       | —     |                           |       |             | 51         |             |       |   | — |   |   |   | 22,349 |   |   |
| Operating income                                                             |       | 32,308     |       |                       | 5,535      |                           |       |             | 489        |             |       |   | — |   |   |   | 38,332 |   |   |
| Interest expense                                                             |       | 29,503     |       |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | 29,503 |   |   |
| Loss on debt  extinguishment                                                 |       | 3,484      |       |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | 3,484 |   |   |
| Income on joint ventures                                                     |       | (323       | )          |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | (323 | ) |   |
| Other income                                                                 |       | (552       | )          |                       | (8         | )                              |       |             | —     |             |       |   | — |   |   |   | (560 | ) |   |
| Equity in (income) loss  of subsidiaries                                     |       | (5,709     | )          |                       | (134       | )                              |       |             | —     |             |       |   | 5,843 |   |   |   | — |   |   |
| Income before income  taxes                                                  |       | 5,905      |       |                       | 5,677      |                           |       |             | 489        |             |       |   | (5,843 | ) |   |   | 6,228 |   |   |
| Provision for income  taxes                                                  |       | 2,014      |       |                       | 226        |                           |       |             | 97         |             |       |   | — |   |   |   | 2,337 |   |   |
| Net income                                                                   |       | $          | 3,891      |                       |       | $                              | 5,451      |             |       |             | $          | 392 |   |   |   | $ | (5,843 | ) |   |   | $ | 3,891 |   |   |

 

**DYNCORPINTERNATIONAL LLC AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATIONFOR THE SIX MONTHS ENDED SEPTEMBER 30, 2005(Unaudited)**

| ** **                                                                   | ** ** | **Parent** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| Revenues                                                                     |       | $          | 757,826    |                       |       | $                              | 106,858    |             |       |             | $          | 104,790 |   |   |   | $ | (104,790 | ) |   |   | $ | 864,684 |   |   |
| Costs of services  (excluding depreciation and amortization disclosed below) |       | 664,059    |       |                       | 99,764     |                           |       |             | 104,559    |             |       |   | (104,790 | ) |   |   | 763,592 |   |   |
| Selling, general and   administrative                                        |       | 36,445     |       |                       | 2,415      |                           |       |             | 1          |             |       |   | — |   |   |   | 38,861 |   |   |
| Depreciation and  amortization                                               |       | 22,154     |       |                       | —     |                           |       |             | 46         |             |       |   | — |   |   |   | 22,200 |   |   |
| Operating income                                                             |       | 35,168     |       |                       | 4,679      |                           |       |             | 184        |             |       |   | — |   |   |   | 40,031 |   |   |
| Interest expense                                                             |       | 27,684     |       |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | 27,684 |   |   |
| Loss on joint ventures                                                       |       | 141        |       |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | 141 |   |   |
| Interest income                                                              |       | (50        | )          |                       | (4         | )                              |       |             | —     |             |       |   | — |   |   |   | (54 | ) |   |
| Equity in (income) loss  of subsidiaries                                     |       | (4,825     | )          |                       | (142       | )                              |       |             | —     |             |       |   | 4,967 |   |   |   | — |   |   |
| Income before income  taxes                                                  |       | 12,218     |       |                       | 4,825      |                           |       |             | 184        |             |       |   | (4,967 | ) |   |   | 12,260 |   |   |
| Provision for income  taxes                                                  |       | 4,121      |       |                       | —     |                           |       |             | 42         |             |       |   | — |   |   |   | 4,163 |   |   |
| Net income                                                                   |       | $          | 8,097      |                       |       | $                              | 4,825      |             |       |             | $          | 142 |   |   |   | $ | (4,967 | ) |   |   | $ | 8,097 |   |   |

 

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 SIX MONTHS ENDED SEPTEMBER 29, 2006(Unaudited)**

| ** **                                            | ** ** | **Parent** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|------------|------------|----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| Net cash provided by operating  activities            |       | $          | 58,929     |                       |       | $                              | 5,283      |             |       |             | $          | 8,294 |   |   |   | $ | — |   |   |   | $ | 72,506 |   |   |
| **Cash flows from investing  activities:**            | ** ** | ** ** | ** ** |                       |       |                           |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Purchases of property and  equipment                  |       | (1,806     | )          |                       | (865       | )                              |       |             | —     |             |       |   | — |   |   |   | (2,671 | ) |   |
| Other assets                                          |       | (1,749     | )          |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | (1,749 | ) |   |
| Net cash used in  investing activities                |       | (3,555     | )          |                       | (865       | )                              |       |             | —     |             |       |   | — |   |   |   | (4,420 | ) |   |
| **Cash flows from financing  activities:**            | ** ** | ** ** | ** ** |                       |       |                           |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Net transfers from (to)  Parent                       |       | 34,623     |       |                       | (9,374     | )                              |       |             | (7,344     | )                |       |   | — |   |   |   | 17,905 |   |   |
| Payment on credit  facility                           |       | (28,831    | )          |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | (28,831 | ) |   |
| Other financing  activities                           |       | 2,706      |       |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | 2,706 |   |   |
| Net cash provided by  (used in) financing activities  |       | 8,498      |       |                       | (9,374     | )                              |       |             | (7,344     | )                |       |   | — |   |   |   | (8,220 | ) |   |
| Net increase (decrease)  in cash and cash equivalents |       | 63,872     |       |                       | (4,956     | )                              |       |             | 950        |             |       |   | — |   |   |   | 59,866 |   |   |
| Cash and cash equivalents  at beginning of period     |       | 7,567      |       |                       | 10,749     |                           |       |             | 2,257      |             |       |   | — |   |   |   | 20,573 |   |   |
| Cash and cash equivalents at end of period            |       | $          | 71,439     |                       |       | $                              | 5,793      |             |       |             | $          | 3,207 |   |   |   | $ | — |   |   |   | $ | 80,439 |   |   |

 

**DYNCORPINTERNATIONAL LLC AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATIONFOR THE SIX MONTHS ENDED SEPTEMBER 30, 2005(Unaudited)**

| ** **                                        | ** ** | **Parent** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------|------------|------------|------------|----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| Net cash provided by  operating activities        |       | $          | 77,565     |                       |       | $                              | 3,301      |             |       |             | $          | 10,906 |   |   |   | $ | — |   |   |   | $ | 91,772 |   |   |
| **Cash flows from investing  activities:**        | ** ** | ** ** | ** ** |                       |       |                           |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Purchases of property and  equipment              |       | (641       | )          |                       | —     |                           |       |             | (56        | )                |       |   | — |   |   |   | (697 | ) |   |
| Other assets                                      |       | (1,272     | )          |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | (1,272 | ) |   |
| Net cash used in investing  activities            |       | (1,913     | )          |                       | —     |                           |       |             | (56        | )                |       |   | — |   |   |   | (1,969 | ) |   |
| **Cash flows from financing  activities:**        | ** ** | ** ** | ** ** |                       |       |                           |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Net transfers from (to)  Parent                   |       | 13,438     |       |                       | (2,980     | )                              |       |             | (10,458    | )                |       |   | — |   |   |   | — |   |   |
| Payments on credit  facility                      |       | (35,000    | )          |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | (35,000 | ) |   |
| Payments on acquisition  debt                     |       | (1,725     | )          |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | (1,725 | ) |   |
| Purchase of interest rate  cap                    |       | (483       | )          |                       | —     |                           |       |             | —     |             |       |   | — |   |   |   | (483 | ) |   |
| Net cash used in financing  activities            |       | (23,770    | )          |                       | (2,980     | )                              |       |             | (10,458    | )                |       |   | — |   |   |   | (37,208 | ) |   |
| Net increase in cash and  cash equivalents        |       | 51,882     |       |                       | 321        |                           |       |             | 392        |             |       |   | — |   |   |   | 52,595 |   |   |
| Cash and cash equivalents  at beginning of period |       | 10,531     |       |                       | 1,423      |                           |       |             | 1,520      |             |       |   | — |   |   |   | 13,474 |   |   |
| Cash and cash equivalents at end of period        |       | $          | 62,413     |                       |       | $                              | 1,744      |             |       |             | $          | 1,912 |   |   |   | $ | — |   |   |   | $ | 66,069 |   |   |

 

19

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

**Note 11—SegmentInformation**

The Company’s business primarily involves providingworldwide maintenance support to U.S. military aircraft and various defensetechnical services. The Company is organized into two segments, FTS and ITS. FTSprimarily offers aviation services, including maintenance and modifications,training, aftermarket logistics support, avionics upgrades, fieldinstallations, and aircraft operations and training. ITS primarily offers basemaintenance/operations and personal and physical security services. The Companyprovides services domestically and in foreign countries under contracts withthe U.S. government and some foreign customers. The risks associated with theCompany’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 FTS operating segment provides long-termaviation services and engineering and logistics support, ranging from dailyfleet maintenance to extensive modification and overhauls on aircraft, weaponssystems and support equipment. FTS generates revenue under long-term contractsthat are typically three to ten years in duration. Based on revenues, ContractField Teams is the most significant program in the FTS operating segment. TheCompany and its predecessors have participated in this program for 54consecutive 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 andweapons systems in addition to depot-level repair.

The Company’s ITS operating segment primarily providesoutsourced law enforcement training, drug eradication, global logistics, baseoperations and personal and physical security services to government andcommercial customers in foreign jurisdictions. The ITS operating segment haswitnessed strong growth as a result of the U.S. government’s trend towardoutsourcing critical related functions. In February 2004, as part of theDepartment of State’s outsourced law enforcement training in the Middle East,the Company was awarded a new Civilian Police contract, which expanded theexisting Civilian Police program in place since 1994. As of September 29,2006, the Company had deployed civilian police officers from the United Statesto two countries to train and offer logistics support to the local police andassist them with infrastructure and reconstruction.

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 or loss from joint ventures.

20

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

Thetable below presents selected financial information for the respective periods,for the two reportable segments and for financial items that cannot beallocated to either operating segment:

| ** **                                           | ** ** | **Field  Technical  Services** | ** ** | **International  Technical  Services** | ** ** | **DynCorp  International  Home Office** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|--------------------------------|------------|----------------------------------------|------------|----------------------------------------------|------------|-----------|------------|
| For the Three  Months Ended September 29, 2006: |       |                           |       |                                   |       |                                         |       |      |       |   |   |   |   |
| Revenues                                             |       | $                              | 165,450    |                                   |       | $                                            | 309,271    |      |       |   | $ | — |   |   | $ | 474,721 |   |
| Earnings before interest and taxes                   |       | 2,450                          |       |                                   | 12,276     |                                         |       |      | (4,915     | ) |   | 9,811 |   |
| Depreciation and amortization                        |       | 2,972                          |       |                                   | 7,867      |                                         |       |      | 1,276      |   |   | 12,115 |   |
| For the Three Months Ended September 30, 2005:  |       |                           |       |                                   |       |                                         |       |      |       |   |   |   |   |
| Revenues                                             |       | $                              | 172,919    |                                   |       | $                                            | 266,710    |      |       |   | $ | — |   |   | $ | 439,629 |   |
| Earnings before interest and taxes                   |       | 7,097                          |       |                                   | 18,566     |                                         |       |      | (2,265     | ) |   | 23,398 |   |
| Depreciation and  amortization                       |       | 2,915                          |       |                                   | 8,072      |                                         |       |      | 735        |   |   | 11,722 |   |

 

| ** **                                         | ** ** | **Field  Technical  Services** | ** ** | **International  Technical  Services** | ** ** | **DynCorp  International  Home Office** | ** ** | **Total** | ** ** |
|----------------------------------------------------|------------|--------------------------------|------------|----------------------------------------|------------|----------------------------------------------|------------|-----------|------------|
| For the Six Months Ended  September 29, 2006: |       |                           |       |                                   |       |                                         |       |      |       |   |   |   |   |
| Revenues                                           |       | $                              | 348,191    |                                   |       | $                                            | 664,214    |      |       |   | $ | — |   |   | $ | 1,012,405 |   |
| Earnings before interest and taxes                 |       | 7,172                          |       |                                   | 38,176     |                                         |       |      | (6,133     | ) |   | 39,215 |   |
| Depreciation and amortization                      |       | 5,978                          |       |                                   | 15,502     |                                         |       |      | 2,035      |   |   | 23,515 |   |
| Assets                                             |       | 317,963                        |       |                                   | 834,996    |                                         |       |      | 118,306    |   |   | 1,271,265 |   |
| For the Six  Months Ended September 30, 2005: |       |                           |       |                                   |       |                                         |       |      |       |   |   |   |   |
| Revenues                                           |       | $                              | 342,371    |                                   |       | $                                            | 522,313    |      |       |   | $ | — |   |   | $ | 864,684 |   |
| Earnings before interest and taxes                 |       | 14,775                         |       |                                   | 28,747     |                                         |       |      | (3,578     | ) |   | 39,944 |   |
| Depreciation and  amortization                     |       | 5,837                          |       |                                   | 15,635     |                                         |       |      | 1,144      |   |   | 22,616 |   |

 

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 financingcosts, including interest expense and income taxes, each of which the Companyevaluates on a consolidated level. The Company’s management believes EBIT is auseful measurement of the Company’s performance because it provides informationthat can be used to evaluate the effectiveness of the Company’s business froman operational perspective, exclusive of the costs to finance those activitiesand exclusive of income taxes, neither of which is directly relevant to theefficiency of those 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 Six   Months Ended** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                          | ** ** | **Sept. 29,  2006**                             | ** ** | **Sept. 30,  2005**                           | ** ** | **Sept. 29,  2006** | ** ** | **Sept. 30,  2005** | ** ** |
| Earnings before  interest and taxes |       | $                                                    | 9,811      |                                               | $          | 23,398 |   | $ | 39,215 |   | $ | 39,944 |   |
| Interest expense                    |       | 14,689                                               |       | 13,855                                             |       | 29,503 |   | 27,684 |   |
| Loss on debt  extinguishment        |       | —                                               |       | —                                             |       | 3,484 |   | — |   |
| Income tax  (benefit) provision     |       | (1,743                                               | )          | 3,524                                              |       | 2,337 |   | 4,163 |   |
| Net (loss) income                   |       | $                                                    | (3,135     | )                                                  | $          | 6,019 |   | $ | 3,891 |   | $ | 8,097 |   |

 

* * * * *

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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”).

**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 

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funded and unfundedbacklog. Funded backlog is based upon amounts actually appropriated by acustomer for payment of goods and services less actual revenue recorded as ofthe measurement 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:

| ** **       | ** ** | **Sept. 30,  2005** | ** ** | **March 31,  2006** | ** ** | **Sept. 29,  2006** | ** ** |
|------------------|------------|--------------------------|------------|--------------------------|------------|--------------------------|------------|
| Funded backlog   |       |                     | $          | 1,178                    |       |                     |       | $ | 1,024 |   |   |   | $ | 886 |   |   |
| Unfunded backlog |       |                     | 1,797      |                     |       |                     | 1,617      |   |   |   | 1,839 |   |   |
| Total backlog    |       |                     | $          | 2,975                    |       |                     |       | $ | 2,641 |   |   |   | $ | 2,725 |   |   |

 

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

| ** ** | ** ** | **For the  Six Months  Ended Sept. 30,  2005** | ** ** | **Fiscal Year  Ended   March 31,  2006** | ** ** | **For the  Six Months  Ended Sept. 29,  2006** | ** ** |
|------------|------------|--------------------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| New orders |       |                                                               | $          | 1,799                                                   |       |                                                               |       | $ | 2,568 |   |   |   | $ | 1,096 |   |   |
|            |            |                                                                    |            |                                                         |            |                                                                    |            |  |  |  |  |  |  |  |  |  |

 

**Estimated RemainingContract Value**

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

| ** **                          | ** ** | **For the  Six Months   Ended Sept. 30,  2005** | ** ** | **Fiscal Year  Ended  March 31,  2006** | ** ** | **For the  Six Months  Ended Sept. 29,  2006** | ** ** |
|-------------------------------------|------------|--------------------------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| Estimated remaining  contract value |       |                                                                     | $          | 5,864                                             |       |                                                               |       | $ | 5,727 |   |   |   | $ | 5,658 |   |   |
|                                     |            |                                                                          |            |                                                   |            |                                                                    |            |  |  |  |  |  |  |  |  |  |

 

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 varydepending upon government budgets and appropriations.

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**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 Six Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                   | ** ** | **Sept. 29,  2006**                           | ** ** | **% of  Revenue**                           | ** ** | **Sept. 30,  2005** | ** ** | **% of  Revenue** | ** ** | **Sept. 29,  2006** | ** ** | **% of  Revenue** | ** ** | **Sept. 30,  2005** | ** ** | **% of  Revenue** | ** ** |
| Revenues:                                                                    |       |                                               |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| International Technical Services                                             |       | $                                                  | 309,271    |                                             |       | 65.1 | % |   | $ | 266,710 |   |   | 60.7 | % |   | $ | 664,214 |   |   | 65.6 | % |   | $ | 522,313 |   |   | 60.4 | % |   |
| Field Technical Services                                                     |       | 165,450                                            |       |                                             | 34.9       |   |   | 172,919 |   |   | 39.3 |   |   | 348,191 |   |   | 34.4 |   |   | 342,371 |   |   | 39.6 |   |   |
| Total revenues                                                               |       | 474,721                                            |       |                                             | 100.0      | % |   | 439,629 |   |   | 100.0 | % |   | 1,012,405 |   |   | 100.0 | % |   | $ | 864,684 |   |   | 100.0 | % |   |
| Costs of services (excluding depreciation and  amortization disclosed below) |       | 423,433                                            |       |                                             | 89.2       |   |   | 385,002 |   |   | 87.6 |   |   | 893,767 |   |   | 88.3 |   |   | 763,592 |   |   | 88.3 |   |   |
| Selling, general and administrative expenses                                 |       | 30,552                                             |       |                                             | 6.4        |   |   | 19,702 |   |   | 4.5 |   |   | 57,957 |   |   | 5.7 |   |   | 38,861 |   |   | 4.5 |   |   |
| Depreciation and amortization                                                |       | 11,212                                             |       |                                             | 2.4        |   |   | 11,515 |   |   | 2.6 |   |   | 22,349 |   |   | 2.2 |   |   | 22,200 |   |   | 2.6 |   |   |
| Total costs and expenses                                                     |       | 465,197                                            |       |                                             | 98.0       |   |   | 416,219 |   |   | 94.7 |   |   | 974,073 |   |   | 96.2 |   |   | 824,653 |   |   | 95.4 |   |   |
| Interest expense                                                             |       | 14,689                                             |       |                                             | 3.1        |   |   | 13,855 |   |   | 3.2 |   |   | 29,503 |   |   | 2.9 |   |   | 27,684 |   |   | 3.2 |   |   |
| Loss on debt extinguishment and preferred stock                              |       | —                                             |       |                                             | —     |   |   | — |   |   | — |   |   | 3,484 |   |   | 0.3 |   |   | — |   |   | — |   |   |
| Loss (income) from joint ventures                                            |       | 123                                                |       |                                             | 0.0        |   |   | 73 |   |   | 0.0 |   |   | (323 | ) |   | 0.0 |   |   | 141 |   |   | 0.0 |   |   |
| Interest income                                                              |       | (410                                               | )          |                                             | (0.1       | ) |   | (61 | ) |   | 0.0 |   |   | (560 | ) |   | (0.1 | ) |   | (54 | ) |   | 0.0 |   |   |
| Loss (income) before income taxes                                            |       | (4,878                                             | )          |                                             | (1.0       | ) |   | 9,543 |   |   | 2.1 |   |   | 6,228 |   |   | 0.7 |   |   | 12,260 |   |   | 1.4 |   |   |
| Income tax (benefit) provision                                               |       | (1,743                                             | )          |                                             | (0.4       | ) |   | 3,524 |   |   | 0.8 |   |   | 2,337 |   |   | 0.2 |   |   | 4,163 |   |   | 0.5 |   |   |
| Net (loss) income                                                            |       | $                                                  | (3,135     | )                                                |       | (0.6 | )% |   | $ | 6,019 |   |   | 1.3 | % |   | $ | 3,891 |   |   | 0.5 | % |   | $ | 8,097 |   |   | 0.9 | % |   |

 

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

*Consolidated*

*Revenues.*   Totalrevenues increased from $439.6 million for the three months ended September 30,2005 to $474.7 million for the three months ended September 29, 2006,an increase of $35.1 million or 8.0%. For the three months ended September 29,2006 and September 30, 2005, approximately 42%, 36% and 22% andapproximately 27%, 40% and 33% of our revenues were derived from fixed-price,time-and-materials, and cost-reimbursement contracts, respectively.

Revenues from our ITS segment increased from$266.7 million for the three months ended September 30, 2005 to$309.3 million for the three months ended September 29, 2006, anincrease of $42.6 million or 16.0%. The International Narcotics and LawEnforcement Air-Wing (“Air-Wing”) program increased $30.6 million. TheDepartment of State awarded our current contract under the Air-Wing programduring May 2005. As part of the new contract, we successfully transitionedmany of the activities under this program from cost-reimbursement tofixed-price. The factors contributing to higher revenues include increasederadication efforts in South America, combined with increased activity inAfghanistan supporting the ground eradication effort under the Air-Wing program.Our Civilian Police program contributed $15.8 million to the increase inrevenues. The Civilian Police program benefited from an increased number ofinternational police liaison officers deployed in Iraq and Afghanistan,compared to the three months ended September 30, 2005. The LogisticsSupport programs revenue increased by $11.2 million, compared to the threemonths ended September 30, 2005. The increase within the Logistics Supportprograms was primarily due to the added work under the Africa Peacekeepingcontract with the Department of State. Partially offsetting the factorscontributing to the increased ITS segment revenue was a reduction in servicesunder the Worldwide Personal Protective Services program. We lost four taskorders under which we provided personal security services in Israel, Haiti,Afghanistan and central Iraq. The lost task orders decreased revenues for thethree months ended September 29, 2006 by $10.0 million, when comparedto the three months ended September 30, 2005.

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Revenues from our FTS segment decreased from$172.9 million for the three months ended September 30, 2005 to $165.5 millionfor the three months ended September 29, 2006, a decrease of$7.4 million or 4.3%. The FTS decrease was primarily driven by thefollowing: (i) decreased Global Air Traffic Management avionicsmodifications under the Life Cycle Contractor Support program of$3.4 million; (ii) a decrease in the U.S. government funding for theArmy Prepositioned Stocks Afloat program of $5.9 million; and (iii) theending of the Fort Hood contract under the Domestic Aviation program in July 2006,which contributed a decrease of $8.1 million. Partially offsetting thefactors contributing to the decrease was an increased level of effort under theContract Field Team program for the maintenance and repair of military assetsreturning from Iraq and Afghanistan of $4.8 million.

*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 $385.0 millionfor the three months ended September 30, 2005 to $423.4 million forthe three months ended September 29, 2006, an increase of$38.4 million or 10.0%. As a percentage of revenue, costs of servicesincreased from 87.6% in the three months ended September 30, 2005 to 89.2%for the three months ended September 29, 2006. A factor contributing tothe increase as a percentage of revenue was recognizing operating costs inexcess of contract funding to complete a base camp in Iraq for the Department ofState under the Worldwide Personal Protective Services program. This factorcontributed to an increase of 1.1% to the costs of services as a percentage ofrevenue. Further contributing to the increase was the suspension of a securitycontract with a customer in Saudi Arabia, which contributed an additional 1.5%to costs of services as a percentage of revenue for the three months ended September 29,2006, compared to the three months ended September 30, 2005.

*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 three months ended September 30, 2005 were$19.7 million and increased to $30.6 million for the three monthsended September 29, 2006, an increase of $10.9 million or 55.3%. Inaddition, as a percentage of revenue, selling, general and administrativeexpenses increased from 4.5% for the three months ended September 30, 2005to 6.4% for the three months ended September 29, 2006. Factorscontributing to higher selling, general and administrative expenses for thethree months ended September 29, 2006 include: (i) an increase of$4.7 million in severance-related costs from the departure of seniorexecutives; (ii) an increase of $2.7 million in segment general andadministrative costs necessary to support the growth of our segments, primarilyITS; (iii) an increase of $1.8 million in corporate administrativecosts, primarily the result of developing these functions as an independentcompany; and (iv) an increase of $1.7 million in business developmentcosts. Offsetting the increase in selling, general and administrative expenseswas a benefit of $2.3 million related to a reduction in bad debt expense.

*Depreciationand amortization.**  *Depreciationand amortization decreased slightly from $11.5 million for the threemonths ended September 30, 2005 to $11.2 million for the three monthsended September 29, 2006, a decrease of $0.3 million or 2.6%.

*Interestexpense.**  *Interestexpense increased from $13.9 million for the three months ended September 30,2005 to $14.7 million for the three months ended September 29, 2006. Interestexpense includes interest costs applicable to the quarter as well asamortization of deferred financing fees. The increase in interest expense isdue to the increase in variable interest rates, compared to the three monthsended September 30, 2005, despite having a lower outstanding averagebalance during the three months ended September 29, 2006. Our averageinterest rate on the senior secured credit facility for the three months ended September 29,2006 was 8.0% compared with 6.5% for the three months ended September 30,2005.

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*Income tax expense.**  *We had an income tax benefit for the threemonths ended September 29, 2006 of $1.7 million, which is a decreaseof $5.2 million from income tax expense of $3.5 million for the threemonths ended September 30, 2005. The decrease is primarily the result ofreduced income before tax as compared to the three months ended September 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 financing costs, including interest expense and income taxes, each ofwhich we evaluate on a consolidated level. We believe EBIT is a usefulmeasurement of our performance because it provides information that can be usedto evaluate the effectiveness of our businesses 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.

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 ITS and FTS operating segments, both in dollars and as apercentage of segment specific revenue, for the three months ended September 29,2006, compared to the three months ended September 30, 2005.

| ** **                          | ** ** | **For the Three Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------------------------|------------|
| ** **                          | ** ** | **September 29,  2006**                       | ** ** | **September 30,  2005** | ** ** |
| Earnings before  interest and taxes |       |                                               |       |   |   |   |   |   |   |
| International Technical Services    |       | $                                                  | 12,276     |   | 4.0 | % | $ | 18,566 |   | 7.0 | % |
| Field Technical Services            |       | 2,450                                              |       | 1.5 | % | 7,097 |   | 4.1 | % |
| Other(1)                            |       | (4,915                                             | )          | NA |   | (2,265 | ) | NA |   |
| Consolidated                        |       | $                                                  | 9,811      |   | 2.1 | % | $ | 23,398 |   | 5.3 | % |

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(1)                Forthe three months ended September 29, 2006, other consists of: (i) severancecosts; (ii) joint venture income or loss; and (iii) compensationexpense related to Class B equity participation not allocated to aspecific segment. For the three months ended September 30, 2005, otherprimarily consists of joint venture income or loss and management retentionbonuses not allocated to a specific segment.

*InternationalTechnical Services*

*Earnings before interestand taxes.*   Earnings before interest and taxesfor the three months ended September 29, 2006 were $12.3 million, adecrease of $6.3 million, or 33.9%, from $18.6 million for the threemonths ended September 30, 2005. The ITS decrease was primarily driven bythe following:**(i) costs in excess ofcontract funding to complete the construction of a base camp in Iraq for theDepartment of State; (ii) charges related to the suspension of a securitycontract with a customer located in Saudi Arabia; (iii) lower profitabilityfrom our Worldwide Personal Protection Services programs due to lost taskorders in Israel, Haiti, Afghanistan and central Iraq and (iv) increasedgeneral and administrative costs of $2.4 million necessary to support thegrowth of the segment, corporate administrative and business development costs,net of $1.9 million related to a reduction in bad debt expense. Partiallyoffsetting the factors contributing to lower earnings before interest in taxeswas improved profitability on our Civilian Police and Air-Wing programs. OurCivilian Police program benefited from an increased number of internationalpolice liaison officers deployed in both Iraq and Afghanistan. Our Air-Wingprogram 

27

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benefited fromincreased aerial eradication efforts predominantly in South America. Earningsbefore interest and taxes as a percentage of revenue for the three months endedSeptember 29, 2006 and September 30, 2005 was 4.0% and 7.0%,respectively.

*Field TechnicalServices*

*Earnings before interestand taxes.**  *Earningsbefore interest and taxes for the three months ended September 29, 2006were $2.5 million, a decrease of $4.6 million, or 64.8%, from$7.1 million for the three months ended September 30, 2005. The FTSdecrease was primarily driven by the following:**(i) higheroperating losses from delivering services to the U.S. Army under the Life CycleContractor Support program; (ii) higher operating losses related tooperational issues in executing the cost structure outlined in the originalproposal for our AH-1/UH-1 services; (iii) the ending of ourFort Hood contract within our Domestic Aviation programs; and (iv) increasedgeneral and administrative costs of $5.6 million necessary to support thegrowth of the segment, corporate administrative and business development costs.Partially offsetting the factors contributing to lower earnings before interestand taxes was improved profitability on our Contract Field Teams program. Thisprogram benefited from maintenance and repair activities performed on militaryassets returning from Iraq and Afghanistan. Earnings before interest and taxesas a percentage of revenue for the three months ended September 29, 2006was 1.5% compared to 4.1% for the three months ended September 30, 2005.

***Six Months Ended September 29, 2006 Compared ToSix Months Ended September 30, 2005***

*Consolidated*

*Revenues.*   Totalrevenues increased from $864.7 million for the six months ended September 30,2005 to $1,012.4 million for the six months ended September 29, 2006,an increase of $147.7 million or 17.1%. For the six months ended September 29,2006 and September 30, 2005, approximately 42%, 36% and 22% andapproximately 27%, 40% and 33% of our revenues were derived from fixed-price,time-and-materials, and cost-reimbursement contracts, respectively.

Revenues from our ITS segment increased from$522.3 million for the six months ended September 30, 2005 to$664.2 million for the six months ended September 29, 2006, anincrease of $141.9 million or 27.2%. The Air-Wing program increased$69.8 million. The Department of State awarded our current contract underthe Air-Wing program during May 2005. As part of the new contract, wesuccessfully transitioned many of the activities under this program fromcost-reimbursement to fixed-price. The factors contributing to higher revenuesinclude increased eradication efforts in South American, combined with increasedactivity in Afghanistan supporting the ground eradication effort under the Air-Wingprogram. Our Civilian Police program contributed $54.4 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 six months ended September 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 $29.7 million, compared tothe six months ended September 30, 2005. The increase within the LogisticsSupport programs is primarily due to the added work under the AfricaPeacekeeping contract with the Department of State. The factors contributing toincreased revenues were partially offset by a reduction in services under theWorldwide Personal Protective Services program. We lost four task orders underwhich we provided personal security services in Israel, Haiti, Afghanistan andcentral Iraq. The lost task orders contributed to a decrease in revenues forthe six months ended September 29, 2006 of $35.6 million, compared tothe six months ended September 30, 2005.

Revenues from our FTS segment increased from$342.4 million for the six months ended September 30, 2005 to$348.2 million for the six months ended September 29, 2006, anincrease of 

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$5.8 million or 1.7%.The FTS increase was primarily driven by an increase in personnel and level ofeffort under the Contract Field Team program of $13.2 million and increasedGlobal Air Traffic Management avionics modifications under the Life CycleContractor Support program of $4.4 million. Partially offsetting thefactors contributing to higher revenue was the Army Prepositioned Stocks Afloatprogram, which decreased by $11.2 million mainly due to the U.S.government reducing its funding. In addition, the Fort Hood contract under theDomestic Aviation program ended in July 2006, which resulted in a $8.6million decrease in revenues.

*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$763.6 million for the six months ended September 30, 2005 to$893.8 million for the six months ended September 29, 2006, anincrease of $130.2 million or 17.1%. Despite recognizing operating costsin excess of contract funding to complete a base camp in Iraq in the secondquarter of 2007 and the suspension of the ARAMCO security contract with acustomer in Saudi Arabia, costs of services as a percentage of revenue remainedthe same at 88.3% for the six months ended September 29, 2006 and the sixmonths ended September 30, 2005. Factors that contributed to maintainingthe percent to revenue were as follows: (i) continued strong performanceof fixed-price task orders under the Civilian Police and Air-Wing programs; and(ii) improved contract mix result from a larger proportion ofhigher-margin fixed-price and time-and-materials contracts as opposed tolower-margin cost-reimbursement contracts.

*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 six months ended September 30, 2005 were$38.9 million and increased to $58.0 million for the six months endedSeptember 29, 2006, an increase of $19.1 million or 49.1%. Inaddition, as a percentage of revenue, selling, general and administrativeexpenses increased from 4.5% for the six months ended September 30, 2005to 5.7% for the six months ended September 29, 2006. Factors contributingto higher selling, general and administrative expenses for the six months endedSeptember 29, 2006 include: (i) an increase of $4.7 million inseverance-related costs from the departure of senior executives*;*(ii) $0.8 million increase for bonuses paid tocertain members of management related to our Successor Parent’s Equity Offering;(iii) an increase of $4.8 million in segment general andadministrative costs necessary to support the growth of our segments, primarilyITS; (iv) an increase of $5.3 million in corporate administrativecosts, primarily the result of developing these functions as an independentcompany; and (v) an increase of $4.3 million in business developmentcosts. Offsetting the increase in selling, general and administrative expenseswas a benefit of $4.5 million related to a reduction in bad debt expense.

*Depreciationand amortization.**  *Depreciationand amortization increased from $22.2 million for the six months ended September 30,2005 to $22.3 million for the six months ended September 29, 2006, anincrease of $0.1 million or 0.5%.

*Interestexpense.**  *Interestexpense increased from $27.7 million for the six months ended September 30,2005 to $29.5 million for the six months ended September 29, 2006. Interestexpense includes interest costs applicable to the six months as well asamortization of deferred financing fees. The increase in interest expense isdue to the increase in variable interest rates, compared to the six monthsended September 30, 2005, despite having a lower outstanding averagebalance during the six months ended September 29, 2006. Our averageinterest rate on the senior secured credit facility for the six months ended September 29,2006 was 7.9% compared with 6.4% for the six months ended September 30,2005.

*Losson debt 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 

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subordinated notes; and (iii) thewrite-off of $0.8 million in deferred financing costs associated with theearly retirement of a portion of our senior subordinated notes.

*Income tax expense.**  *We had income tax expense for the sixmonths ended September 29, 2006 of $2.3 million, which is a decreaseof $1.9 million from income tax expense of $4.2 million for the sixmonths ended September 30, 2005. The decrease is primarily the result ofreduced income before tax as compared to the six months ended September 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 financing costs, including interest expense and income taxes, each ofwhich we evaluate on a consolidated level. We believe EBIT is a usefulmeasurement of our performance because it provides information that can be usedto evaluate the effectiveness of our businesses 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.

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 ITS and FTS operating segments, both in dollars and as apercentage of segment specific revenue, for the six months ended September 29,2006, compared to the six months ended September 30, 2005.

| ** **                          | ** ** | **For the Six Months Ended** | ** ** |
|-------------------------------------|------------|--------------------------------------------------|------------|
| ** **                          | ** ** | **September 29,  2006**                     | ** ** | **September 30,  2005** | ** ** |
| Earnings before  interest and taxes |       |                                             |       |   |   |   |   |   |   |
| International Technical Services    |       | $                                                | 38,176     |   | 5.7 | % | $ | 28,747 |   | 5.5 | % |
| Field Technical Services            |       | 7,172                                            |       | 2.1 | % | 14,775 |   | 4.3 | % |
| Other(1)                            |       | (6,133                                           | )          | NA |   | (3,578 | ) | NA |   |
| Consolidated                        |       | $                                                | 39,215     |   | 3.9 | % | $ | 39,944 |   | 4.6 | % |

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(1)                Forthe six months ended September 29, 2006, other consists of: (i) severancecosts; (ii) joint venture income or loss; and (iii) compensationexpense related to Class B equity participation not allocated to aspecific segment. For the six months ended September 30, 2005, otherprimarily consists of joint venture income or loss and management retentionbonuses not allocated to a specific segment.

*InternationalTechnical Services*

*Earnings before interestand taxes.*   Earnings before interest andtaxes for the six months ended September 29, 2006 were $38.2 million,an increase of $9.5 million, or 33.1%, from $28.7 million for the sixmonths ended September 30, 2005. The ITS increase was primarily driven bythe following: (i) strong performance on fixed-price task orders under theCivilian Police and Air-Wing programs; and (ii) improved contract mixresulting from a larger proportion of higher-margin fixed-price andtime-and-materials contracts as opposed to lower-margin cost-reimbursementcontracts. Partially offsetting the factors contributing to higher earningsbefore interest and taxes were the following: (i) costs in excess ofcontract funding to complete the construction of a base camp in Iraq for theDepartment of State; (ii) charges related to the suspension of a securitycontract with a customer located in Saudi Arabia; (iii) lowerprofitability from our Worldwide Personal Protection Services programs due tolost task orders 

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in Israel, Haiti,Afghanistan and central Iraq; and (iv) increased general andadministrative costs of $6.2 million necessary to support the growth of the segment,corporate administrative and business development costs, net of $4.2 millionrelated to a reduction in bad debt expense. Earnings before interest and taxesas a percentage of revenue for the six months ended September 29, 2006 andSeptember 30, 2005 was 5.7% and 5.5%, respectively.

*Field TechnicalServices*

*Earnings before interestand taxes.**  *Earningsbefore interest and taxes for the six months ended September 29, 2006 were$7.2 million, a decrease of $7.6 million, or 51.4%, from$14.8 million for the six months ended September 30, 2005. The FTSdecrease was primarily driven by the following: (i) higher operatinglosses from delivering services to the U.S. Army under the Life CycleContractor Support program; (ii) higher operating losses related tooperational issues in executing the cost structure outlined in the originalproposal for our AH-1/UH-1 services; and (iii) increasedgeneral and administrative costs of $9.2 million necessary to support thegrowth of the segment, corporate administrative and business development costs..Partially offsetting the factors contributing to lower earnings before interestand taxes was improved profitability on our Contract Field Teams program. Thisprogram has benefited from maintenance and repair activities performed onmilitary assets returning from Iraq and Afghanistan. Earnings before interestand taxes as a percentage of revenue for the six months ended September 29,2006 was 2.1% compared to 4.3% for the six months ended September 30,2005.

**Liquidity andCapital Resources**

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

| ** **                                  | ** ** | **For the Six Months Ended** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                  | ** ** | **September 29,  2006**                     | ** ** | **September 30,  2005** | ** ** |
| Net cash provided  by operating activities  |       |                                             | $          | 72,506 |   |   |   | $ | 91,772 |   |   |
| Net cash  used in investing activities |       |                                             | (4,420     | ) |   |   | (1,969 | ) |   |
| Net cash used in financing  activities      |       |                                             | (8,220     | ) |   |   | (37,208 | ) |   |

 

*Cash Flows*

**OperatingActivities.****  **Cash andcash equivalents as of September 29, 2006 were $80.4 million comparedto $66.1 million as of September 30, 2005. Net cash provided byoperating activities for the six months ended September 29, 2006 was$72.5 million, while net cash provided by operating activities for the sixmonths ended September 30, 2005 was $91.8 million. The six monthsended September 29, 2006 benefited from lower accounts receivable balances.In addition, during the six months ended September 29, 2006, operatingcash flow benefited from accounts payable and accrued liability activitiesrelated to the timing of payroll processing, timing of interest payments andcustomer advances. The timing for payroll processing, interest payments andcustomer advances can vary from quarter to quarter. Another factor impactingoperating cash flow during the six months ended September 29, 2006included the payment of special cash bonuses subsequent to our Successor’sParent Equity 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. Operating cash flow for the six monthsended September 29, 2005 reflected high cash collections, which resultedin a $98.2 million source of cash. Partially off setting the collectionactivity was significant vendor payments. Trade accounts payable increasedduring the period leading up to the 2005 Acquisition only to result in paymentduring the six months ended September 30, 2005.

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**InvestingActivities.****  **Netcash used in investing activities was $4.4 million and $2.0 millionfor the six months ended September 29, 2006 and September 30, 2005,respectively. For the six months ended September 29, 2006 andSeptember 30, 2005, the primary use of cash was to purchase property andequipment.

**FinancingActivities.****  **Netcash used in financing activities was $8.2 million and $37.2 millionfor the six months ended September 29, 2006 and September 30, 2005,respectively. The cash used in financing activities during the six months endedSeptember 29, 2006 included: (i) net proceeds from Successor Parentof $17.9 million; (ii) partial redemption of senior subordinatednotes of $28.8 million, including accrued interest and (iii) otherfinancing activities of $2.7 million. The cash used in financing activitiesduring the six months ended September 30, 2005 was due to the$35.0 million repayment of borrowings under our revolving credit facility,the $1.7 million scheduled repayment of our bank note borrowings and the$0.5 million purchase of an interest rate cap that limits our exposure toupward movements in variable rate debt.

Based on our current levelof operations, we believe our cash flow from operations and our availableborrowings under our senior secured credit facility will be adequate to meetour liquidity needs for at least the next twelve months. However, servicing ourindebtedness will require a significant amount of cash. Our ability to generatesufficient cash depends on numerous factors beyond our control and we cannot beassured that our business will generate sufficient cash flow from operations,or that future borrowings will be available to us under our senior securedcredit facility 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*

As of September 29, 2006, we had$632.7 million of indebtedness, including the senior subordinated notesand excluding interest accrued thereon, of which $340.7 million wassecured. On the same date, we had approximately $80.1 million availableunder our senior secured credit facility. This figure gives effect to$9.9 million in outstanding letters of credit, which reduced ouravailability by that amount.

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 to3.20:1.00 during the term of the senior secured credit facility. The maximumleverage coverage ratio 

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decreases from 6:1 to 3:1during the term of the senior secured credit facility. The current leveragecoverage ratio is 5.5 to 1.0. The senior secured credit facility also restrictsthe maximum amount of our capital expenditures during each year of the seniorsecured credit facility. Capital expenditures are expenditures that arerequired by GAAP 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 firstamendment and waiver of our senior secured credit facility. The first amendmentand waiver increased the revolving commitment under our senior secured creditfacility by $15.0 million to $90.0 million, which includes anincrease in the sub-limit for letters of credit equal to the same amount. Thefirst amendment and waiver also permitted us to: (i) pay a transaction feeto Veritas Capital related to our Successor Parent’s Equity Offering of up to$10.0 million; (ii) pay a distribution to the holders of ourSuccessor Parent’s Class B common stock in an amount equal to the sum of (x) $100.0 millionplus (y) the proceeds, if any, of the underwriters’ over-allotment option,net of discount and estimated offering expenses; (iii) redeem all of ourSuccessor Parent’s then currently outstanding preferred stock; and (iv) redeemup to $65.0 million of the $320.0 million aggregate principal amountof the senior 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 entered into a second amendment and waiver of our senior securedfacility, dated February 11, 2005. The second amendment and waiverprovided for a senior secured credit facility of $431.6 million,representing a $90.0 million revolver and a $341.6 millionoutstanding term loan. The Company did not have an outstanding balance on therevolver on the date of the second amendment and waiver. The maturity date ofthe amended term loan remains unchanged. The second amendment and waiver alsodoes the following, among other things: (i) decreases the interest rateapplicable to the term loan under our senior secured credit facility; (ii) permitsus to request an increase in our revolving credit facility by an aggregateamount of up to $30.0 million, subject to the Company obtainingcommitments from existing and/or new lenders; (iii) increases the amountof capital expenditures permitted under our senior secured credit facility from$4.0 million per fiscal year to $8.0 million per fiscal year; (iv) increasesthe amount of capitalized leases permitted under our senior secured creditfacility; (v) allows for the payment of dividends and the repurchase ofour capital stock in the amount of $10.0 million plus, if our leverageratio (as defined in our senior secured credit facility) is below 3.25:1.00,25% of our excess cash flow (as defined in our senior secured creditfacility) for each fiscal year; and (vi) provides for the first excesscash flow payment, as defined by the senior secured credit facility, tocommence on our fiscal year that ends on March 30, 2007.

*Other Long-TermLiabilities*

Other long-termliabilities represent $2.9 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*.”

*Off-Balance SheetArrangements*

As of September 29,2006, other than the operating leases discussed above, we had no off-balancesheet arrangements.

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**Critical AccountingPolicies**

Our discussion and analysis of our financial conditionand results of operations are based upon our consolidated financial statements,which are prepared in accordance with GAAP. The preparation of these financialstatements in accordance with GAAP requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosure of contingencies at the date of the financial statements as well asthe reported amounts 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. The resultsof these estimates form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources. Actual results could materially differ from these estimates underdifferent 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 Recognitionand Cost Estimation on Long-Term Contracts*

We provide our services under fixed-price,time-and-materials and cost-reimbursement contracts. The form of contract,rather than the type of service offering, is the primary determinant of revenuerecognition. Revenues are recognized when persuasive evidence of an arrangementexists, services or products have been provided to the client, the sales priceis fixed or determinable and collectibility is reasonably assured.

Revenue on fixed-price contracts is generallyrecognized ratably over the contract period, measured by either output or inputmethods appropriate to the services or products provided. For example, “outputmeasures” can include period of service, such as for aircraft fleetmaintenance, and units delivered or produced, such as aircraft for which modificationhas been completed. “Input measures” can include a cost-to-cost method, such asfor procurement-related services.

Revenue on fixed-price construction or production-typecontracts, when they occur, is recognized on the basis of the estimated percentageof completion. Progress towards completion is typically measured based onachievement of specified contract milestones, when available, or based on costsincurred as a proportion of estimated total costs. Profit in a given period isreported at the expected profit margin to be achieved on the overall contract. Thismethod can result in the deferral of costs or profit on these contracts. Managementregularly reviews project profitability and underlying estimates. Revisions tothe estimates at completion are reflected in results of operations as a changein accounting 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 

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through 2004. Contractrevenues on U.S. government contracts have been recorded in amounts that areexpected to be realized upon final settlement.

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 may include the provision of morethan one of our services. For revenue arrangements with multiple deliverables,revenue recognition includes the proper identification of separate units ofaccounting and the allocation of revenue across all elements based on relativefair 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 forDoubtful Accounts*

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 valueultimately assigned to customer-related intangibles and internally developedtechnology were determined by a third-party valuation firm as of the date ofacquisition, based on estimates and judgments provided by us regardingexpectations for the estimated future after-tax cash flows from those assetsover their lives, including the probability of expected future contractrenewals and sales, less a cost-of-capital charge, all of which was discountedto present value. If actual future after-tax cash flows are significantly lowerthan our 

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estimates, we may berequired to record an impairment charge to write down the identifiableintangible assets to their realizable values.

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 September 29, 2006,we had goodwill of $420.2 million and identifiable intangible assets of$252.4 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 three months ended September 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 $18.9 million are realizable based on the “more likely thannot” standard required for recognition.

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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, statutory rates and enacted tax rules. Significantjudgment is required in determining the Company’s provision for income taxesand in evaluating its tax positions on a worldwide basis. The Company believesits tax position is consistent with the tax laws in the jurisdictions in whichit conducts its business. It is possible that these positions may bechallenged, which may have a significant impact on the Company’s effective taxrate.

*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 2006, allowing a one-time transitional cumulative effect adjustmentto retained earnings as of April 1, 2006 for errors that were not previouslydeemed material, but are material under the guidance in SAB No. 108. Weare 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 expands disclosuresabout fair value measurements. This statement does not require any new fairvalue measurements; rather, it applies under other accounting pronouncementsthat require or permit fair value measurements. The provisions of thisstatement are to be applied prospectively as of the beginning of the fiscalyear 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 and 

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correctionsof errors made in fiscal periods beginning after December 15, 2005. Theadoption of SFAS No. 154 did not have any effect on our consolidatedfinancial statements.

**ITEM3.   QUANTITATIVE AND 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” inthe Company’s Annual Report on Form 10-K for the fiscal year ended March 31,2006, filed with the SEC on June 29, 2006.

**ITEM4.   CONTROLS AND PROCEDURES**

***(a) Evaluation of Disclosure Controls and Procedures***

Our management, with theparticipation of our Chief Executive Officer and our Chief Financial Officer,has evaluated our disclosure controls and procedures (as such term is definedin Rules 13a-15(e) and 15d-15(e) of the ExchangeAct). Based on that evaluation, our Chief Executive Officer and Chief FinancialOfficer have concluded that, as of the end of the period covered by thisreport, our disclosure controls and procedures were effective to ensure thatinformation required to be disclosed in reports that we file or submit underthe Exchange Act are: (1) recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms; and (2) accumulatedand communicated to our management, including our Chief Executive Officer andChief Financial Officer, as appropriate to allow timely decisions regarding requireddisclosure.

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

There have been no changes in our internal controlsover financial reporting that have occurred during our fiscal quarter ended September 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

There have been nomaterial 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 with 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.

**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        |            |       | Amended and Restated  Limited Liability Company Operating Agreement of DIV Holding LLC                                                       |   | (A) |
|             | 3.2        |            |       | Amendment No. 1 to  the Amended and Restated Limited Liability Company Operating Agreement of DIV  Holding LLC                          |   | (B) |
|             | 3.3        |            |       | Amendment No. 2 to  the Amended and Restated Limited Liability Company Operating Agreement of DIV  Holding LLC                          |   | (C) |
|             | 3.4        |            |       | Amendment No. 3 to  the Amended and Restated Limited Liability Company Operating Agreement of DIV  Holding LLC                          |   | (D) |
|             | 3.5        |            |       | Amendment No. 4 to  the Amended and Restated Limited Liability Company Operating Agreement of DIV  Holding LLC                          |   | (E) |
|             | 10.1       |            |       | Employment Agreement  effective as of July 17, 2006 between DynCorp International LLC and  Herbert J. Lanese                            |   | (E) |
|             | 10.2       |            |       | Consulting Services  Agreement effective as of September 1, 2006 by and between DynCorp  International LLC and General Anthony C. Zinni |   | (F) |

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|        | 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 LLC’s Registration Statement on Form S-4/A(Reg. No. 333-127343), filed with the SEC on September 27, 2005and incorporated herein by reference.

(B)        Previously filed as anexhibit to DynCorp International Inc.’s Amendment No. 2 to Form S-1(Reg. No. 333-128637), filed with the SEC on November 30, 2005and incorporated herein by reference.

(C)        Previously filed as anexhibit to DynCorp International Inc.’s Amendment No. 3 to Form S-1(Reg. No. 333-128637), filed with the SEC on March 27, 2006 andincorporated herein by reference.

(D)       Previously filed as anexhibit to DynCorp International Inc.’s Form 10-K, filed withthe SEC on June 29, 2006 and incorporated herein by reference.

(E)        Previously filed as anexhibit to DynCorp International Inc.’s Form 8-K, filed withthe SEC on July 19, 2006 and incorporated herein by reference.

(F)         Previously filed as anexhibit to DynCorp International Inc.’s Form 8-K, filed withthe SEC on September 18, 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: November 13, 2006  |
|   |       |       |       | /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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