** **

**UNITED STATES**

**SECURITIES 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 28, 2007**

** **                                                                                                      |
| **or**                                                                                                                                                                  |
| **     ****o****    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**            |

** **

**For thetransition period from        to       **

** **

**CommissionFile Number: 333-127343**

** **

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**DYNCORP INTERNATIONAL LLC**

(Exact name of registrant as specified in itscharter)

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

 

**3190 FairviewPark Drive, Suite 700, Falls Church, Virginia 22042**

**(571) 722-0210**

(Address, including zip code, and telephonenumber, including area code,

of registrant’s principal executive offices)

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

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated 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 a shell company (asdefined in Rule 12b-2 of the Exchange Act). Yes   o   No   x

 

The registrant has one class of member units. As of November 1,2007, DynCorp International Inc. held 100% of the member units.

 

 

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**DYNCORPINTERNATIONAL LLC**

**TABLE OFCONTENTS**

 
| ** **                                          | **Page**   |
|-----------------------------------------------------|------------|
| **PART I. FINANCIAL  INFORMATION**

** ** | ** ** |
| Item 1.                                        |       | Financial Statements

  |   |
|                                                |       | Condensed  Consolidated Statements of Operations — Three Months Ended  September 28, 2007 and September 29, 2006 (unaudited) | 1 |
|                                                |       | Condensed  Consolidated Statements of Operations — Six Months Ended September 28,  2007 and September 29, 2006 (unaudited) | 2 |
|                                                |       | Condensed  Consolidated Balance Sheets — September 28, 2007 and March 30,  2007 (unaudited) | 3 |
|                                                |       | Condensed  Consolidated Statements of Cash Flows - Six Months Ended  September 28, 2007 and September 30, 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 | 19 |
| Item 3.                                        |       | Quantitative  and Qualitative Disclosures About Market Risk | 29 |
| Item 4.                                        |       | Controls and  Procedures | 29 |
| ** **                                          |       |
| **PART II. OTHER  INFORMATION**                |       |
|                                                |       |   |   |
| Item 1.                                        |       | Legal Proceedings | 30 |
| Item 1A.                                       |       | Risk Factors | 30 |
| Item 2.                                        |       | Unregistered  Sales of Equity Securities and Use of Proceeds | 30 |
| Item 3.                                        |       | Defaults Upon  Senior Securities | 30 |
| Item 4.                                        |       | Submission of  Matters to a Vote of Security Holders | 30 |
| Item 5.                                        |       | Other Information | 30 |
| Item 6.                                        |       | Exhibits | 30 |

 

 

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**PART I -FINANCIAL INFORMATION**

 

**ITEM 1.          FINANCIAL STATEMENTS**

 

**DYNCORPINTERNATIONAL LLC**

**CONDENSEDCONSOLIDATED STATEMENT OF OPERATIONS**

*(Dollars inthousands)*

 
| ** **                                   | ** ** | **For the Three Months Ended** | ** ** |
|----------------------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **Sept. 28, 2007**             | ** ** | **Sept. 29, 2006** | ** ** |
| ** **                                   |       | (unaudited)                    |       |
| Revenues                                     |       | $                              | 495,109    |   | $ | 474,721 |   |
|                                         |       |                           |       |   |   |
| Cost of services                             |       | (425,633                       | )          | (423,433 | ) |
| Selling, general and administrative expenses |       | (24,928                        | )          | (30,552 | ) |
| Depreciation and amortization expense        |       | (10,601                        | )          | (11,212 | ) |
| Operating income                             |       | 33,947                         |       | 9,524 |   |
| Interest expense                             |       | (13,705                        | )          | (14,689 | ) |
| Net earnings (loss) from affiliates          |       | 1,176                          |       | (123 | ) |
| Interest income                              |       | 430                            |       | 410 |   |
| Income (loss) before income taxes            |       | 21,848                         |       | (4,878 | ) |
| (Provision) benefit for income taxes         |       | (7,895                         | )          | 1,743 |   |
| Net income (loss)                            |       | $                              | 13,953     |   | $ | (3,135 | ) |
|                                              |            |                                |            |  |  |  |  |  |  |

 

See notes to condensed consolidated financialstatements.

 

1

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** **

**DYNCORPINTERNATIONAL LLC**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

*(Dollars inthousands)*

 

 
| ** **                                   | ** ** | **For the Six Months Ended** | ** ** |
|----------------------------------------------|------------|------------------------------|------------|
| ** **                                   | ** ** | **Sept. 28, 2007**      | ** ** | **Sept. 29, 2006** | ** ** |
| ** **                                   |       | (unaudited)                  |       |
| Revenues                                     |       | $                            | 1,043,782  |   | $ | 1,012,405 |   |
|                                         |       |                         |       |   |   |
| Cost of services                             |       | (905,721                     | )          | (893,767 | ) |
| Selling, general and administrative expenses |       | (51,463                      | )          | (57,957 | ) |
| Depreciation and amortization expense        |       | (20,991                      | )          | (22,349 | ) |
| Operating income                             |       | 65,607                       |       | 38,332 |   |
| Interest expense                             |       | (28,195                      | )          | (29,503 | ) |
| Loss on early extinguishment of debt         |       | —                       |       | (3,484 | ) |
| Net earnings from affiliates                 |       | 2,067                        |       | 323 |   |
| Interest income                              |       | 1,680                        |       | 560 |   |
| Income before income taxes                   |       | 41,159                       |       | 6,228 |   |
| Provision for income taxes                   |       | (14,948                      | )          | (2,337 | ) |
| Net income                                   |       | $                            | 26,211     |   | $ | 3,891 |   |

 

See notes to condensedconsolidated financial statements.

 

2

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**DYNCORPINTERNATIONAL LLC**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

*(Dollars inthousands)*

 
| ** **                                                | ** ** | **As of**               | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                | ** ** | **Sept. 28, 2007** | ** ** | **March 30, 2007** | ** ** |
| ** **                                                | ** ** | (unaudited)             | ** ** |
| **ASSETS**                                                |       |                    |       |   |   |
| Current assets:                                           |       |                    |       |   |   |
| Cash and cash equivalents                                 |       | $                       | 110,062    |   | $ | 102,455 |   |
| Restricted cash                                           |       | 17,627                  |       | 20,224 |   |
| Accounts receivable, net of allowances of $955 and $3,428 |       | 457,718                 |       | 461,950 |   |
| Prepaid expenses and other current assets                 |       | 79,391                  |       | 69,487 |   |
| Deferred income taxes                                     |       | 15,427                  |       | 12,864 |   |
| Total current assets                                      |       | 680,225                 |       | 666,980 |   |
| Property and equipment, net                               |       | 12,912                  |       | 12,646 |   |
| Goodwill                                                  |       | 420,180                 |       | 420,180 |   |
| Tradename                                                 |       | 18,318                  |       | 18,318 |   |
| Other intangibles, net                                    |       | 195,835                 |       | 214,364 |   |
| Deferred income taxes                                     |       | 17,360                  |       | 13,459 |   |
| Other assets, net                                         |       | 14,960                  |       | 16,954 |   |
| Total assets                                              |       | $                       | 1,359,790  |   | $ | 1,362,901 |   |
| ** **                                                |       |                    |       |   |   |
| **LIABILITIES AND MEMBER’S EQUITY**                  |       |                    |       |   |   |
|                                                      |       |                    |       |   |   |
| Current liabilities:                                      |       |                    |       |   |   |
| Current portion of long-term debt                         |       | $                       | 3,096      |   | $ | 37,850 |   |
| Accounts payable                                          |       | 134,188                 |       | 127,282 |   |
| Accrued payroll and employee costs                        |       | 91,263                  |       | 88,929 |   |
| Other accrued liabilities                                 |       | 114,804                 |       | 116,308 |   |
| Income taxes payable                                      |       | 9,427                   |       | 13,682 |   |
| Total current liabilities                                 |       | 352,778                 |       | 384,051 |   |
|                                                      |       |                    |       |   |   |
| Long-term debt, less current portion                      |       | 591,614                 |       | 593,144 |   |
| Other long-term liabilities                               |       | 9,673                   |       | 6,032 |   |
|                                                      |       |                    |       |   |   |
| Commitments and contingencies                             |       |                    |       |   |   |
|                                                      |       |                    |       |   |   |
| Member’s equity:                                     |       |                    |       |   |   |
| Member’s units, 100 outstanding                      |       | 318,958                 |       | 316,633 |   |
| Retained earnings                                         |       | 88,042                  |       | 63,205 |   |
| Accumulated other comprehensive loss                      |       | (1,275                  | )          | (164 | ) |
| Total member’s equity                                |       | 405,725                 |       | 379,674 |   |
| Total liabilities and member’s equity                |       | $                       | 1,359,790  |   | $ | 1,362,901 |   |
|                                                           |            |                         |            |  |  |  |  |  |

 

 

See notes to condensed consolidated financialstatements.

 

 

3

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** **

**DYNCORPINTERNATIONAL LLC**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

*(Dollars inthousands)*

 
| ** **                                                                         | ** ** | **For the Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                         | ** ** | **Sept. 28, 2007**           | ** ** | **Sept. 29, 2006** | ** ** |
| ** **                                                                         | ** ** | (unaudited)                  | ** ** |
| **Cash flows from operating activities**                                           |       |                         |       |   |   |
| Net income                                                                         |       | $                            | 26,211     |   | $ | 3,891 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                         |       |   |   |
| Depreciation and amortization                                                      |       | 21,632                       |       | 23,515 |   |
| Loss on early extinguishment of debt                                               |       | —                       |       | 2,657 |   |
| Amortization of deferred loan costs                                                |       | 1,507                        |       | 2,342 |   |
| Recovery of losses on accounts receivable                                          |       | (1,066                       | )          | (4,563 | ) |
| Net earnings from affiliates, net of dividends received                            |       | (511                         | )          | (334 | ) |
| Deferred income taxes                                                              |       | (1,957                       | )          | (6,609 | ) |
| Equity-based compensation                                                          |       | 2,263                        |       | 999 |   |
| Net loss on disposition of assets                                                  |       | 178                          |       | 7 |   |
| Excess tax benefits from equity-based compensation                                 |       | (62                          | )          | — |   |
| Changes in assets and liabilities:                                                 |       |                         |       |   |   |
| Restricted cash                                                                    |       | 2,597                        |       | — |   |
| Accounts receivable                                                                |       | 6,062                        |       | 28,791 |   |
| Prepaid expenses and other current assets                                          |       | (9,227                       | )          | (4,599 | ) |
| Accounts payable and accrued liabilities                                           |       | 7,671                        |       | 30,931 |   |
| Income taxes payable                                                               |       | (5,388                       | )          | (4,522 | ) |
| Net cash provided by operating activities                                          |       | 49,910                       |       | 72,506 |   |
| ** **                                                                         |       |                         |       |   |   |
| **Cash flows from investing activities**                                           |       |                         |       |   |   |
| Purchase of property and equipment                                                 |       | (2,114                       | )          | (2,671 | ) |
| Purchase of computer software                                                      |       | (1,264                       | )          | (1,386 | ) |
| Other investing activities                                                         |       | 158                          |       | (363 | ) |
| Net cash used by investing activities                                              |       | (3,220                       | )          | (4,420 | ) |
| ** **                                                                         |       |                         |       |   |   |
| **Cash flows from financing activities**                                           |       |                         |       |   |   |
| Net transfers from parent company                                                  |       | —                       |       | 17,905 |   |
| Payments on long-term debt                                                         |       | (36,285                      | )          | (28,831 | ) |
| Premium paid on redemption of senior subordinated notes                            |       | —                       |       | (2,657 | ) |
| Payment of deferred financing costs                                                |       | —                       |       | (529 | ) |
| Excess tax benefits from equity-based compensation                                 |       | 62                           |       | — |   |
| (Payments) borrowings under other financing arrangements                           |       | (2,860                       | )          | 5,892 |   |
| Net cash used by financing activities                                              |       | (39,083                      | )          | (8,220 | ) |
| Net increase in cash and cash equivalents                                          |       | 7,607                        |       | 59,866 |   |
| Cash and cash equivalents, beginning of period                                     |       | 102,455                      |       | 20,573 |   |
| Cash and cash equivalents, end of period                                           |       | $                            | 110,062    |   | $ | 80,439 |   |
|                                                                               |       |                         |       |   |   |
| Income taxes paid (net of refunds)                                                 |       | $                            | 21,297     |   | $ | 13,470 |   |
| Interest paid                                                                      |       | $                            | 27,234     |   | $ | 27,956 |   |
| Non-cash investing activities                                                      |       | $                            | —     |   | $ | 1,554 |   |
|                                                                                    |            |                              |            |  |  |  |  |  |  |  |  |  |

 

 

See notes to condensed consolidated financialstatements.

 

 

4

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**DYNCORPINTERNATIONAL LLC**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

*(Unaudited)*

 

**Note 1 - Basis of Presentation andAccounting Policies**

 

*Basis of Presentation*

 

                DynCorpInternational LLC and its subsidiaries provide defense and technical servicesand government outsourced solutions primarily to United States (“U.S.”)government agencies. Our specific global expertise is in law enforcementtraining and support, security services, base operations, and aviation servicesand operations. References herein to “DynCorp”, the “Company”, “we”, “our”, or “us”refer to DynCorp International LLC and its wholly owned subsidiaries.

 

                The condensedconsolidated financial statements include the accounts of the Company and itsdomestic and foreign subsidiaries. These condensed consolidated financialstatements have been prepared by the Company, without audit, pursuant toaccounting principles generally accepted in the United States of America (“GAAP”)for interim financial information and with the instructions to Form 10-Qand Article 10 of Regulation S-X.

 

                Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with GAAP have been condensed or omitted pursuant tosuch rules and regulations. However, the Company believes that all disclosuresare adequate to make the information presented not misleading. These condensedconsolidated financial statements should be read in conjunction with theCompany’s audited consolidated financial statements and the related notesthereto included in the Company’s Annual Report on Form 10-K, filed withthe Securities and Exchange Commission (the “SEC”) on June 20, 2007.

 

                In the opinion ofmanagement, all adjustments necessary to fairly present the Company’s financialposition at September 28, 2007 and March 30, 2007, the results ofoperations for the three and six months ended September 28, 2007 and September29, 2006, and cash flows for the six months ended September 28, 2007 andSeptember 29, 2006, have been included. The results of operations for the threeand six months ended September 28, 2007 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 Companyreports its results on a 52/53 week fiscal year with the fiscal year ending onthe Friday closest to March 31 of such year. The three months endedSeptember 28, 2007 was a 13-week period from June 30, 2007 to September 28,2007. The three months ended September 29, 2006 was a 13-week period from July1, 2006 to September 29, 2006.  The sixmonths ended September 28, 2007 was a 26-week period from March 31, 2007 toSeptember 28, 2007.  The six months endedSeptember 29, 2006 was a 26-week period from April 1, 2006 to September 29,2006.

 

*Income Taxes, Deferred Taxes, Tax ValuationAllowances and Tax Reserves*

 

                At the beginningof fiscal 2008, we adopted Financial Interpretation (“FIN”) No. 48, “Accountingfor Uncertainty in Income Taxes - an Interpretation of FinancialAccounting Standards Board (“FASB”) Statement No. 109.” FIN No. 48addresses the determination of whether tax benefits claimed or expected to beclaimed on a tax return should be recorded in the financial statements. UnderFIN No. 48, we may recognize the tax benefit from an uncertain taxposition only if it is more likely than not that the tax position will besustained on examination by the taxing authorities. The determination is basedon the technical merits of the position and presumes that each uncertain taxposition will be examined by the relevant taxing authority that has fullknowledge of all relevant information.

 

*Principles of Consolidation*

 

The consolidated financial statements include theaccounts of the Company and its domestic and foreign subsidiaries. Allintercompany transactions and balances have been eliminated in consolidation.Generally, 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 policiesand is not the primary beneficiary as defined in FASB InterpretationNo. 46R (Revised 2003), *“Consolidationof Variable Interest Entities”* (“FIN 46R”). The Company has noinvestments in business entities of less than 20%.

 

 

5

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                The following table sets forth the Company’s ownership injoint ventures and companies that are not consolidated into the Company’sfinancial statements as of September 28, 2007, and are accounted for by theequity method. Economic rights are indicated by the ownership percentageslisted below.

 

| DynEgypt LLC                          |   | 50.0 | % |
|---------------------------------------|--------|------|---|
| Dyn Puerto Rico Corporation           |   | 49.9 | % |
| Contingency Response Services LLC     |   | 45.0 | % |
| Babcock DynCorp Limited               |   | 44.0 | % |
| Partnership for Temporary Housing LLC |   | 40.0 | % |
| DCP Contingency Services LLC          |   | 40.0 | % |

 

                The following table sets forth the Company’s ownership injoint ventures that are consolidated into the Company’s financial statements asof September 28, 2007. For the entities listed below, the Company has the rightto elect half of the board of directors of such entity or other management bodyand is the primary beneficiary as defined in FIN 46R.

 

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

 

                Duringthe three months ended September 28, 2007, the Company acquired the remaining 50 percentof DynCorp-Hiberna Ltd. (“Hiberna”) from thejoint venture partnerfor approximately $400,000, net of cash acquired. The assets, liabilities, andresults of operations of the entity acquired were not material to the Company’sconsolidated financial position or results of operations, and thus pro-formainformation is not presented.

 

*Other Accounting Policies*

 

                Other significantaccounting policies, for which no significant changes have occurred in the sixmonths ended September 28, 2007, are detailed in Note 1 of our 2007 AnnualReport on Form 10-K filed with the SEC on June 20, 2007.

 

*Accounting Developments*

 

*         Pronouncements Implemented*

 

                InFebruary 2006, the FASB issued Statement of Financial Accounting Standards(“SFAS”) No. 155, “Accounting for Certain Hybrid Financial Instruments,”which amends SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities,” and SFAS No. 140, “Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities.” SFASNo. 155 is effective for all financial instruments acquired or issuedafter the beginning of an entity’s fiscal year that begins afterSeptember 15, 2006. Our adoption of SFAS No. 155 in the first quarterof fiscal year 2008 had no impact on our consolidated financial condition orresults of operations.

 

                InMarch 2006, the FASB issued SFAS No. 156, “Accounting for Servicingof Financial Assets - an amendment of Statement No. 140.” SFASNo. 156 clarifies when an obligation to service financial assets should beseparately recognized as a servicing asset or a servicing liability andrequires that a separately recognized servicing asset or servicing liability beinitially measured at fair value and permits an entity with a separatelyrecognized servicing asset or servicing liability to choose either theamortization method or fair value method for subsequent measurement. SFASNo. 156 is effective for all separately recognized servicing assets andliabilities acquired or issued after the beginning of an entity’s fiscal yearthat begins after September 15, 2006. Our adoption of SFAS No. 156 inthe first quarter of fiscal year 2008 had no impact on our consolidatedfinancial condition or results of operations.

 

                In July 2006,the FASB issued FIN No. 48, which clarifies the accounting for uncertaintyin income taxes recognized in an enterprise’s financial statements inaccordance with SFAS No. 109, “Accounting for Income Taxes.” Theprovisions of FIN No. 48 are effective for fiscal years beginning afterDecember 15, 2006. The impact on our consolidated financial condition andresults of operations of adopting FIN No. 48 in the first quarter offiscal 2008 is presented in Note 3.

 

 

 

6

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*PronouncementsNot Yet Implemented*

 

                InSeptember 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements.” SFAS No. 157 establishes a single definition of fair valueand a framework for measuring fair value under GAAP and expands disclosuresabout fair value measurements. SFAS No. 157 applies under other accountingpronouncements that require or permit fair value measurements; however, it doesnot require any new fair value measurements. SFAS No. 157 is effective forfinancial statements issued for fiscal years beginning after November 15,2007. We do not expect the adoption of SFAS No. 157 to have a materialimpact on our consolidated financial condition and results of operations.

 

                InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities - Including anamendment of FASB Statement No. 115.” SFAS No. 159 permits entitiesto choose to measure many financial instruments and certain other items at fairvalue that are not currently required to be measured at fair value. It providesentities with the opportunity to mitigate volatility in reported earningscaused by measuring related assets and liabilities differently without havingto apply complex hedge accounting provisions. SFAS No. 159 is effectivefor fiscal years beginning after November 15, 2007. We do not expect theadoption of SFAS No. 159 to have a material impact on our consolidatedfinancial condition and results of operations.

 

**Note 2 - Other Intangible Assets**

 

                The followingtables provide information about changes relating to intangible assets:

 
| ** **                                          | ** ** | **September 28, 2007**                 | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------|------------|
| ***(Amounts in thousands, except years)***          | ** ** | **Weighted  Average  Useful Life  (Years)** | ** ** | **Gross  Carrying  Value** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Finite-lived intangible assets:                     |       |                                        |       |   |   |   |   |   |   |
| Customer-related intangible assets                  |       | 8.5                                         |       | $ | 290,547 |   | $ | (100,983 | ) | $ | 189,564 |   |
| Other                                               |       | 4.3                                         |       | 13,863 |   | (7,592 | ) | 6,271 |   |
|                                                |       |                                        |       | $ | 304,410 |   | $ | (108,575 | ) | $ | 195,835 |   |
| Indefinite-lived intangible assets - Tradename |       |                                        |       | $ | 18,318 |   | $ | — |   | $ | 18,318 |   |

 
| ** **                                          | ** ** | **March 30, 2007**                     | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------|------------|
| ***(Amounts in thousands, except years)***          | ** ** | **Weighted  Average  Useful Life  (Years)** | ** ** | **Gross  Carrying  Value** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Finite-lived intangible assets:                     |       |                                        |       |   |   |   |   |   |   |
| Customer-related intangible assets                  |       | 8.5                                         |       | $ | 290,381 |   | $ | (82,233 | ) | $ | 208,148 |   |
| Other                                               |       | 4.2                                         |       | 12,599 |   | (6,383 | ) | 6,216 |   |
|                                                |       |                                        |       | $ | 302,980 |   | $ | (88,616 | ) | $ | 214,364 |   |
| Indefinite-lived intangible assets - Tradename |       |                                        |       | $ | 18,318 |   | $ | — |   | $ | 18,318 |   |

 

                Amortizationexpense for customer-related and other intangibles was $10.0 millionand $10.6 million for the three months ended September 28, 2007 andSeptember 29, 2006, respectively, and $20.0 million and $20.5 millionfor the six months ended September 28, 2007 and September 29, 2006,respectively.

 

**Note 3 - Income Taxes**

 

                We adopted theprovisions of FIN No. 48 at the beginning of fiscal 2008. FIN No. 48addresses the determination of whether tax benefits claimed or expected to beclaimed on a tax return should be recorded in the financial statements. FINNo. 48 also provides guidance on derecognition, classification, interestand penalties on income taxes, accounting in interim periods and requiresincreased disclosures.

 

 

 

7

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                The cumulativeeffect of adopting FIN No. 48, net of adjustments to deferred tax assets,was an increase to liabilities and a decrease to opening retained earnings of$1.4 million at March 31, 2007. Upon adoption, the estimated value ofthe Company’s uncertain tax positions is a liability of $5.9 millionresulting from unrecognized net tax benefits, including penalties and interest.The liability for uncertain tax positions is carried in other accruedliabilities in the condensed consolidated balance sheet as ofSeptember 28, 2007, and approximately $1.2 million is reported aslong-term. At March 31, 2007, the amount of unrecognized tax benefitsthat, if recognized, would affect the effective tax rate was $1.1 million.

 

                It is reasonablypossible that the total amount of unrecognized tax benefits could decreaseapproximately $3.0 million to $4.0 million primarily due to itemsthat were not fixed and determinable as of March 31, 2007 and for whicheconomic performance is expected to occur in the next 12 months.

 

                The Companyrecognizes accrued interest related to uncertain tax positions in interestexpense. The balance of accrued interest recorded on the balance sheet atMarch 31, 2007 was approximately $0.3 million. The Company recognizesaccrued penalties related to uncertain tax positions in income tax expense. Thebalance of accrued penalties recorded on the balance sheet at March 31,2007 was approximately $0.2 million. The balance of the reserves foruncertain tax positions, including interest and penalties, did not materiallychange during the six months ended September 28, 2007.

 

                The Company andits subsidiaries file income tax returns in U.S. federal and statejurisdictions and in various foreign jurisdictions. The statute of limitationsis open for U.S. federal and state income tax examinations for the Company’sfiscal year 2005 forward and, with few exceptions, foreign income taxexaminations for the calendar year 2003 forward.

 

**Note 4 - Accounts Receivable**

 

                AccountsReceivable, net consisted of the following:

 
| ***(Dollars in thousands)*** | ** ** | **Sept. 28, 2007** | ** ** | **March 30, 2007** | ** ** |
|------------------------------|------------|--------------------|------------|-------------------------|------------|
| Billed                       |       | $                  | 196,683    |                    | $          | 227,942 |   |
| Unbilled                     |       | 257,393            |       | 232,543                 |       |
| Other receivables            |       | 3,642              |       | 1,465                   |       |
| Total                        |       | $                  | 457,718    |                    | $          | 461,950 |   |

 

                Unbilledreceivables at September 28, 2007 and March 30, 2007 include$45.1 million and $38.3 million, respectively, related to costsincurred on projects for which the Company has been requested by the customerto begin work under a new contract or extend work under an existing contract,and for which formal contracts or contract modifications have not been executedat the end of the respective periods. The balance of unbilled receivablesconsists of costs and fees billable on contract completion or other specifiedevents, the majority of which is expected to be billed and collected within oneyear.

 

**Note 5 - Long-Term Debt**

 

                Long-term debtconsisted of the following:

 
| ***(Dollars in thousands)***           | ** ** | **Sept. 28, 2007** | ** ** | **March 30, 2007** | ** ** |
|----------------------------------------|------------|--------------------|------------|-------------------------|------------|
| Term loans                             |       | $                  | 302,678    |                    | $          | 338,962 |   |
| 9.5% Senior subordinated notes         |       | 292,032            |       | 292,032                 |       |
|                                   |       | 594,710            |       | 630,994                 |       |
| Less current portion of long-term debt |       | (3,096             | )          | (37,850                 | )          |
| Total long-term debt                   |       | $                  | 591,614    |                    | $          | 593,144 |   |

 

                For a descriptionof our indebtedness, see Note 7, *Long-termDebt*, to the consolidated financial statements in our Annual Reporton Form 10-K filed with the SEC on June 20, 2007.

 

                The Company isrequired, under certain circumstances as defined in its credit agreement, tomake a payment to reduce the outstanding principal of the term loans in thefollowing year (the “Excess Cash Flow Payment”). Such payments are due at theend of the first quarter of the following fiscal year. As a result, the Companymade payments of approximately $34.6 million on the term loans during thefirst quarter of fiscal 2008 related to the Excess Cash Flow Payment for thefiscal year ended March 30, 2007. The Excess Cash Flow Payment is anannual requirement under the credit agreement, and the Company cannot estimatewith certainty what the Excess Cash Flow Payment will be, if any, for thefiscal year ended March 28, 2008.

 

 

 

8

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                AtSeptember 28, 2007, availability under the revolving credit line foradditional borrowings was approximately $76.4 million (which gives effect toapproximately $26.6 million of outstanding letters of credit, which reduced theCompany’s availability by that amount). The credit agreement requires an unusedline fee equal to 0.5% per annum, payable quarterly in arrears, of the unusedportion of the revolving credit facility.

 

**Note 6 - Commitments and Contingencies**

 

***Commitments***

 

                The Company hasoperating leases for the use of real estate and certain property and equipment.Operating leases are non-cancelable, except by the payment of penalties orcancelable upon one month notice. All lease payments are based on the lapse oftime but include, in some cases, payments for insurance, maintenance andproperty taxes. There are no purchase options on operating leases at favorableterms, but most leases have one or more renewal options. Certain leases on realestate property are subject to annual escalations for increases in utilitiesand property taxes. Lease rental expense amounted to $9.6 million and$10.3 million for the three months ended September 28, 2007 andSeptember 29, 2006, respectively, and $25.5 million and $32.4 millionfor the six months ended September 28, 2007 and September 29, 2006,respectively.

 

***Contingencies***

 

*         General Legal Matters*

 

                The Company andits subsidiaries and affiliates are involved in various lawsuits and claimsthat have arisen in the normal course of business. In most cases, the Companyhas denied, or believes it has a basis to deny any liability. The Company hasrecorded its best estimate of the aggregate liability that will result fromthese matters and believes that these matters are adequately reserved. While itis not possible to predict with certainty the outcome of litigation and othermatters discussed below, it is the opinion of the Company’s management, basedin part upon opinions of counsel, insurance in force and the facts currentlyknown, that liabilities in excess of those recorded, if any, arising from suchmatters would not have a material adverse effect on the results of operations,consolidated financial condition or liquidity of the Company over the longterm.

 

*         Pending Litigation and Claims*

 

                On April 24,2007, March 14, 2007, December 29, 2006 and December 4, 2006four lawsuits were served, seeking unspecified monetary damages against theCompany and several of its former affiliates in the U.S. District Court for theSouthern District of Florida, concerning the spraying of narcotic plant cropsalong the Colombian border adjacent to Ecuador. Three of the lawsuits, filed onbehalf of the Providences of Esmeraldas, Sucumbíos, and Carchi in Ecuador,allege violations of Ecuadorian law, international law, and the statutes andcommon law of Florida, including negligence, trespass, and nuisance. The fourthlawsuit, filed on behalf of 1,663 citizens of the Ecuadorian provinces ofEsmeraldas and Sucumbíos, alleges personal injury, various counts ofnegligence, trespass, battery, assault, intentional infliction of emotionaldistress, violations of the Alien Tort Claims Act, and various violations ofinternational law. The Department of State (“DoS”) contract under which thiswork is performed provides indemnification to the Company against third-partyliabilities arising out of the contract, subject to available funding. The fourlawsuits were consolidated and, based on the Company’s motion granted by theU.S. District Court for the Southern District of Florida on May 22, 2007,subsequently transferred to the U.S. District Court for the District ofColumbia.

 

                On May 29,2003, Gloria Longest, a former accounting manager for the Company, filed suitagainst the Company under the False Claims Act and the Florida WhistleblowerStatute, alleging that it submitted false claims to the government under theInternational Narcotics & Law Enforcement Affairs contract with theDoS. The action, titled *U.S. ex rel. Longestv. 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, acourt ruling against the Company in this lawsuit could have a material adverseeffect on its operating performance.

 

 

 

 

 

9

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On September 11, 2001, a class actionlawsuit seeking $100.0 million on behalf of approximately 10,000 citizensof Ecuador was filed against the Company and several of its former affiliatesin the U.S. District Court for the District of Columbia. The action allegespersonal injury, property damage and wrongful death as a consequence of thespraying of narcotic plant crops along the Colombian border adjacent toEcuador. The spraying operations were and continue to be conducted under a DoScontract in cooperation with the Colombian government. The terms of the DoScontract provide that the DoS will indemnify the Company against third-partyliabilities arising out of the contract, subject to available funding. TheCompany is also entitled to indemnification by Computer Sciences Corporation inconnection with this lawsuit, subject to certain limitations. Additionally, anydamage award would have to be apportioned between the other defendants and theCompany.

 

*         U.S. Government Investigations*

 

          We also are occasionallythe subject of investigations by various agencies of the U.S. government. Suchinvestigations, whether related to our U.S. government contracts or conductedfor other reasons, could result in administrative, civil or criminalliabilities, including repayments, fines or penalties being imposed upon us, orcould lead to suspension or debarment from future U.S. government contracting.

 

          On January 30,2007, the Special Inspector General for Iraq Reconstruction, or SIGIR, issued areport on one of our task orders concerning the Iraqi Police Training Program (“TrainingProgram”). Among other items, the report raises questions about our work toestablish a residential camp in Baghdad to house training personnel.Specifically, the SIGIR report recommends that DoS seek reimbursement from usof $4.2 million paid by the DoS for work that the SIGIR maintains was notcontractually authorized. In addition, the SIGIR report recommends that the DoSrequest the Defense Contract Audit Agency (“DCAA”) to review two of ourinvoices totaling $19.1 million. On June 28, 2007, we received aletter from the DoS contracting officer requesting our repayment ofapproximately $4.0 million for work performed under this task order, whichthe letter claims was unauthorized.  Weresponded to the DoS contracting officer in letters dated July 7, 2007 andSeptember 4, 2007, explaining that the work for which we were paid by DoS wasappropriately performed and denying DoS’ request for repayment of approximately$4.0 million.  On October 23, 2007, theSIGIR issued an interim review of our expenditures under the contract for theTraining Program.  The SIGIR reportgenerally describes contract management issues within the DoS adverselyaffecting, among other things, the DoS’ ability to provide a detailedaccounting of our expenditures under the Training Program.  Additionally, the report identifies specificexpenditures arising from DoS reviews of our invoices under the TrainingProgram which DoS has questioned or addressed with us.  We believe that based on facts currentlyknown, the foregoing matters will not have a material adverse effect on ourconsolidated financial condition, results of operations or liquidity.

 

*         U.S. Government Audits*

 

          Our contracts areregularly audited by the DCAA and other government agencies. These agenciesreview our contract performance, cost structure and compliance with applicablelaws, regulations and standards. The DCAA also reviews the adequacy of, and ourcompliance with, our internal control systems and policies, including ourpurchasing, property, estimating, compensation and management informationsystems. Any costs found to be improperly allocated to a specific contract willnot be reimbursed. In addition, government contract payments received by us forallowable direct and indirect costs are subject to adjustment after audit bygovernment auditors and repayment to the government if the payments exceedallowable costs as defined in the government contracts.

 

          The Defense ContractManagement Agency (“DCMA”) formally notified the Company of non-compliancewith Cost Accounting Standard 403, Allocation of Home Office Expenses toSegments, on April 11, 2007. The Company issued a response to the DCMA onApril 26, 2007 with a proposed solution to resolve the non-compliance,which related to the allocation of corporate general and administrative costsbetween the Company’s divisions. On August 13, 2007 DCMA notified the Companythat additional information would be necessary to justify the proposedsolution.  The Company issued a responseon September 17, 2007 and the matter is pending resolution.  In management’s opinion and based on factscurrently known, the above described matters will not have a material adverseeffect on the Company’s consolidated financial condition, results of operationsor liquidity.

 

 

 

10

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**Note 7 - Member’s Equity**

 

          The following tablepresents the changes to member’s equity for the six months ended September 28,2007 (dollars in thousands):

 
| ** **                                      | ** ** | **Member’s  Units** | ** ** | **Retained  Earnings** | ** ** | **Accumulated Other  Comprehensive (Loss)  Income** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|------------------------|------------|-----------------------------------------------------|------------|-----------|------------|
| Balance at March 30, 2007                  |       | $                        | 316,633    |                   | $          | 63,205                                              |       | $         | (164       | ) | $ | 379,674 |   |
| Adjustment for the adoption of FIN No. 48       |       |                     |       | (1,374                 | )          | —                                              |       | (1,374    | )          |
| Comprehensive income:                           |       |                     |       |                   |       |                                                |       |      |       |
| Net income                                      |       |                     |       | 26,211                 |       | —                                              |       | 26,211    |       |
| Interest rate hedging activity, net of tax      |       |                     |       | —                 |       | (1,178                                              | )          | (1,178    | )          |
| Foreign currency translation                    |       |                     |       | —                 |       | 67                                                  |       | 67        |       |
| Comprehensive income                            |       |                     |       | 26,211                 |       | (1,111                                              | )          | 25,100    |       |
| Equity-based compensation                       |       | 2,263                    |       | —                 |       | —                                              |       | 2,263     |       |
| Net tax benefits from equity-based compensation |       | 62                       |       | —                 |       | —                                              |       | 62        |       |
| Balance at September 28, 2007                   |       | $                        | 318,958    |                   | $          | 88,042                                              |       | $         | (1,275     | ) | $ | 405,725 |   |

 

**Note 8 - Interest Rate Derivatives**

 

  AtSeptember 28, 2007, our derivative instruments consisted of three interestrate swap agreements, designated as cash flow hedges, that effectively fix theinterest rate on the applicable notional amounts of our variable rate debt asfollows (dollars in thousands):

 

| ****Date Entered**** | **** **** | ****Notional************Amount**** | **** **** | ****Fixed************Interest************Rate Paid***** | **** **** | ****Variable************Interest Rate************Received**** | ** **     | ********Expiration Date**** | ** **     |
|----------------------|----------------|------------------------------------|----------------|---------------------------------------------------------|----------------|---------------------------------------------------------------|----------------|-----------------------------|----------------|
| April 2007           |           | $                                  | 168,620        |                                                    | 4.975          | %                                                             | 3-month  LIBOR |                        | May 2010       |   |
| April 2007           |           | $                                  | 31,380         |                                                    | 4.975          | %                                                             | 3-month  LIBOR |                        | May 2010       |   |
| September 2007       |           | $                                  | 75,000         |                                                    | 4.910          | %                                                             | 3-month  LIBOR |                        | September 2008 |   |

----

          * plus applicable margin(2.00% at September 28, 2007).

 

**         **The fair valueof the interest rate swap agreements was a liability of $2.0 million atSeptember 28, 2007. Unrealized net loss from the changes in fair value of theinterest rate swap agreements of $1.1 million, net of tax, for the six monthsended September 28, 2007 is included in other comprehensive income (loss).There was no material impact on earnings due to hedge ineffectiveness for thequarter and six months ended September 28, 2007.

 

**Note 9 -Equity-Based Compensation**

 

*         ClassB Equity*

 

          For a more detaileddescription of the Company’s equity-based compensation, see Note 11, *Equity-Based Compensation*, to theconsolidated financial statements in our Annual Report on Form 10-K filedwith the SEC on June 20, 2007.

 

          The Company’s equity-basedcompensation is accounted for under SFAS No. 123(R), “Share-BasedPayment”. Under this method, the Company recorded equity-basedcompensation expense of $1.1 million and $0.3 million for the three months endedSeptember 28, 2007 and September 29, 2006, respectively, and$2.3 million and $1.0 million for the six months ended September 28,2007 and September 29, 2006, respectively.

 

 

 

11

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Assuming each grant of Class B equityoutstanding as of September 28, 2007 fully vests, the Company will recognizeadditional non-cash compensation expense as follows (dollars in thousands):

 
| Six month period ended March 28, 2008          |   | $     | 1,880  |   |
|-----------------------------------------------------|--------|-------|--------|--------|
| Fiscal year ended April 3, 2009                |   | 2,398 |   |
| Fiscal year ended April 2, 2010 and thereafter |   | 1,937 |   |
| Total                                               |   | $     | 6,215  |   |

 

*         2007 OmnibusEquity Incentive Plan*

 

          InAugust 2007, the shareholders of DynCorp International Inc.("Parent") approved the adoption of the Parent’s 2007 Omnibus EquityIncentive Plan (“2007 Plan”). Under the 2007 Plan, there are 2,250,000 sharesof Class A common stock of the Parent authorized for issuance (subject toadjustment as per certain events set forth in the 2007 Plan).  The 2007 Plan provides for the grant of stockoptions, stock appreciation rights, restricted stock, other share-based awards,and provides that the Compensation Committee of the Parent, which administersthe 2007 Plan, may also make awards of performance shares, performance units orperformance cash incentives subject to the satisfaction of specifiedperformance criteria.  Employees of the Parentor its subsidiaries and non-employee members of the Board of Directors areeligible to be selected to participate in the 2007 Plan. No stock options orperformance-based restricted stock have been issued under the 2007 Plan as ofSeptember 28, 2007.

 

**Note 10 - Segment Information**

 

          The Company’s operationsare aligned into two divisions, each of which constitutes a reporting segment:Government Services (“GS”) and Maintenance and Technical Support Services (“MTSS”).GS primarily provides outsourced law enforcement training, drug eradication,construction management, global logistics, base operations and personal andphysical security services to government and commercial customers in foreignjurisdictions. MTSS provides long-term aviation services and engineering andlogistics support, ranging from daily fleet maintenance to extensivemodification and overhauls on aircraft, weapons systems and support equipment.

 

          During the three monthsended June 29, 2007, certain contracts were reclassified between segments.All prior year revenues and operating income related to these contracts werereclassified to conform to the current year presentation. The reclassificationshad no impact on our consolidated results of operations, financial position orcash flows. The following is a summary of the financial information of thereportable segments reconciled to the amounts reported in the condensedconsolidated financial statements.

 
| ** **                                 | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**    | ** ** |
|--------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ***(Dollars in thousands)***               | ** ** | **Sept. 28, 2007** | ** ** | **Sept. 29, 2006** | ** ** | **Sept. 28, 2007** | ** ** | **Sept. 29, 2006** | ** ** |
| **Revenues**                               |       |                    |       |                    |       |   |   |   |   |
| Government Services                        |       | $                       | 325,156    |                    | $          | 317,064 |   | $ | 683,172 |   | $ | 676,003 |   |
| Maintenance and Technical Support Services |       | 169,953                 |       | 157,657                 |       | 360,610 |   | 336,402 |   |
| Total reportable segments                  |       | 495,109                 |       | 474,721                 |       | 1,043,782 |   | 1,012,405 |   |
| Corporate activities                       |       | —                  |       | —                  |       | — |   | — |   |
|                                       |       | $                       | 495,109    |                    | $          | 474,721 |   | $ | 1,043,782 |   | $ | 1,012,405 |   |
| ** **                                 | ** ** | ** **              | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating Income (Loss)**                |       |                    |       |                    |       |   |   |   |   |
| Government Services                        |       | $                       | 29,909     |                    | $          | 11,153 |   | $ | 56,655 |   | $ | 36,783 |   |
| Maintenance and Technical Support Services |       | 5,096                   |       | (1,326                  | )          | 11,215 |   | 2,548 |   |
| Total reportable segments                  |       | 35,005                  |       | 9,827                   |       | 67,870 |   | 39,331 |   |
| Net unallocated corporate expenses(a)      |       | (1,058                  | )          | (303                    | )          | (2,263 | ) | (999 | ) |
|                                       |       | $                       | 33,947     |                    | $          | 9,524 |   | $ | 65,607 |   | $ | 38,332 |   |
| ** **                                 | ** ** | ** **              | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Depreciation and amortization**          |       |                    |       |                    |       |   |   |   |   |
| Government Services                        |       | $                       | 7,854      |                    | $          | 8,600 |   | $ | 15,231 |   | $ | 16,590 |   |
| Maintenance and Technical Support Services |       | 3,209                   |       | 3,515                   |       | 6,401 |   | 6,925 |   |
| Total reportable segments                  |       | 11,063                  |       | 12,115                  |       | 21,632 |   | 23,515 |   |
| Corporate activities                       |       | —                  |       | —                  |       | — |   | — |   |
|                                       |       | $                       | 11,063     |                    | $          | 12,115 |   | $ | 21,632 |   | $ | 23,515 |   |

----

(a)     Represents equity-basedcompensation as discussed in Note 9.

 

12

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**Note 11 - Consolidating Financial Statementsof Subsidiary Guarantors**

 

          As of September 28,2007, the Company had outstanding $292.0 million aggregate principalamount of 9.5% senior subordinated notes due 2013. These senior subordinatednotes are fully and unconditionally guaranteed, jointly and severally, on asenior subordinated unsecured basis by the following subsidiaries of theCompany: DTS Aviation Services LLC, DynCorp Aerospace Operations LLC, DynCorpInternational Services LLC, Dyn Marine Services LLC, DynCorp International ofNigeria LLC, Dyn Marine Services of Virginia LLC, Services International LLCand Worldwide Humanitarian Services LLC.

 

          The followingsupplemental consolidating financial statements present:

 

1.                                     The Company’sconsolidating balance sheets as of September 28, 2007 and March 30, 2007,the consolidating statements of operations information for the three monthsended September 28, 2007 and September 29, 2006, the consolidating statementsof operations information for the six months ended September 28, 2007 andSeptember 29, 2006 and the consolidating statements of cash flows for the sixmonths ended September 28, 2007 and September 29, 2006.

 

2.                                     DynCorpInternational LLC (the “DI LLC”), the combined Subsidiary Guarantors and thecombined Subsidiary Non-Guarantors account for their investments insubsidiaries using the equity method of accounting; therefore, the DI LLCcolumn reflects the equity income (loss) of its Subsidiary Guarantors andSubsidiary Non-Guarantors, which are also separately reflected in the stand-aloneSubsidiary Guarantors and Subsidiary Non-Guarantors column. Additionally, theSubsidiary Guarantors column reflects the equity income (loss) of itsSubsidiary Non-Guarantors, which are also separately reflected in the stand-aloneSubsidiary Non-Guarantors column.

 

3.                                     Eliminationentries necessary to consolidate DI LLC and all of its subsidiaries.

 

 

 

 

13

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**DynCorpInternational LLC and Subsidiaries**

**CondensedConsolidating Statement of Operations Information**

**For theThree Months Ended September 28, 2007**

**(Unaudited)**

*(Dollars inthousands)*

 
| ** **                                    | ** ** | **DI LLC** | ** ** | **Subsidiary  Guarantor** | ** ** | **Subsidiary  Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|------------|------------|---------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| Revenues                                      |       | $          | 425,433    |                      | $          | 69,676                         |       | $                | 82,138     |             | $          | (82,138 | ) | $ | 495,109 |   |
| Cost of services                              |       | (363,696   | )          | (64,071                   | )          | (80,004                        | )          | 82,138           |       | (425,633         | )          |
| Selling, general  and administrative expenses |       | (21,733    | )          | (2,703                    | )          | (492                           | )          | —           |       | (24,928          | )          |
| Depreciation and  amortization expense        |       | (10,381    | )          | —                    |       | (220                           | )          | —           |       | (10,601          | )          |
| Operating income                              |       | 29,623     |       | 2,902                     |       | 1,422                          |       | —           |       | 33,947           |       |
| Interest expense                              |       | (13,705    | )          | —                    |       | —                         |       | —           |       | (13,705          | )          |
| Net earnings from  affiliates                 |       | 1,176      |       | —                    |       | —                         |       | —           |       | 1,176            |       |
| Equity in income  from subsidiaries           |       | 2,963      |       | (101                      | )          | —                         |       | (2,862           | )          | —           |       |
| Interest income                               |       | 417        |       | 13                        |       | —                         |       | —           |       | 430              |       |
| Income before  income taxes                   |       | 20,474     |       | 2,814                     |       | 1,422                          |       | (2,862           | )          | 21,848           |       |
| Provision for  income taxes                   |       | (6,521     | )          | (1,284                    | )          | (90                            | )          | —           |       | (7,895           | )          |
| Net income                                    |       | $          | 13,953     |                      | $          | 1,530                          |       | $                | 1,332      |             | $          | (2,862 | ) | $ | 13,953 |   |

 

 

**DynCorpInternational LLC and Subsidiaries**

**CondensedConsolidating Statement of Operations Information**

**For theThree Months Ended September 29, 2006**

**(Unaudited)**

*(Dollars inthousands)*

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

 

 

14

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** **

**DynCorpInternational LLC and Subsidiaries**

**CondensedConsolidating Statement of Operations Information**

**For the SixMonths Ended September 28, 2007**

**(Unaudited)**

*(Dollars inthousands)*

 
| ** **                                   | ** ** | **DI LLC** | ** ** | **Subsidiary  Guarantor** | ** ** | **Subsidiary  Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------|------------|------------|------------|---------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| Revenues                                     |       | $          | 907,190    |                      | $          | 136,592                        |       | $                | 164,694    |             | $          | (164,694 | ) | $ | 1,043,782 |   |
| Cost of services                             |       | (783,363   | )          | (126,063                  | )          | (160,989                       | )          | 164,694          |       | (905,721         | )          |
| Selling, general and administrative expenses |       | (45,085    | )          | (5,463                    | )          | (915                           | )          | —           |       | (51,463          | )          |
| Depreciation and amortization expense        |       | (20,746    | )          | —                    |       | (245                           | )          | —           |       | (20,991          | )          |
| Operating income                             |       | 57,996     |       | 5,066                     |       | 2,545                          |       | —           |       | 65,607           |       |
| Interest expense                             |       | (28,195    | )          | —                    |       | —                         |       | —           |       | (28,195          | )          |
| Net earnings from affiliates                 |       | 2,067      |       | —                    |       | —                         |       | —           |       | 2,067            |       |
| Interest income                              |       | 1,660      |       | 20                        |       | —                         |       | —           |       | 1,680            |       |
| Equity in income of subsidiaries             |       | 6,162      |       | 11                        |       | —                         |       | (6,173           | )          | —           |       |
| Income before income taxes                   |       | 39,690     |       | 5,097                     |       | 2,545                          |       | (6,173           | )          | 41,159           |       |
| Provision for income taxes                   |       | (13,479    | )          | (1,291                    | )          | (178                           | )          | —           |       | (14,948          | )          |
| Net income                                   |       | $          | 26,211     |                      | $          | 3,806                          |       | $                | 2,367      |             | $          | (6,173 | ) | $ | 26,211 |   |
|                                              |            |            |            |                           |            |                                |            |                  |            |                  |            |  |  |  |  |  |  |

 

 

**DynCorpInternational LLC and Subsidiaries**

**CondensedConsolidating Statement of Operations Information**

**For the SixMonths Ended September 29, 2006**

**(Unaudited)**

*(Dollars inthousands)*

 
| ** **                                   | ** ** | **DI LLC** | ** ** | **Subsidiary  Guarantor** | ** ** | **Subsidiary  Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------|------------|------------|------------|---------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| Revenues                                     |       | $          | 887,767    |                      | $          | 124,638                        |       | $                | 129,195    |             | $          | (129,195 | ) | $ | 1,012,405 |   |
| Cost of services                             |       | (778,545   | )          | (115,818                  | )          | (128,599                       | )          | 129,195          |       | (893,767         | )          |
| Selling, general and administrative expenses |       | (54,616    | )          | (3,285                    | )          | (56                            | )          | —           |       | (57,957          | )          |
| Depreciation and amortization expense        |       | (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           | )          |
| Net earnings from affiliates                 |       | 323        |       | —                    |       | —                         |       | —           |       | 323              |       |
| Interest income                              |       | 552        |       | 8                         |       | —                         |       | —           |       | 560              |       |
| Equity in income 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 |   |

 

 

15

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**DynCorpInternational LLC and Subsidiaries**

**CondensedConsolidating Balance Sheet Information**

**September28, 2007**

**(Unaudited)**

*(Dollars inthousands)*

 
| ** **                                  | ** ** | **DI LLC** | ** ** | **Subsidiary  Guarantor** | ** ** | **Subsidiary  Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------|------------|------------|------------|---------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| **ASSETS**                                  | ** ** | ** ** | ** ** | ** **                | ** ** | ** **                     | ** ** | ** **       | ** ** | ** **       | ** ** |
| Current assets:                             |       |       |       |                      |       |                           |       |             |       |             |       |
| Cash and cash  equivalents                  |       | $          | 105,947    |                      | $          | 1,821                          |       | $                | 2,294      |             | $          | — |   | $ | 110,062 |   |
| Restricted cash                             |       | —     |       | 17,627                    |       | —                         |       | —           |       | 17,627           |       |
| Accounts  receivable, net                   |       | 408,223    |       | 48,022                    |       | 1,473                          |       | —           |       | 457,718          |       |
| Prepaid expenses  and other current assets  |       | 63,786     |       | 30,972                    |       | 60                             |       | —           |       | 94,818           |       |
| Total current  assets                       |       | 577,956    |       | 98,442                    |       | 3,827                          |       | —           |       | 680,225          |       |
| Property and  equipment, net                |       | 9,388      |       | 3,201                     |       | 323                            |       | —           |       | 12,912           |       |
| Goodwill                                    |       | 398,559    |       | 21,621                    |       | —                         |       | —           |       | 420,180          |       |
| Tradename                                   |       | 18,318     |       | —                    |       | —                         |       | —           |       | 18,318           |       |
| Other  intangibles, net                     |       | 181,949    |       | 13,886                    |       | —                         |       | —           |       | 195,835          |       |
| Investment in  subsidiaries                 |       | 36,562     |       | 539                       |       | —                         |       | (37,101          | )          | —           |       |
| Other assets, net                           |       | 32,320     |       | —                    |       | —                         |       | —           |       | 32,320           |       |
| Intercompany  receivables                   |       | 16,263     |       | —                    |       | 48,817                         |       | (65,080          | )          | —           |       |
| Total assets                                |       | $          | 1,271,315  |                      | $          | 137,689                        |       | $                | 52,967     |             | $          | (102,181 | ) | $ | 1,359,790 |   |
| **LIABILITIES  AND MEMBER’S EQUITY**   | ** ** | ** ** | ** ** | ** **                | ** ** | ** **                     | ** ** | ** **       | ** ** | ** **       | ** ** |
| Current  liabilities:                       |       |       |       |                      |       |                           |       |             |       |             |       |
| Current portion  of long-term debt          |       | $          | 3,096      |                      | $          | —                         |       | $                | —     |             | $          | — |   | $ | 3,096 |   |
| Accounts payable                            |       | 117,594    |       | 16,584                    |       | 10                             |       | —           |       | 134,188          |       |
| Accrued payroll  and employee costs         |       | 43,538     |       | 13,944                    |       | 33,781                         |       | —           |       | 91,263           |       |
| Other accrued  liabilities                  |       | 66,472     |       | 35,817                    |       | 12,515                         |       | —           |       | 114,804          |       |
| Income taxes  payable                       |       | 6,436      |       | 2,864                     |       | 127                            |       | —           |       | 9,427            |       |
| Total current  liabilities                  |       | 237,136    |       | 69,209                    |       | 46,433                         |       | —           |       | 352,778          |       |
| Long-term  debt, less current portion       |       | 591,614    |       | —                    |       | —                         |       | —           |       | 591,614          |       |
| Other long-term  liabilities                |       | 5,901      |       | 3,772                     |       | —                         |       | —           |       | 9,673            |       |
| Intercompany  payables                      |       | 30,939     |       | 34,141                    |       | —                         |       | (65,080          | )          | —           |       |
| Member’s equity                        |       | 405,725    |       | 30,567                    |       | 6,534                          |       | (37,101          | )          | 405,725          |       |
| Total liabilities  and member’s equity |       | $          | 1,271,315  |                      | $          | 137,689                        |       | $                | 52,967     |             | $          | (102,181 | ) | $ | 1,359,790 |   |
|                                             |            |            |            |                           |            |                                |            |                  |            |                  |            |  |  |  |  |  |  |  |  |  |

 

 

 

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**DynCorpInternational LLC and Subsidiaries**

**CondensedConsolidating Balance Sheet Information**

**March 30,2007**

**(Unaudited)**

*(Dollars inthousands)*

 
| ** **                                  | ** ** | **DI LLC** | ** ** | **Subsidiary  Guarantor** | ** ** | **Subsidiary  Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------|------------|------------|------------|---------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| **ASSETS**                                  |       |       |       |                      |       |                           |       |             |       |             |       |
| Current assets:                             |       |       |       |                      |       |                           |       |             |       |             |       |
| Cash and cash  equivalents                  |       | $          | 95,458     |                      | $          | 5,212                          |       | $                | 1,785      |             | $          | — |   | $ | 102,455 |   |
| Restricted cash                             |       | —     |       | 20,224                    |       | —                         |       | —           |       | 20,224           |       |
| Accounts  receivable, net                   |       | 425,847    |       | 35,979                    |       | 124                            |       | —           |       | 461,950          |       |
| Prepaid expenses  and other current assets  |       | 55,404     |       | 26,883                    |       | 64                             |       | —           |       | 82,351           |       |
| Total current  assets                       |       | 576,709    |       | 88,298                    |       | 1,973                          |       | —           |       | 666,980          |       |
| Property and  equipment, net                |       | 8,592      |       | 3,496                     |       | 558                            |       | —           |       | 12,646           |       |
| Goodwill                                    |       | 398,559    |       | 21,621                    |       | —                         |       | —           |       | 420,180          |       |
| Tradename                                   |       | 18,318     |       | —                    |       | —                         |       | —           |       | 18,318           |       |
| Other  intangibles, net                     |       | 200,479    |       | 13,885                    |       | —                         |       | —           |       | 214,364          |       |
| Investment in  subsidiaries                 |       | 30,410     |       | 529                       |       | —                         |       | (30,939          | )          | —           |       |
| Other assets, net                           |       | 29,863     |       | 550                       |       | —                         |       | —           |       | 30,413           |       |
| Intercompany  receivables                   |       | —     |       | —                    |       | 56,326                         |       | (56,326          | )          | —           |       |
| Total assets                                |       | $          | 1,262,930  |                      | $          | 128,379                        |       | $                | 58,857     |             | $          | (87,265 | ) | $ | 1,362,901 |   |
| **LIABILITIES  AND MEMBER’S EQUITY**   |       |       |       |                      |       |                           |       |             |       |             |       |
| Current  liabilities:                       |       |       |       |                      |       |                           |       |             |       |             |       |
| Current portion  of long-term debt          |       | $          | 37,850     |                      | $          | —                         |       | $                | —     |             | $          | — |   | $ | 37,850 |   |
| Accounts payable                            |       | 118,806    |       | 8,466                     |       | 10                             |       | —           |       | 127,282          |       |
| Accrued payroll  and employee costs         |       | 53,971     |       | 9,072                     |       | 25,886                         |       | —           |       | 88,929           |       |
| Other accrued  liabilities                  |       | 39,873     |       | 47,755                    |       | 28,680                         |       | —           |       | 116,308          |       |
| Income taxes  payable                       |       | 11,997     |       | 1,571                     |       | 114                            |       | —           |       | 13,682           |       |
| Total current  liabilities                  |       | 262,497    |       | 66,864                    |       | 54,690                         |       | —           |       | 384,051          |       |
| Long-term  debt, less current portion       |       | 593,144    |       | —                    |       | —                         |       | —           |       | 593,144          |       |
| Other long-term  liabilities                |       | 2,412      |       | 3,620                     |       | —                         |       | —           |       | 6,032            |       |
| Intercompany  payables                      |       | 25,203     |       | 31,123                    |       | —                         |       | (56,326          | )          | —           |       |
| Member’s equity                        |       | 379,674    |       | 26,772                    |       | 4,167                          |       | (30,939          | )          | 379,674          |       |
| Total liabilities  and member’s equity |       | $          | 1,262,930  |                      | $          | 128,379                        |       | $                | 58,857     |             | $          | (87,265 | ) | $ | 1,362,901 |   |
|                                             |            |            |            |                           |            |                                |            |                  |            |                  |            |  |  |  |  |  |  |

 

 

17

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** **

**DyncorpInternational LLC and Subsidiaries**

**CondensedConsolidating Statement of Cash Flow Information**

**For the SixMonths Ended September 28, 2007**

**(Unaudited)**

*(Dollars inthousands)*

 
| ** **                                            | ** ** | **DI LLC** | ** ** | **Subsidiary  Guarantor** | ** ** | **Subsidiary  Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|------------|------------|---------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| Net cash provided  (used) by operating activities     |       | $          | 63,319     |                      | $          | (6,409                         | )          | $                | (7,000     | )                | $          | — |   | $ | 49,910 |   |
| **Cash  flows from investing activities:**            |       |       |       |                      |       |                           |       |             |       |             |       |
| Purchase of  property and equipment                   |       | (2,114     | )          | —                    |       | —                         |       | —           |       | (2,114           | )          |
| Other investing  cash flows                           |       | (1,106     | )          | —                    |       | —                         |       | —           |       | (1,106           | )          |
| Net cash used in  investing activities                |       | (3,220     | )          | —                    |       | —                         |       | —           |       | (3,220           | )          |
| **Cash  flows from financing activities:**            |       |       |       |                      |       |                           |       |             |       |             |       |
| Net transfers  (to) from Parent                       |       | (10,527    | )          | 3,018                     |       | 7,509                          |       | —           |       | —           |       |
| Payments on  credit facility                          |       | (36,285    | )          | —                    |       | —                         |       | —           |       | (36,285          | )          |
| Other financing  activities                           |       | (2,798     | )          | —                    |       | —                         |       | —           |       | (2,798           | )          |
| Net cash (used)  provided by financing activities     |       | (49,610    | )          | 3,018                     |       | 7,509                          |       | —           |       | (39,083          | )          |
| Net increase  (decrease) in cash and cash equivalents |       | 10,489     |       | (3,391                    | )          | 509                            |       | —           |       | 7,607            |       |
| Cash and cash  equivalents, beginning of period       |       | 95,458     |       | 5,212                     |       | 1,785                          |       | —           |       | 102,455          |       |
| Cash and cash  equivalents, end of period             |       | $          | 105,947    |                      | $          | 1,821                          |       | $                | 2,294      |             | $          | — |   | $ | 110,062 |   |

 

 

 

**DynCorpInternational LLC and Subsidiaries**

**CondensedConsolidating Statement of Cash Flow Information**

**For the SixMonths Ended September 29, 2006**

**(Unaudited)**

*(Dollars inthousands)*

 
| ** **                                            | ** ** | **DI LLC** | ** ** | **Subsidiary  Guarantor** | ** ** | **Subsidiary  Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|------------|------------|---------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| Net cash provided  by operating activities            |       | $          | 58,929     |                      | $          | 5,283                          |       | $                | 8,294      |             | $          | — |   | $ | 72,506 |   |
| **Cash  flows from investing activities:**            | ** ** | ** ** | ** ** | ** **                | ** ** | ** **                     | ** ** | ** **       | ** ** | ** **       | ** ** |
| Purchase of  property and equipment                   |       | (1,806     | )          | (865                      | )          | —                         |       | —           |       | (2,671           | )          |
| Other investing  cash flows                           |       | (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           |       |
| Payments on  credit facility                          |       | (28,831    | )          | —                    |       | —                         |       | —           |       | (28,831          | )          |
| Other financing  activities                           |       | 2,706      |       | —                    |       | —                         |       | —           |       | 2,706            |       |
| Net cash provided  (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, beginning of period       |       | 7,567      |       | 10,749                    |       | 2,257                          |       | —           |       | 20,573           |       |
| Cash and cash  equivalents, end of period             |       | $          | 71,439     |                      | $          | 5,793                          |       | $                | 3,207      |             | —     |   | $ | 80,439 |   |
|                                                       |            |            |            |                           |            |                                |            |                  |            |                  |            |  |  |  |  |  |

 

 

18

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**ITEM 2.****       ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

                The followingdiscussion and analysis of our consolidated financial condition and results ofoperations should be read in conjunction with the condensed consolidatedfinancial statements, and the notes thereto, and other data contained elsewherein this Quarterly Report. The following discussion and analysis should also beread in conjunction with our audited consolidated financial statements, andnotes thereto, and “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” included in our Annual Report on Form 10-Kfiled with the SEC on June 20, 2007. References to “DynCorp”, the “Company”,“we”, “our”, or “us” refer to DynCorp International LLC and its subsidiariesunless otherwise stated or indicated by context. We refer to our parentcompany, DynCorp International Inc., as our “Parent.” All references inthis Quarterly Report to fiscal years of the U.S. government pertain to thefiscal year which ends on September 30th of each year.

 

**Disclosure Regarding Forward-Looking Information**

 

                This QuarterlyReport on Form 10-Q contains various forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended (the “Exchange Act”). Forward-looking statements, written, oralor otherwise made, represent our expectation or belief concerning futureevents. Forward-looking statements involve risks and uncertainties.Without limiting the foregoing, we use words such as “believes,” “thinks,” “anticipates,”“plans,” “expects” and similar expressions to identify forward-lookingstatements. We caution that these statements are further qualified by importanteconomic, competitive, governmental and technological factors that could causeour business, strategy or actual results or events to differ materially, orotherwise, from those in the forward-looking statements, including,without limitation, changes in the demand for services that we provide;termination of key U.S. government contracts; pursuit of new commercialbusiness and foreign government opportunities; activities of competitors;changes in significant operating expenses; changes in availability of capital;general economic and business conditions in the United States; acts of war orterrorist activities; variations in performance of financial markets; estimatesof contract 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 our reports filed with the SEC. Accordingly, such forward-lookingstatements do not purport to be predictions of future events or circumstances;therefore, there can be no assurance that any forward-looking statementcontained herein will prove to be accurate. We assume no obligation to updatethe forward-looking statements.

 

 

 

 

 

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**COMPANY OVERVIEW**

 

                We are a leadingprovider of specialized mission-critical outsourced technical services tocivilian and military government agencies. Our specific global expertise is inlaw enforcement training and support, security services, base operations andaviation services and operations. We also provide logistics support for all ourservices. Our current customers include the Department of State, or DoS; theU.S. Army, Air Force, Navy and Marine Corps (collectively, the Department ofDefense, or DoD); commercial customers and foreign governments. As of September28, 2007, we had over 14,600 employees in 33 countries, approximately 45 activecontracts ranging in duration from three to ten years and over 100 task orders.Our predecessors have provided essential services to numerous U.S. governmentdepartments and agencies since 1951.

 

                We operate throughtwo core business segments, Government Services, or GS, and Maintenance andTechnical Support Services, or MTSS. The following table describes the keyservice offerings for each of GS and MTSS:

 
| ** **                | ** ** | **GOVERNMENT SERVICES**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | ** ** | **MAINTENANCE AND TECHNICAL****SUPPORT SERVICES**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|---------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Key Service Offerings** | ** ** | **Law Enforcement and Security -**  International police training, judicial support, immigration support, base  operations, security for diplomats, personal protection, security system  design, installation and operations, and development of security software,  smart cards and biometrics**Contingency and Logistics Operations -** Peace-keeping  support, humanitarian relief, de-mining, worldwide contingency planning  and other rapid response services, inventory procurement, tracking services,  equipment maintenance, property control, data entry and mobile repair  services**Operations Maintenance and Construction  Management -** Facility and equipment maintenance, custodial  and administrative services, civil, electrical, infrastructure, environmental  and mechanical engineering and construction management**Specialty Aviation and Counter-drug  Operations -** Drug eradication, aerial firefighting, counter-drug  surveillance, border control, host nation pilot and crew training | ** ** | **Aviation Services and Operations -** Aircraft  fleet maintenance and modifications, depot augmentation, aftermarket  logistics support, aircrew services and training, ground equipment  maintenance and modifications, quality control, Federal Aviation  Administration certification, facilities and operations support, aircraft  scheduling and flight planning and the provisioning of pilots, test pilots  and flight crews**Aviation Engineering -**  Aircraft modification programs manufacturing and installation, engineering  design and kit manufacturing and installation, avionics upgrades, field  installations, cockpit/fuselage design and configuration management and  technical data, drawings and manual revisions**Aviation Ground Equipment Support -**  Ground equipment support, maintenance and overhaul, modifications and  upgrades, corrosion control, engine rebuilding, hydraulic and load testing  and serviceability inspections**Ground Vehicle Maintenance -**  Vehicle maintenance, overhaul and corrosion control and scheduling work flow  management, logistics support and equipment inspection |

 

**CURRENT OPERATING CONDITIONS AND OUTLOOK**

 

                Over most of thelast two decades, the U.S. government has been increasing its reliance on theprivate sector for a wide range of professional and support services. Thisincreased use of outsourcing by the U.S. government has been driven by avariety of factors: lean-government initiatives launched in the 1990s; surgesin demand during times of national crisis; the increased complexity ofmissions; the transformation of the U.S. military to focus on the war-fighter effortsand the loss of skills within the government caused by workforce reductions andretirements. We believe that the U.S. government’s growing mission andcontinued human capital challenges have combined to create a new marketdynamic, one that is less directly reflective of overall government budgets andmore reflective of the ongoing shift of service delivery from the federalworkforce to private sector providers.

 

 

 

20

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                In addition to theincrease in government spending on outsourcing, particularly among ourcustomers, our end-markets are also growing. The DoD budget for fiscal 2008,excluding supplemental funding relating to operations in Iraq and Afghanistan,has been proposed to Congress at $481.4 billion, representing a 62%increase over fiscal 2001. Fiscal 2007 DoD outlay was $569.2 billion. Thisgrowth is expected to continue, with the DoD forecasting its annual budget togrow to over $538.4 billion (excluding supplemental funding) by fiscal2012. The U.S. government budget for international development and humanitarianand international security assistance coordinated by the DoS has grown fromapproximately $15.0 billion in fiscal 2000 to $25.0 billion in fiscal2006, a CAGR of 8.9%. Services included in this budget include law enforcementtraining, eradication of international narcotics, certain contingency servicesand security services. Similarly, there has been significant growth in theDepartment of Homeland Security budget which is estimated at $39.8 billionfor fiscal 2008, which represents a 12% CAGR since fiscal 2002 for theDepartment of Homeland Security and its predecessor entities.

 

                We believe thefollowing industry trends will further increase demand and enable us to moresuccessfully compete for outsourced services in our target markets:

 

•                  Transformation of military forces, leading toincreases in outsourcing of non-combat functions;

 

•                  Increased level and frequency of overseas deploymentand peace-keeping operations for the DoS, DoD and United Nations;

 

•                  Growth in U.S. military budget driven by increasedoperations and maintenance spending;

 

•                  Increased maintenance, overhaul and upgrade needs tosupport aging military platforms;

 

•                  Increased reliance on private contractors to performlife-cycle asset management functions ranging from organizational to depotlevel maintenance;

 

•                  Increased opportunities to support foreigngovernments in providing a wide spectrum of maintenance, supply support,facilities management and construction management-related services; and

 

•                  Shift to more multiple award Indefinite Delivery,Indefinite Quantity (“IDIQ”) contracts.

 

***Contract Structure***

 

                Our governmentcontracts have three distinct pricing structures: cost-reimbursable,time-and-material and fixed-price. Fixed-price contracts are for a fixed sum tocover all costs and any profit element for a defined scope of work whiletime-and-material contracts include a fixed labor rate per hour or per day. Weassume additional financial risk on fixed-price and time-and-material contractsbecause we assume the risk of performing those contracts at the stipulatedprices or negotiated hourly/daily rates, respectively. While fixed-price andtime-and-material contracts involve greater risk, they also are potentially moreprofitable for us, since the customer pays a premium to transfer many risks tous. With cost-reimbursement contracts, so long as actual costs incurred arewithin the contract funding and allowable under the terms of the contract, weare entitled to reimbursement of the costs plus a stipulated fee and anadditional award fee for some contracts. Cost-reimbursable contracts aregenerally less risky to us, since the customer retains many of the risks;therefore, are typically less profitable than fixed-price and time-and-materialcontracts. Effective during the three months ended September 28, 2007, certainportions of our Civilian Police Program, or CIVPOL, contract with the DoStransitioned from fixed-price to cost-reimbursable. As such, our margins on thoseportions of the contract could be reduced going forward.   However,we continue to believe the general trend for our customers is a shift away fromcost-reimbursable to fixed-price/time-and-material contracts, which typicallyresult in higher margins.

 

 

 

 

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**BACKLOG**

 

We track contracted backlog in order toassess our current business development effectiveness and to assist us inforecasting our future business needs and financial performance. Backlogconsists of orders and priced options under our contracts. We define contractedbacklog as the estimated value of contract modifications received fromcustomers that have not been recognized as revenue. Our backlog consists offunded and unfunded amounts. Funded backlog is based upon amounts actuallyappropriated by a customer for payment of goods and services less actualrevenue recorded as of the measurement date under that appropriation. Unfundedbacklog is the actual dollar value of unexercised contract options. Most of ourU.S. government contracts allow the customer the option to extend the period ofperformance of a contract for a period of one or more years. These options maybe exercised at the sole discretion of the customer. Historically, it has beenour experience that the customer has exercised contract options.

 

                Firm funding forour contracts is usually made for one year at a time, with the remainder of thecontract period consisting of a series of one-year options. As is the case withthe base period of our U.S. government contracts, option periods are subject tothe availability 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.

 

                The followingtable sets forth our approximate contracted backlog as of the dates indicated:

 
| ***(Dollars in millions)*** | ** ** | **Sept. 28, 2007** | ** ** | **March 30, 2007** |
|----------------------------------|------------|-------------------------|------------|-------------------------|
| Funded Backlog                   |       | $                       | 1,029      |                    | $ | 1,402 |
| Unfunded Backlog                 |       | 1,691                   |       | 4,730                   |
| Total Backlog                    |       | $                       | 2,720      |                    | $ | 6,132 |

 

The decrease in backlog is due to the exclusion of the previouslyincluded $3.3 billion from the linguist and translation services contractawarded by the U.S. Army Intelligence and Security Command (“INSCOM”) to GlobalLinguist Solutions LLC, a joint venture of DynCorp International and McNeilTechnologies. The Army terminated the contract for convenience after theGovernment Accountability Office (“GAO”) sustained the incumbent’s protest.INSCOM requested and received revised proposals which are currently underevaluation prior to making a new award decision.

 

**ESTIMATEDREMAINING CONTRACT VALUE**

 

                Our estimatedremaining contract value represents total backlog plus management’s estimate offuture revenues under IDIQ contracts that have not been funded, or award termperiods that have not yet been earned. These future revenues would be ourestimate of revenue that would occur from the end of currently funded taskorders until the end of the IDIQ contracts. Our estimated remaining contractvalue is based on our experience under contracts, and we believe our estimatesare reasonable. However, there can be no assurance that our existing contractswill result in actual revenues in any particular period or at all. Theseamounts could vary or even change significantly depending upon governmentpolicies, government budgets, appropriations and the outcome of protestedcontract awards. The following table sets forth our estimated remainingcontract value as of the dates indicated:

 
| ***(Dollars in millions)***   | ** ** | **Sept. 28, 2007** | ** ** | **March 30, 2007** |
|------------------------------------|------------|-------------------------|------------|-------------------------|
| Estimated remaining contract value |       | $                       | 5,361      |                    | $ | 8,991 |
|                                    |            |                         |            |                         |  |  |

 

As discussed above, estimated remainingcontract value was reduced $3.3 billion due to the U.S. Army’s actions inresponse to the GAO’s recommendations.

 

 

 

22

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**CONSOLIDATED RESULTS OF OPERATIONS**

 

                The table below provides selectedfinancial data for the Company for the three months ended September 28, 2007compared with the three months ended September 29, 2006 and the six monthsended September 28, 2007 compared with the six months ended September 29, 2006.

 
| ** **                                   | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**    | ** ** |
|----------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                   | ** ** | **Sept. 28, 2007** | ** ** | **Sept. 29, 2006** | ** ** | **Sept. 28, 2007** | ** ** | **Sept. 29, 2006** | ** ** |
| ***(Dollars  in thousands)***                | * *   | * *                | * *   | * *                | * *   | * * | * * | * * | * * |
| Revenues                                     |       | $                       | 495,109    |                    | $          | 474,721 |   | $ | 1,043,782 |   | $ | 1,012,405 |   |
| Cost of services                             |       | (425,633                | )          | (423,433                | )          | (905,721 | ) | (893,767 | ) |
| Selling, general and administrative expenses |       | (24,928                 | )          | (30,552                 | )          | (51,463 | ) | (57,957 | ) |
| Depreciation and amortization expense        |       | (10,601                 | )          | (11,212                 | )          | (20,991 | ) | (22,349 | ) |
| Operating income                             |       | 33,947                  |       | 9,524                   |       | 65,607 |   | 38,332 |   |
| Interest expense                             |       | (13,705                 | )          | (14,689                 | )          | (28,195 | ) | (29,503 | ) |
| Loss on early extinguishment of debt         |       | —                  |       | —                  |       | — |   | (3,484 | ) |
| Net earnings (loss) from affiliates          |       | 1,176                   |       | (123                    | )          | 2,067 |   | 323 |   |
| Interest income                              |       | 430                     |       | 410                     |       | 1,680 |   | 560 |   |
| Income (loss) before taxes                   |       | 21,848                  |       | (4,878                  | )          | 41,159 |   | 6,228 |   |
| (Provision) benefit for income taxes         |       | (7,895                  | )          | 1,743                   |       | (14,948 | ) | (2,337 | ) |
| Net income (loss)                            |       | $                       | 13,953     |                    | $          | (3,135 | ) | $ | 26,211 |   | $ | 3,891 |   |

* *

*Revenues:*Revenues for the three and six monthsended September 28, 2007 increased $20.4 million or 4.3% and$31.4 million or 3.1%, respectively, as compared with the three and sixmonths ended September 29, 2006, reflecting increased revenues in bothreporting segments. See the reportable segment discussions below for more analysisof our revenue growth.

 

*Operating Income:* Operating income for thethree and six months ended September 28, 2007, increased$24.4 million or 256% and $27.3 million or 71.2%, respectively, ascompared with the three and six months ended September 29, 2006. Theincreases, as more fully described in the reportable segment discussions below,are primarily due to improved contract performance, higher revenue volumes, lowerdepreciation and amortization expense and lower selling, general andadministrative expenses (“SG&A”). Factors contributing to the decreasedSG&A included: (i) one-time severance-related expenses incurred duringfiscal 2007, and (ii) employee-related costs incurred in the prior yeardue to the build up of in-house capabilities; offset by (i) cost incurredin fiscal 2008 related to our Sarbanes-Oxley compliance project; and(ii) general SG&A costs necessary to support the continued growth ofour business. The lower depreciation and amortization expense is primarily dueto certain intangible assets that were fully amortized in the prior fiscal yearand an impairment charge incurred in the prior fiscal year related to acustomer-related intangible asset.

 

*Interestexpense:* Interest expense for the three and six monthsended September 28, 2007, decreased $1.0 million, and $1.3 million,respectively, as compared with the three and six months endedSeptember 29, 2006.  The decreaseswere primarily due to lower average debt outstanding in the three and sixmonths ended September 28, 2007, as compared with the three and six monthsended September 29, 2006. The interest expense incurred relates to our creditfacility, senior subordinated notes and amortization of deferred financingfees.

 

*Losson debt extinguishment:*In conjunction with our Parent’s initial public offering inMay 2006, we incurred: (i) a premium of $2.7 million related tothe redemption of a portion of our senior subordinated notes; and (ii) thewrite-off of $0.8 million in deferred financing costs associated with theearly retirement of a portion of our senior subordinated notes.

 

*Interestincome:* Interestincome for the three and six months ended September 28, 2007 increased$0.02 million and $1.1 million, respectively, as compared with the three andsix months ended September 29, 2006.  Theincreases were primarily due to higher average cash balances in the six monthsended September 28, 2007, as compared with the six months ended September 29,2006.

 

*Provisionfor income taxes:*Oureffective tax rate of 36.1% for the three months ended September 28, 2007increased from a tax benefit of 35.7% for the three months ended September 29,2006. The increase is due to higher income before tax. Our provision for incometax for the six months ended September 28, 2007 was $14.9 million, an increaseof $12.6 million, as compared to $2.3 million for the six months endedSeptember 29, 2006. The increase is primarily the result of increased incomebefore tax.

 

 

 

23

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**RESULTS OF OPERATIONS BY REPORTABLE SEGMENT**

 

                The followingtable sets forth the revenues and operating income for our GS operatingsegment, for the three months ended September 28, 2007 as compared to the threemonths ended September 29, 2006 and the six months ended September 28, 2007 ascompared to the six months ended September 29, 2006.

 

***Government Services***
| ** **                    | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**    | ** ** |
|-------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                    | ** ** | **Sept. 28, 2007** | ** ** | **Sept. 29, 2006** | ** ** | **Increase** | ** ** | **Sept. 28, 2007** | ** ** | **Sept. 29, 2006** | ** ** | **Increase** | ** ** |
| ***(Dollars  in thousands)*** | * *   | * *                | * *   | * *                | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| Revenues                      |       | $                       | 325,156    |                    | $          | 317,064 |   | $ | 8,092 |   | $ | 683,172 |   | $ | 676,003 |   | $ | 7,169 |   |
| Operating income              |       | $                       | 29,909     |                    | $          | 11,153 |   | $ | 18,756 |   | $ | 56,655 |   | $ | 36,783 |   | $ | 19,872 |   |
|                               |            |                         |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

***Three Months Ended September 28, 2007 Compared To ThreeMonths Ended September 29, 2006***

 

*Revenues —* Revenues for the three months ended September 28, 2007 increased $8.1million, or 2.6%, as comparedto the threemonths ended September 29, 2006. The increase primarily reflected the following:

 

•                  increased deployment of internationalpolice advisors to the Middle East under CIVPOL, a CIVPOL task order totrain Iraqi border security personnel, both in the Law Enforcement and Securitystrategic business unit - $13.8 million; and

 

•                  additional work supportingthe International Narcotics and Law Enforcement Air Wing program in theSpecialty Aviation and Counter-Drug Operations strategic business unit -$8.2 million.

 

offset by:

 

•                  conclusion of constructionand camp support services task orders and non-recurring contingency andlogistics services provided to the U.S. Federal Emergency Management Agencyafter hurricane Katrina in the prior fiscal year in the Contingency andLogistics Operations strategic business unit - $9.5 million; and

 

•                  conclusion of constructiontask orders in the Operations Maintenance and Construction Management strategicbusiness unit - $4.5 million.

 

*Operating Income —*Operating income for the three months ended September 28, 2007increased $18.8 million, or 168.2%, as compared to the three months ended September 29, 2006.  The increase primarily reflected thefollowing:

 

•                  improved contractperformance in fiscal 2008 and elimination of certain one-time costs incurredduring the three months ended September 29, 2006 related to contract losses inthe Law Enforcement and Security strategic business unit - $23.0 million; and

 

•                  lower corporate expenseallocation, primarily due to one-time costs incurred in the prior year related to severanceexpenses for certain former executives and bonus compensation associated withthe Company’s initial public offering - $4.5 million.

 

offset by:

 

•                  conclusion of constructionand camp support services task orders in the prior fiscal year in theContingency and Logistics Operations strategic business unit - $2.2 million;

 

•                  conclusion of constructiontask orders in the Operations Maintenance and Construction Management strategicbusiness unit - $3.2 million; and

 

•                  charges related to severanceand cost in excess of contract funding in the Specialty Aviation & CounterDrug strategic business unit - $3.3 million.

 

 

 

24

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***Six Months Ended September 28, 2007 Compared To Six MonthsEnded September 29, 2006***

 

*Revenues —* Revenues for the six months ended September 28,2007 increased $7.2 million, or 1.1%, as compared to the six monthsended September 29, 2006. The increase primarily reflected the following:

 

•                  contract modifications whichexpanded the program scope in the Specialty Aviation and Counter-DrugOperations strategic business unit - $25.7 million.

 

offset by:

 

•                  conclusionof various task orders in the Law Enforcement and Security strategic businessunit - $4.7 million; and

 

•                  conclusion of construction and campsupport services task orders in the Contingency and Logistics Operationsstrategic business unit - $13.4 million.

 

*Operating Income —*Operating income for the six months ended September 28, 2007 increased$19.9 million, or 54.0%, as compared to the six months ended September 29, 2006. The increase primarily reflected the following:

 

•                  improved contractperformance and non-recurring write-offs due to contract losses that occurredin the prior year in the Law Enforcement and Security strategic business unit -$25.4 million; and

 

•                  lower corporate expenseallocation, primarily due to one-time costs incurred in the prior year related to severanceexpenses for certain former executives and bonus compensation associated withthe Company’s initial public offering- $5.4 million.

 

offset by:

 

•                  conclusion of constructionand camp support services task orders in the prior fiscal year in theContingency and Logistics Operations strategic business unit - $3.5 million;

 

•                  conclusion of constructiontask orders in the Operations Maintenance and Construction Management strategicbusiness unit - $3.9 million; and

 

•                  charges related to severanceand cost in excess of contract funding in the Specialty Aviation & CounterDrug strategic business unit - $3.5 million.

 

                The followingtable sets forth the revenues and operating income (loss) for our MTSSoperating segment, for the three months ended September 28, 2007 as compared tothe three months ended September 29, 2006 and the six months ended September28, 2007 as compared to the six months ended September 29, 2006.

 

 

***Maintenance & Technical Support Services***
| ** **                    | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**    | ** ** |
|-------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                    | ** ** | **Sept. 28, 2007** | ** ** | **Sept. 29, 2006** | ** ** | **Increase** | ** ** | **Sept. 28, 2007** | ** ** | **Sept. 29, 2006** | ** ** | **Increase** | ** ** |
| ***(Dollars  in thousands)*** | * *   | * *                | * *   | * *                | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| Revenues                      |       | $                       | 169,953    |                    | $          | 157,657 |   | $ | 12,296 |   | $ | 360,610 |   | $ | 336,402 |   | $ | 24,208 |   |
| Operating income (loss)       |       | $                       | 5,096      |                    | $          | (1,326 | ) | $ | 6,422 |   | $ | 11,215 |   | $ | 2,548 |   | $ | 8,667 |   |

 

 

***Three Months Ended September 28, 2007 Compared To ThreeMonths Ended September 29, 2006***

 

*Revenues —* Revenues for the three months ended September 28,2007 increased $12.3 million, or 7.8%, as compared to the three monthsended September 29, 2006.  The increaseprimarily reflected the following:

 

**•**                  new business growth inContract Logistics Support service line, primarily related to a new contractunder which we provide logistic support services to the U.S. Air Force C-21fleet - $9.3 million; and

 

**•**                  new business growth in the Aviation and Maintenanceservice line - $14.5 million.

 

 

 

25

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offset by:

 

**•**                  decrease in personnel andlevel of services provided under the Field Service Operations serviceline - $11.5 million.

 

*Operating Income —*Operating income for the three months ended September 28, 2007increased $6.4 million to $5.1 million from an operating loss of $1.3 millionfor the three months ended September 29, 2006. The increaseprimarily reflected the following:

 

**•**                  improved operatingperformance, non-recurring contract losses in the prior year and new business growthin Contract Logistics Support service line, primarily related to a new contractunder which we provide logistic support services to the U.S. Air Force C-21fleet - $2.1 million;

 

**•**                  net new businessgrowth and improved operating performance in the Aviation and Maintenanceservice line - $2.8 million; and

 

**•**                  lower corporate expenseallocation, primarily due to one-time costs incurred in the prior year related to severanceexpenses for certain former executives and bonus compensation associated withthe Company’s initial public offering- $2.8 million.

 

offset by:

 

**•**                  decrease in personnel andlevel of services provided under the Field Service Operations serviceline - $1.3 million.

 

 

***Six Months Ended September 28, 2007 Compared To Six MonthsEnded September 29, 2006***

 

*Revenues —* Revenues for the six months ended September 28,2007 increased $24.2 million, or 7.2%, as compared to the six monthsended September 29, 2006.  The increaseprimarily reflected the following:

 

**•**                  new business growth inContract Logistics Support service line, primarily related to a new contractunder which we provide logistic support services to the U.S. Air Force C-21fleet - $20.4 million; and

 

**•**                  new business growth in the Aviation and Maintenanceservice line - $17.0 million.

 

offset by:

 

**•**                  decrease in personnel andlevel of services provided under the Field Service Operations serviceline - $13.2 million.

 

 

                *Operating Income —*Operatingincome for the six months ended September 28, 2007 increased $8.7 million to$11.2 million from $2.5 million for the six months ended September 29,2006.  The increase primarily reflected the following:

 

**•**                  improvedoperating performance and non-recurring contract losses in the prior year underthe Contract Logistics Support service line - $3.2 million;

 

**•**                  net new businessgrowth and improved operating performance in the Aviation and Maintenanceservice line - $3.4 million; and

 

**•**                  lower corporate expenseallocation, primarily due to one-time costs incurred in the prior year related to severanceexpenses for certain former executives and bonus compensation associated withthe Company’s initial public offering- $2.8 million.

 

offset by:

 

**•**                  decrease in personnel andlevel of services provided under the Field Service Operations serviceline - $0.7 million.

 

 

 

26

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**LIQUIDITY AND CAPITAL RESOURCES**

 

                Cash generated byoperations and borrowings available under our credit facility are our primarysources of short-term liquidity. Our sources of operating cash generallyinclude revenues and the reduction of our working capital, particularlyaccounts receivable. Based on our current level of operations, we believe ourcash flow from operations and our available borrowings under our creditfacility will be adequate to meet our liquidity needs for at least the nexttwelve months.

 

*Cash Flow Analysis*

 
| ** **                                | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------|------------|
| ***(Dollars in thousands)***              | ** ** | **Sept. 28, 2007**   | ** ** | **Sept. 29, 2006** | ** ** |
| Net Cash provided by operating activities |       | $                    | 49,910     |   | $ | 72,506 |   |
| Net Cash used by investing activities     |       | $                    | (3,220     | ) | $ | (4,420 | ) |
| Net Cash used by financing activities     |       | $                    | (39,083    | ) | $ | (8,220 | ) |

 

                Cash provided byoperating activities for the six months ended September 28, 2007 was $49.9million, a decrease of $22.6 million, or 31.2%, compared to $72.5 millionof cash provided for the six months ended September 29, 2006. The decrease incash flows is primarily due to the timing of cash collections from the DoS,offset by an increase in net income of $22.3 million. In addition, theoperating cash flow for the six months ended September 29, 2006 benefited from thetiming of payroll processing, interest payments and customer advances.

 

                Cash used byinvesting activities was $3.2 million for the six months ended September28, 2007 compared to cash used of $4.4 million for the six months endedSeptember 29, 2006. The cash used in both periods was primarily due to thepurchase of property and equipment and computer software.

 

                Cash used byfinancing activities was $39.1 million for the six months ended September28, 2007 compared to cash used of $8.2 million for the six months endedSeptember 29, 2006. The cash used by financing activities during the six monthsended September 28, 2007 was primarily due to repayment of borrowings under ourterm loans of $36.3 million. The cash used during the six months ended September29, 2006 included: (i) net proceeds from our Parent of $17.9 million;(ii) partial redemption of senior subordinated notes of $28.8 million,including accrued interest; and (iii) net borrowings under other financingarrangements of $2.7 million.

 

*Financing*

 

                As of September28, 2007, no balance was outstanding under our revolving credit facility and$302.7 million was outstanding under our term loans. Our availableborrowing capacity under the revolving credit facility, totaled$76.4 million at September 28, 2007, which gives effect to$26.6 million of outstanding letters of credit. The weighted-averageinterest rate at September 28, 2007 for our borrowings under the creditfacility was approximately 7.0%.

 

                We are required,under certain circumstances as defined in our credit agreement, to make theExcess Cash Flow Payment. Such payments are due at the end of the first quarterof the following fiscal year. As a result, we made payments of approximately$34.6 million on the term loans during the first quarter of fiscal 2008related to the Excess Cash Flow Payment for the fiscal year endedMarch 30, 2007. The Excess Cash Flow Payment is an annual requirementunder the credit agreement, and we cannot estimate with certainty what theExcess Cash Flow Payment will be, if any, for the fiscal year endedMarch 28, 2008.

 

                As of September28, 2007, $292.0 million of principal amount was outstanding under oursenior subordinated notes. Our senior subordinated notes matureFebruary 2013. Interest accrues on our senior subordinated notes and ispayable semi-annually.

 

                Principal paymentson our credit facilities and senior subordinated notes based on outstandingborrowings as of September 28, 2007 are expected to be approximately$1.5 million for the remainder of fiscal 2008, $3.9 million in fiscal2009, $3.1 million in fiscal 2010, $294.2 million in fiscal 2011,none in fiscal 2012, and $292.0 million in the fiscal years thereafter.

 

 

27

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                We entered intointerest rate swap agreements to hedge our exposure to cash flows related toour credit facility. These agreements are more fully described in Note 8to our condensed consolidated financial statements included in this QuarterlyReport.

 

*DebtCovenants and Other Matters*

 

                Our creditfacility contains various financial covenants, including minimum levels ofearnings before interest, taxes, depreciation and amortization (“EBITDA”),minimum interest and fixed charge coverage ratios, and maximum capitalexpenditures and total leverage ratio. Non-financial covenants restrict theability of the Company and its subsidiaries to dispose of assets; incuradditional indebtedness, prepay other indebtedness or amend certain debtinstruments; pay dividends; create liens on assets; enter into sale andleaseback transactions; make investments, loans or advances; issue certainequity instruments; make acquisitions; engage in mergers or consolidations orengage in certain transactions with affiliates; and otherwise restrict certaincorporate activities. We were in compliance with various financial andnon-financial covenants at September 28, 2007.

 

 

**OFF BALANCESHEET ARRANGEMENTS**

 

                Our off-balancesheet arrangements relate to operating lease obligations and letters of credit,which are excluded from the balance sheet in accordance with GAAP.

 

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

                Management’sdiscussion and analysis of financial condition and results of operations arebased on our condensed consolidated financial statements and related footnotescontained within this Quarterly Report. Our more critical accounting policiesused in the preparation of the consolidated financial statements were discussedin our 2007 Annual Report on Form 10-K for the fiscal year endedMarch 30, 2007, filed with the SEC on June 20, 2007. These criticalpolicies, for which no significant changes have occurred in the six monthsended September 28, 2007, include:

 

•                  Revenue Recognition and Cost Estimation onLong-Term Contracts;

 

•                  Use of Estimates;

 

•                  Allowance for Doubtful Accounts;

 

•                  Property and Equipment;

 

•                  Impairment of Long-Lived Assets, including AmortizedIntangibles;

 

•                  Indefinite Lived Assets;

 

•                  Income Taxes;

 

•                  Equity-Based Compensation;

 

•                  Fair Values of Financial Instruments; and

 

•                  Currency Translation.

 

                The process ofpreparing financial statements in conformity with GAAP requires the use ofestimates and assumptions to determine certain of the assets, liabilities,revenues and expenses. These estimates and assumptions are based upon what we believeis the best information available at the time of the estimates or assumptions.The estimates and assumptions could change materially as conditions within andbeyond our control change. Accordingly, actual results could differ materiallyfrom those estimates.

 

 

 

28

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**ACCOUNTINGDEVELOPMENTS**

 

                We have presentedthe information about accounting pronouncements not yet implemented inNote 1 to our condensed consolidated financial statements included in thisQuarterly Report.

 

 

**ITEM 3.      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” in theCompany’s Annual Report on Form 10-K for the fiscal year endedMarch 30, 2007, filed with the SEC on June 20, 2007.

 

 

**ITEM 4.      CONTROLS AND PROCEDURES**

 

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

 

                Our management,with the participation of our Chief Executive Officer and our Chief FinancialOfficer, has evaluated our disclosure controls and procedures (as such term isdefined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based onthat evaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that, as of the end of the period covered by this report, ourdisclosure controls and procedures were effective to ensure that informationrequired to be disclosed in reports that we file or submit under the ExchangeAct are: (1) recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms; and (2) accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosure.

 

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

 

                There have been nochanges in our internal controls over financial reporting that have occurredduring the fiscal quarter ended September 28, 2007 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlsover financial reporting.

 

 

 

 

 

29

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**PART II -OTHER INFORMATION**

 

**ITEM 1.          LEGAL PROCEEDINGS**

 

                        Informationrelated to various commitments and contingencies is described in Note 6 tothe condensed consolidated financial statements.

 

**ITEM 1A.       RISK FACTORS**

 

                        Therehave been no material changes in risk factors from those described inPart I, Item 1A, “Risk Factors” in the Company’s Annual Report onForm 10-K for the fiscal year ended March 30, 2007, filed with theSEC on June 20, 2007.

 

**ITEM 2.          UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

None.

 

**ITEM 3.          DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM 4.          SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

None.

 

**ITEM 5.          OTHER INFORMATION**

 

None.

 

**ITEM 6.          EXHIBITS**

 
| **Exhibit****Number** | ** ** | ** **

**Description**                                                                         |
|-----------------------|------------|-----------------------------------------------------------------------------------------------------|
| 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 |

----

*      Filedherewith.

 

 

30

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** **

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|   | **DYNCORP INTERNATIONAL LLC**

Date: November 7, 2007 |
|--------|-----------------------------------------------------------------|
|   | ** **                                                      |
|   | ** **                                                      |
|   | /s/  MICHAEL J. THORNE                                          |
|   | Name:                                                           |   Michael J. Thorne |
|   | Title:                                                          |   Senior Vice President and  Chief Financial Officer |

 

 

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