~~Table~~UNITED ofSTATES ~~Contents~~SECURITIES AND EXCHANGE COMMISSION

~~UNITED~~WASHINGTON, ~~STATES SECURITIES~~D.C. ~~AND EXCHANGE COMMISSION~~20549

~~WASHINGTON,~~FORM ~~D.C. 20549~~10-Q

~~FORM~~þ ~~10-Q~~ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

þFor ~~QUARTERLY~~the ~~REPORT~~Quarterly ~~PURSUANT~~Period TOEnded ~~SECTION~~June 30, ~~13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~2006

~~For the Quarterly Period Ended June 30, 2005~~OR

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

oCommission ~~TRANSITION~~File ~~REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~No. 333-124394

~~Commission~~STANDARD ~~File~~AERO NoHOLDINGS, INC. ~~333-124394~~

~~STANDARD~~(Exact ~~AERO~~Name ~~HOLDINGS,~~of ~~INC.~~ Registrant as Specified in Its Charter)

(Exact Name of Registrant as Specified in Its Charter)


		98-0432892
Delaware		(I.R.S. Employer
(State of Incorporation)		Identification Number)

Delaware		98-0432892
(State of Incorporation)		(I.R.S. Employer
		Identification Number)

500-1780 Wellington Avenue
Winnipeg, Manitoba, Canada R3H 1B3
(Address of Principal Executive Offices and Zip Code)

~~145 Duncan Drive, Suite~~(204) ~~1000~~987-8860 ~~San Antonio, Texas 78226~~ (~~Address~~Registrant’s ofTelephone ~~Principal~~Number, ~~Executive~~Including ~~Offices~~Area ~~and Zip~~ Code)

Indicate by check mark whether the registrant (~~210~~1) ~~334-6105~~has filed all reports required to be filed by Section 13 or 15(~~Registrant’s~~d) ~~Telephone~~of ~~Number,~~the ~~Including~~Securities ~~Area~~Exchange ~~Code~~Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant ~~(1) has~~is ~~filed~~a ~~all~~large ~~reports~~accelerated ~~required~~filer, toan beaccelerated ~~filed~~filer, ~~by Section 13~~ or ~~15(d)~~a ofnon-accelerated ~~the~~filer. ~~Securities~~See ~~Exchange~~definition ~~Act~~ of ~~1934~~“accelerated ~~during~~filer ~~the~~and ~~preceding~~large ~~12 months,~~accelerated ~~and~~filer” ~~(2)~~in Rule ~~has~~12b-2 ~~been~~of ~~subject to such filing requirements for~~ the ~~past~~Exchange ~~90 days~~Act. ~~Yes o No þ~~

~~Indicate~~Large ~~by check mark whether the registrant is an~~ accelerated filer ~~(as~~o Accelerated ~~defined~~filer ~~in Rule 12b~~o Non-2accelerated offiler ~~the Exchange Act). Yes o No~~ þ

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

The registrant had 1,000 shares of its $0.01 par value common stock outstanding as of July 30, ~~2005~~ 2006.

INDEX

		Page
		No.
	PART I
	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited).		2 – 4
	Notes to Condensed Consolidated Financial Statements (Unaudited).		5 – 25
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		26 – 42
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.		43
Item 4.	Controls and Procedures.		44
	PART II
	OTHER INFORMATION
Item 1.	Legal Proceedings.		46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.
Item 4.	Submission of Matters to a Vote of Security Holders.
Item 6.	Exhibits.
SIGNATURES			48
EX-31.1
EX-31.2
EX-32

PART I
FINANCIAL INFORMATION


			Page
			No.
Item 1. Financial Statements

Unaudited Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2006 and June 30, 2005			1

Unaudited Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005			2

Unaudited Condensed Consolidated Statements of Stockholder’s Equity for the six months ended June 30, 2006 and June 30, 2005			3

Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and June 30, 2005			4

Unaudited Notes to Condensed Consolidated Financial Statements			5 - 22

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23 - 38

Item 3. Quantitative and Qualitative Disclosures About Market Risk			38 - 39

Item 4. Controls and Procedures			39 - 40

PART II
OTHER INFORMATION

Item 1. Legal Proceedings			41
Item 1A. Risk Factors			41
Item 6. Exhibits			42
SIGNATURES			43

~~Standard~~STANDARD ~~Aero~~AERO ~~Holdings~~HOLDINGS, ~~Inc~~INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands)

Condensed Consolidated Statement of Operations (Successor) (Unaudited)/ Condensed Combined Statement of Operations (Predecessor) (Unaudited) For the three months ended June 30, 2005 and 2004 and the six months ended June 30, 2005 and 2004 (In thousands of U.S. dollars)


	Three months ended June 30,				Six months ended June 30,
	2006		2005		2006		2005
Revenues	$	200,371	$	171,781	$	386,169	$	359,195


Operating expenses
Cost of revenues		167,078		144,578		322,052		298,366
Selling, general and administrative expense		13,758		12,851		27,311		25,504
Amortization of intangible assets		2,146		2,446		4,292		4,892


Total operating expenses		182,982		159,875		353,655		328,762


Income from operations		17,389		11,906		32,514		30,433

Interest expense		9,554		8,721		19,027		17,822


Income before income taxes		7,835		3,185		13,487		12,611

Income tax expense		592		39		2,470		2,907


Net income	$	7,243	$	3,146	$	11,017	$	9,704

	Three months ended June 30,						Six months ended June 30,
	2005			2004			2005			2004
	(Successor)			(Predecessor)			(Successor)			(Predecessor)
Revenues	$	171,781		$	189,917		$	359,195		$	367,868
Operating expenses
Cost of revenues		(145,264	)		(154,748	)		(299,569	)		(301,978	)
Selling, general and administrative expense		(12,851	)		(11,531	)		(25,395	)		(22,440	)
Amortization of intangible assets		(2,446	)		(688	)		(4,892	)		(1,376	)
Total operating expenses		(160,561	)		(166,967	)		(329,856	)		(325,794	)
Income from operations		11,220			22,950			29,339			42,074
Interest expense		(8,547	)		(1,896	)		(17,475	)		(3,835	)
Income before income taxes		2,673			21,054			11,864			38,239
Benefit (provision) for income taxes		126			(7,924	)		(2,587	)		(14,418	)
Net income	$	2,799		$	13,130		$	9,277		$	23,821

The accompanying notes are an integral part of the financial statements.

~~The accompanying notes are an integral part of these statements.~~1

2STANDARD AERO HOLDINGS, INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)


	June 30,			December 31,
	2006			2005
ASSETS
Current assets
Cash and cash equivalents	$	6,991		$	24,056
Cash and cash equivalents (restricted)		23,492			—
Accounts receivable (less allowance for doubtful accounts of $2,944 and $2,987 at June 30, 2006 and December 31, 2005, respectively)		134,841			120,456
Inventories		143,814			134,011
Prepaid expenses and other current assets		8,030			7,668
Income taxes receivable		3,479			3,811
Deferred income taxes		3,024			2,407


Total current assets		323,671			292,409


Deferred finance charges		16,799			18,272
Deferred income taxes		8,437			7,920
Property, plant and equipment, net		138,447			136,968
Intangible assets, net		189,363			195,168
Goodwill		191,342			192,301


Total assets	$	868,059		$	843,038

LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities
Accounts payable	$	82,120		$	75,301
Other accrued liabilities		27,581			29,197
Due to related party		3,940			3,940
Unearned revenue		40,321			14,196
Accrued warranty provision		3,958			3,986
Income taxes payable		6,555			9,323
Current portion of long-term debt		11,621			2,574


Total current liabilities		176,096			138,517


Deferred income taxes		68,622			72,542
Long-term debt		450,015			470,000


Total liabilities		694,733			681,059


Commitments and contingencies (Note 8)

Stockholder’s equity
Common stock (1,000 shares authorized, issued and outstanding, par value $0.01)		—			—
Additional paid in capital		215,000			215,000
Accumulated deficit		(42,065	)		(53,082	)
Accumulated other comprehensive income		391			61


Total stockholder’s equity		173,326			161,979


Total liabilities and stockholder’s equity	$	868,059		$	843,038

~~Standard~~The ~~Aero~~accompanying ~~Holdings,~~notes ~~Inc~~are an integral part of the financial statements.

~~Condensed Consolidated Balance Sheet (Successor)~~2 ~~As at June 30, 2005 (Unaudited) and December 31, 2004 (In thousands of U.S. dollars)~~

	June 30,		December 31,
	2005		2004
	(Successor)		(Successor)
Assets
Current assets
Cash and cash equivalents	$	83	$	27,891
Accounts receivable (less allowance for doubtful accounts of $3,932 and $3,909 at December 31, 2004 and June 30, 2005, respectively)		102,022		111,992
Inventories (note 3)		150,026		146,875
Prepaid expenses and other current assets		7,705		10,994
Income taxes receivable		7,225		4,563
Deferred income taxes		3,584		4,118
Total current assets		270,645		306,433
Deferred finance charges		19,446		21,215
Deferred income taxes		3,545		3,856
Property, plant and equipment, net		139,740		136,140
Intangible assets, net (note 4)		230,874		237,280
Goodwill		240,490		240,490
Total assets	$	904,740	$	945,414
Liabilities and stockholder’s equity
Current liabilities
Accounts payable	$	77,614	$	106,419
Other accrued liabilities		23,481		24,015
Due to related party		3,940		2,808
Unearned revenue		12,092		12,519
Accrued warranty provision		5,752		6,907
Income taxes payable		6,640		8,608
Current portion of long-term debt (note 5)		1,825		1,985
Total current liabilities		131,344		163,261
Deferred income taxes		82,193		84,522
Long-term debt (note 5)		471,570		487,261
Total liabilities		685,107		735,044
Commitments and contingencies (note 7)
Stockholder’s equity
Common stock (1,000 shares authorized, issued and outstanding, par value $0.01)		—		—
Additional paid in capital		215,000		215,000
Retained earnings / (deficit)		4,595		(4,682	)
Accumulated other comprehensive income		38		52
Total stockholder’s equity		219,633		210,370
Total liabilities and stockholder’s equity	$	904,740	$	945,414

STANDARD AERO HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
(In thousands)

~~The~~Six ~~accompanying~~months ~~notes~~Ended ~~are~~June 30, ~~an integral part of these statements.~~2005


					Retained			Accumulated
					earnings /			other			Total
	Common				(Accumulated			comprehensive			Stockholder’s
	stock		Paid in capital		deficit)			income			equity

Balance as of December 31, 2004	$	—	$	215,000	$	(3,901	)	$	52		$	211,151


Comprehensive income
Net income		—		—		9,704			—			9,704
Other comprehensive income
Unrealized loss on cash flow hedge		—		—		—			(14	)		(14	)


Total comprehensive income		—		—		9,704			(14	)		9,690


Balance as of June 30, 2005	$	—	$	215,000	$	5,803		$	38		$	220,841

~~Table~~Six ofmonths ~~Contents~~Ended June 30, 2006

Standard Aero Holdings, Inc.


								Accumulated
								other		Total
	Common				Accumulated			comprehensive		Stockholder’s
	stock		Paid in capital		deficit			income		equity

Balance as of December 31, 2005	$	—	$	215,000	$	(53,082	)	$	61	$	161,979


Comprehensive income
Net income		—		—		11,017			—		11,017
Other comprehensive income
Unrealized gain on cash flow hedge		—		—		—			330		330


Total comprehensive income		—		—		11,017			330		11,347


Balance as of June 30, 2006	$	—	$	215,000	$	(42,065	)	$	391	$	173,326

~~Condensed~~The ~~Consolidated~~accompanying ~~Statement~~notes ofare ~~Cash~~an ~~Flows~~integral ~~(Successor)~~part ~~(Unaudited)/ Condensed Combined Statements~~ of ~~Cash~~the ~~Flows~~financial ~~(Predecessor) (Unaudited) (In thousands of U~~statements.~~S. dollars)~~

	Six months ended June 30,
	2005			2004
	(Successor)			(Predecessor)
Cash provided by (used in)
Operating activities
Net income for the period	$	9,277		$	23,821
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		13,218			10,151
Amortization of deferred finance charges		1,769			272
Deferred income taxes		(505	)		(3,423	)
Gain on disposal of property, plant and equipment		(9	)		—
Other		—			47
Changes in assets and liabilities
Accounts receivable		5,292			(33,838	)
Inventories		(3,151	)		(35,943	)
Prepaid expenses and other current assets		3,275			397
Accounts payable and other current liabilities		(30,921	)		66,742
Income taxes payable and receivable		(5,609	)		(657	)
Net cash provided by (used in) operating activities		(7,364	)		27,569
Investing activities
Acquisition of intangibles — licenses		—			(125	)
Acquisition of rental assets and spare engines		(9,293	)		(6,889	)
Acquisition of property, plant and equipment		(5,882	)		(4,202	)
Proceeds from disposals of rental assets and spare engines		4,730			4,845
Proceeds from disposals of property, plant, and equipment		42			12
Net cash used in investing activities		(10,403	)		(6,359	)
Financing activities
Repayment of long-term debt		(15,851	)		(843	)
Change in due to and from related companies		5,810			2,366
Net cash provided by (used in) financing activities		(10,041	)		1,523
Net (decrease) increase in cash and cash equivalents		(27,808	)		22,733
Cash and cash equivalents — Beginning of period		27,891			22,698
Cash and cash equivalents — End of period	$	83		$	45,431
Supplemental cash flow information
Cash paid during the six months ended June 30, 2005 and 2004 for:
Interest	$	16,253		$	3,562
Income taxes		7,805			16,862

~~The~~STANDARD ~~accompanying~~AERO ~~notes~~HOLDINGS, ~~are~~INC. UNAUDITED anCONDENSED ~~integral~~CONSOLIDATED ~~part~~STATEMENTS ofOF ~~these~~CASH ~~statements.~~FLOWS (In thousands)


	Six Months Ended June 30,
	2006			2005

Operating activities
Net income for the period	$	11,017		$	9,704
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation and amortization		12,898			13,218
Amortization of deferred finance charges		1,473			1,769
Deferred income taxes		(5,054	)		(1,240	)
Gain on disposal of property, plant and equipment		(9	)		(9	)
Foreign exchange (gain) loss		(428	)		578
Changes in assets and liabilities
Accounts receivable, net		(14,385	)		9,970
Inventories		(9,803	)		(2,610	)
Prepaid expenses and other current assets		421			(1,403	)
Accounts payable and other current liabilities		7,808			(32,190	)
Income taxes payable and receivable		(1,477	)		(4,573	)


Net cash provided by (used in) operating activities		2,461			(6,786	)

Investing activities
Acquisitions of property, plant and equipment		(3,056	)		(5,882	)
Proceeds from disposals of property, plant, and equipment		11			42
Acquisition of rental assets		(9,179	)		(9,293	)
Proceeds from disposals of rental assets		3,661			4,730


Net cash used in investing activities		(8,563	)		(10,403	)

Financing activities
Repayment of term loans and other, net		(20,938	)		(15,851	)
Increase in revolving credit facility		10,000			—
Change in due to related party		—			5,810


Net cash used in financing activities		(10,938	)		(10,041	)


Effect of exchange rate changes on cash and cash equivalents		(25	)		(578	)


Net decrease in cash and cash equivalents		(17,065	)		(27,808	)

Cash and cash equivalents — Beginning of period		24,056			27,891


Cash and cash equivalents — End of period	$	6,991		$	83

~~Table~~The accompanying notes are an integral part of ~~Contents~~the financial statements.

~~STANDARD~~4 ~~AERO HOLDINGS, INC.~~

STANDARD AERO HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1		Nature of operations
		Successor
		Standard Aero Holdings, Inc. was incorporated on June 20, 2004 in the State of Delaware to acquire the MRO business (as described below). Standard Aero Holdings, Inc. and its subsidiaries (the “Company” or the “Successor”) commenced operations on August 25, 2004.
		The Company is an independent provider of aftermarket maintenance repair and overhaul (“MRO”) services for gas turbine engines used primarily for military, regional and business aircraft. The Company repairs and overhauls a wide range of aircraft engines and provides its customers with comprehensive, value-added maintenance solutions.
		The Acquisition
		On August 24, 2004, pursuant to a purchase agreement with Meggitt plc, the Company acquired from Meggitt the MRO Division of Dunlop Standard Aerospace Group Limited (the “Predecessor”) for cash consideration of $699.7 million, including direct costs of the Acquisition of $28.0 million. This transaction is referred to as the Acquisition. The Company is a wholly owned subsidiary of Standard Aero Acquisition Holdings, Inc., which is a corporation formed at the direction of The Carlyle Group. Affiliates of The Carlyle Group own 98.2% of Standard Aero Acquisition Holdings, Inc. common stock. The purchase price was financed by a $215.0 million equity investment from the Company’s parent company, Standard Aero Acquisition Holdings, Inc., $325.0 million of term loans and $200.0 million of senior subordinated notes.
		The Acquisition forms part of The Carlyle Group’s aerospace and defence portfolio and expands The Carlyle Group’s presence and expertise in a wide range of global aerospace markets.
		The accompanying financial statements include the consolidated accounts of the Company and its subsidiaries subsequent to the Acquisition and also include the combined accounts of the Predecessor prior to the Acquisition. All significant intercompany accounts and transactions, including profit and loss as a result of those transactions, have been eliminated in the consolidation. The financial statements of the Predecessor are presented for comparative purposes and include the combined historical financial statements of the MRO Division of Dunlop Standard Aerospace Group Limited. As a result of the Acquisition, the combined financial statements of the Predecessor Company are not fully comparable to the consolidated financial statements of the Successor Company due to the different basis of accounting and change in capital structures.

1 Nature of operations

5The Company

~~Table~~Standard Aero Holdings, Inc. was incorporated on June 20, 2004 in the State of ~~Contents~~Delaware. Standard Aero Holdings, Inc. and its subsidiaries (the “Company”) commenced operations on August 25, 2004. Standard Aero Holdings, Inc. accounts for the following entities:

STANDARD AERO HOLDINGS, INC.


Name		Country of Incorporation
Standard Aero, Inc.		USA
Standard Aero (US) Inc.		USA
Standard Aero (San Antonio) Inc.		USA
Standard Aero (Alliance) Inc.		USA
Standard Aero (US) Legal Inc.		USA
Standard Aero Materials Inc.		USA
Standard Aero Canada Inc.		USA
Standard Aero de Mexico		Mexico
Standard Aero Limited		Canada
Not FM Canada Inc.		Canada
3091781 Nova Scotia Company		Canada
3091782 Nova Scotia Company		Canada
3091783 Nova Scotia Company		Canada
Standard Aero (Australia) Pty Limited		Australia
Standard Aero International Pty Limited		Australia
Standard Aero (Asia) Pte Limited		Singapore
Standard Aero BV		Netherlands
Standard Aero (Netherlands) BV		Netherlands

~~NOTES~~The TOCompany ~~CONDENSED~~is ~~CONSOLIDATED~~an ~~FINANCIAL~~independent ~~STATEMENTS~~provider of aftermarket maintenance repair and overhaul (~~UNAUDITED~~“MRO”) services for gas turbine engines used primarily for military, regional and business aircraft. The Company repairs and overhauls a wide range of aircraft engines and provides its customers with comprehensive, value-added maintenance solutions.

~~The~~Basis ~~Company accounted for the Acquisition using the purchase method~~ of accounting in accordance with SFAS No. 141, Business Combinations and, accordingly, the Acquisition resulted in a new basis of accounting for the Company. The Company allocated the purchase price based on the fair values of the assets acquired and liabilities assumed at the Acquisition date, as follows:presentation

	August 25, 2004
Current assets
Cash and cash equivalents	$	35,700
Accounts receivable		106,372
Inventories		186,718
Prepaid expenses and other current assets		3,205
Property, plant and equipment		136,123
Goodwill		240,490
Intangible assets		241,550
Total assets acquired		950,158
Current liabilities
Accounts payable		120,415
Other current liabilities		15,653
Unearned revenue		17,120
Accrued warranty provision		6,740
Long-term debt		4,872
Deferred income taxes		85,647
Total liabilities assumed		250,447
Net assets acquired for cash	$	699,711

The unaudited condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The December 31, 2005 Condensed Consolidated Balance Sheet was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. However, the Company believes that the disclosures are adequate to make the information presented not misleading.

~~The~~In ~~excess of~~ the ~~cost~~opinion of ~~the~~management, ~~Acquisition over~~ the ~~fair~~unaudited ~~values~~condensed ofconsolidated ~~the~~financial ~~net~~statements ~~tangible~~include all ~~and~~adjustments ~~intangible~~necessary ~~assets~~for ~~acquired~~a offair ~~$240.5~~presentation ~~million has been allocated to goodwill. All~~ of the ~~goodwill~~results ~~has~~of ~~been~~operations ~~allocated~~for to the ~~Aviation Maintenance, Repair and Overhaul reporting segment of the Company~~interim periods. AsResults atfor ~~June 30, 2005,~~ the ~~goodwill~~interim ~~had~~periods ~~not~~are ~~yet been assigned to reporting units. In accordance with SFAS No. 142, this goodwill will~~ not benecessarily ~~amortized~~indicative ~~but will be reviewed annually for impairment. The majority~~ of ~~the~~results ~~goodwill~~that ~~will~~may ~~not~~ be expected ~~deductible~~ for ~~income tax purposes. Of~~ the ~~$241.6~~fiscal ~~million~~year ofending ~~acquired intangible assets~~December 31, ~~$97~~2006.3 ~~million~~These ~~was~~interim ~~assigned~~financial tostatements should ~~trademarks~~be ~~that~~read ~~have~~in ~~indefinite~~conjunction ~~lives,~~with ~~$98.0~~our ~~million~~Annual ~~was~~Report ~~assigned~~on toForm ~~customer~~10-K ~~relationships~~for ~~that~~the ~~have~~year anended ~~estimated weighted average useful life of 17.4 years~~December 31, ~~$38~~2005.4 million was assigned to OEM authorizations and licenses that have an estimated weighted average useful life of 14.2 years, and $7.9 million was assigned to technology and other that have an estimated average useful life of 5 years.

~~Table~~STANDARD ofAERO ~~Contents~~HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~STANDARD AERO~~2 ~~HOLDINGS,~~Summary ~~INC~~of significant accounting policies The condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and are reported in U. S. dollars.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

	a)		Stock based compensation

			Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”, using the prospective method. The prospective method requires compensation cost to be recognized for new awards and for awards modified, repurchased, or cancelled after the required effective date. Under the prospective method, the Company will continue to account for any portion of awards outstanding at the date of adoption using the provisions of APB No. 25 whereby no stock option compensation expense was recognized in the determination of net income in the accompanying statement of operations. For the six months ended June 30, 2006, there was no impact of adopting Statement FAS 123(R) as no new awards were granted or existing awards modified, repurchased or cancelled.

			For all new awards granted, if any, in the future, SFAS 123(R) requires the Company to estimate the fair value of share based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Consolidated Statement of Operations.

	b)		Consolidation of Variable Interest Entity

			Financial Accounting Standards Board Interpretation No. 46R “Consolidation of Variable Interest Entities” (“FIN 46”), which was issued in December 2003, requires the “primary beneficiary” of a variable interest entity (“VIE”) to include the VIE’s assets, liabilities and operating results in its consolidated financial statements. In general, a VIE is a corporation, partnership, limited –liability corporation, trust or any other legal structure used to conduct activities or hold assets that either (i) has an insufficient amount of equity to carry out its principal activities without additional subordinate financial support; (ii) has a group of owners that are unable to make significant decisions about its activities; or (iii) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations.

			In the normal course of business, the Company enters into agreements to provide engine repair and maintenance services. Certain of these agreements establish trust accounts, which the customer will deposit cash into the trust account, generally in advance of the services to be performed under the contract, based on an agreed upon engine operating fee. Subject to the terms of each agreement, the Company will generally receive cash distributions from the trust accounts when maintenance worked is performed. Actual gross payments by the customer into the trust accounts could exceed the cost of services performed by the Company. Per the agreements the Company would receive the benefit of the remaining proceeds in the trust account, if any. The Company has determined that the trust accounts are VIE’s and that the Company is the primary beneficiary. Based on this determination, the Company has consolidated the trust accounts in its consolidated financial statements during the quarter ended June 30, 2006.

			The consolidation of the VIE’s increased restricted cash by $23.5 million and increased unearned revenue by $23.5 million as at June 30, 2006. There is no income statement effect upon the consolidation of the VIE’s.

Predecessor The financial statements of the Predecessor reflect the combined financial position, combined results of operations and combined cash flows of the Predecessor business which includes the accounts of Standard Aero (US) Inc. (formerly Dunlop Standard Aerospace (US) Inc.), related to the MRO business and the accounts of the following entities:6

~~Name~~STANDARD ~~Country~~AERO ofHOLDINGS ~~Incorporation Standard Aero, Inc~~INC. NOTES ~~USA~~TO ~~Standard~~CONDENSED ~~Aero~~CONSOLIDATED ~~(San~~FINANCIAL ~~Antonio)~~STATEMENTS ~~Inc. USA Standard Aero~~ (~~Alliance~~UNAUDITED) Inc. USA Standard Aero Limited Canada Standard Aero de Mexico de C.V. Mexico Standard Aero (Australia) Pty Limited Australia Standard Aero International Pty Limited Australia Standard Aero BV Netherlands Standard Aero (Asia) Pte Limited Singapore Standard Aero (Netherlands) BV (formerly Dunlop Standard Aerospace (Nederland) BV) Netherlands Standard Aero (US) Legal Inc. (formerly Dunlop Standard Aerospace (US) Legal Inc.) USA Standard Aero Materials Inc. (formerly Dunlop Aerospace Parts Inc.) USA Not FM Canada Inc. Canada Standard Aerospace BV Netherlands Standard Aero vof Netherlands

Standard Aero (US) Inc.’s (formerly Dunlop Standard Aerospace (US) Inc.) accounts include investments in two wholly-owned subsidiaries which carry on business not related to the MRO Division and, therefore, these investments have been excluded from the Predecessor’s financial statements. All material intra-group balances and transactions have been eliminated in the combination. The combined financial statements reflect a divisional equity account which represents the parent company’s initial investments, accumulated earnings less distributions and advances to and from the parent company. Divisional equity also includes advances to or from related companies made at the discretion of the parent company that are considered investing and financing activities in these financial statements. Certain administration, management and other services were provided by Dunlop Standard Aerospace Group Limited including, but not limited to, executive and strategic management, accounting and financial reporting, treasury, cash management, employee benefit administration, training and redesign services. The Predecessor was charged an allocation for these services by Dunlop Standard Aerospace Group Limited. All allocations and estimates are based on assumptions that management believes are reasonable. However, the combined results of operations, combined divisional equity and combined cash flows of the Predecessor for the period from January 1, 2004 to June 30, 2004, may not necessarily reflect those that would have occurred had the Predecessor operated autonomously as an entity independent of Dunlop Standard Aerospace Group Limited. Seasonality The Company does not experience significant fluctuations in earnings or cash flows due to seasonality.

	c)		Comparative figures

			Certain comparative figures have been reclassified to conform with the current year’s financial statement presentation.

	d)		New accounting standards

			In June 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes.” FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions taken or expected to be taken on a tax return. Under FIN 48, the tax benefit from an uncertain tax position may be recognized only if it is more likely than not that the tax position will be sustained, based solely on its technical merits, with the taxing authority having full knowledge of all relevant information. The measurement of a tax benefit for an uncertain tax position that meets the more-likely-than-not threshold is based on a cumulative probability model under which the largest amount of tax benefit recognized is the amount with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. FIN 48 also requires significant new annual disclosures. FIN 48 is effective for the Company beginning January 1, 2007. The Company is currently determining the effect of FIN 48 on the consolidated financial statements.

7 3 Inventories


	June 30,		December 31,
	2006		2005
	(In thousands)
Raw materials	$	63,643	$	66,241
Work in process		80,171		67,770


	$	143,814	$	134,011

~~STANDARD AERO HOLDINGS, INC.~~7

STANDARD AERO HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

		Basis of presentation
		The unaudited condensed consolidated financial statements of the Successor and the unaudited condensed combined consolidated financial statements of the Predecessor included herein have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, the unaudited consolidated financial statements and the unaudited combined financial statements include all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for the interim periods. Results for the interim periods are not necessarily indicative of results that may be expected for the fiscal year ending December 31, 2005. These interim financial statements should be read in conjunction with the consolidated financial statements and footnotes of the Company as of December 31, 2004 and for the period from August 25, 2004 to December 31, 2004 and the combined financial statements and footnotes of the MRO Division of Dunlop Standard Aerospace Group Limited as of December 31, 2003 and for the period from January 1, 2004 to August 24, 2004 and the years ended December 31, 2003 and December 31, 2002.
2		Summary of significant accounting policies
		The consolidated and combined financial statements of the Company and the Predecessor, respectively, have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) and are reported in U.S. dollars.

4		Intangible assets and goodwill

		Intangible assets are comprised of:

a) Revenue recognition The Company’s revenues related to engine maintenance, repair and overhaul services includes the provision of services and parts which are accounted for as a single accounting unit. These revenues and related cost of revenues are recognized when the services are completed or repaired parts are shipped to the customer. The Company’s standard terms and conditions provide that title and risk of loss passes to the customer when the customer owned material is shipped to the customer. Amounts received in advance from customers are recorded as unearned revenue. Certain of the Company’s arrangements may include multiple elements consisting both of engine repair and overhaul services and engine rentals. In these arrangements, the service and rental elements are divided into separate units of accounting based on the relative fair values of each unit and each unit is accounted for in accordance with the policies noted above. Lease income associated with the rental of engines or engine modules to customers is recorded based on time incurred (i.e., on the number of hours flown) as reported to the Company by the customer. Provisions for estimated loss on work orders in progress are provided in the period the loss is probable and can be reasonably estimated.


	Gross Carrying		Accumulated
At June 30, 2006	Amount		Amortization		Net Balance

	(In thousands)
Definite lived intangible assets:
Customer relationships	$	98,000	$	14,042	$	83,958
OEM authorizations and licenses		38,350		5,548		32,802
Technology and other		7,900		2,897		5,003


		144,250		22,487		121,763
Indefinite lived intangible assets:
Trademarks		67,600		—		67,600


Total intangible assets	$	211,850	$	22,487	$	189,363


	Gross Carrying		Accumulated
At December 31, 2005	Amount		Amortization		Net Balance

	(In thousands)
Definite lived intangible assets:
Customer relationships	$	98,000	$	10,540	$	87,460
OEM authorizations and licenses		38,350		4,035		34,315
Technology and other		7,900		2,107		5,793


		144,250		16,682		127,568
Indefinite lived intangible assets:
Trademarks		67,600		—		67,600


Total intangible assets	$	211,850	$	16,682	$	195,168

~~Table~~The ofamortization ~~Contents~~expense for the period from January 1, 2006 to June 30, 2006 was $5.8 million. The amortization expense for the period January 1, 2005 to June 30, 2005 was $6.4 million.

~~STANDARD~~Amortization ~~AERO~~of ~~HOLDINGS,~~OEM ~~INC~~authorizations and licenses is included within cost of revenues.

~~NOTES~~The TOchanges ~~CONDENSED~~in ~~CONSOLIDATED~~the ~~FINANCIAL~~carrying ~~STATEMENTS~~amount ~~(UNAUDITED)~~of goodwill for the six months ended June 30, 2006, were as follows:

	b)		Goodwill and intangible assets
		Aviation
			Intangibles with definite lives of the Successor are being amortized over 1 to 20 years with a weighted average of 12.6 years. Intangibles with definite lives of the Predecessor were being amortized over 3 to 40 years with a weighted average of 31.5 years. The goodwill and intangible assets determined to have indefinite lives are tested for impairment annually or if the situation indicates that the asset might be impaired.
		Maintenance Repair
			Intangible assets having definite lives are recorded at cost and amortized over their estimated useful lives or terms of licenses, using the straight-line method, as summarized below:
		and Overhaul			Enterprise Services		Total
Balance as at December 31, 2005		$	192,301		$	—	$	192,301
Reallocated from pre-acquisition contingent liabilities			(959	)		—		(959	)
Balance as at June 30, 2006		$	191,342		$	—	$	191,342

	Successor	Predecessor
Customer relationships	1 to 20 years	13 to 40 years
OEM authorizations and licenses	4 to 17 years	3 to 10 years
Technology and other	5 years	—

The change in goodwill is a result of changes in estimates of contingent liabilities recorded at the date of acquisition.

	c)		Income taxes
			The Company recognizes deferred tax assets and liabilities using the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to record the deferred tax assets at an amount expected more likely than not to be recoverable. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
			Investment tax credits are accounted as a reduction in the cost of the asset or as a reduction in associated operating costs when it is likely that such credits will be realized. These investment tax credits are used to reduce current and future taxes payable.
	d)		Share-based compensation
			The Company does not have a share-based compensation plan. However, certain employees of the Company participate in the Stock Option and Purchase Plan of the Company’s parent, Standard Aero Acquisition Holdings, Inc. Options granted by Standard Aero Acquisition Holdings, Inc. had an exercise price equal to fair value of the underlying stock on the date of the grant. The parent company accounts for stock-based employee compensation using the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting to Stock Issued to Employees”.
			The following table illustrates the effect on net income of the Successor if Standard Aero Acquisition Holdings, Inc. had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”:

	January 1, 2005
	to June 30, 2005
Net income, as reported	$	9,277
Deduct: Stock-based compensation expense calculated in accordance with SFAS No. 123		(253	)
Pro forma net income	$	9,024

STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

9 5 Long-term debt Long-term debt is summarized as follows:


	June 30,			December 31,
	2006			2005

	(In thousands)
Term loans	$	250,000		$	270,000
Senior subordinated notes		200,000			200,000
Obligations under capital leases		1,636			2,574
Revolving credit facility		10,000			—

		461,636			472,574
Less: Current portion		(11,621	)		(2,574	)


Long-term debt	$	450,015		$	470,000

~~STANDARD~~The ~~AERO~~Company ~~HOLDINGS~~had outstanding bank term loans of $250.0 million at June 30, ~~INC~~2006. The Company has provided as collateral for the loans substantially all of its assets. The term of the loans is eight years repayable by installments of $23.3 million in 2011 and $226.7 million in 2012. At the option of the Company, borrowing under the term loans bears interest at Base Prime Rate or Eurodollar rate plus an applicable margin. The bank term loans of $250.0 million are denominated and are repayable in US dollars, and bear interest at 7.12% at June 30, 2006 (6.81% at December 31, 2005). The borrowing under the term loans will bear interest between 1.25% and 1.5% plus the Base Prime Rate or between 2.25% and 2.5% plus the Eurodollar rate. The applicable margin is determined based on the Company’s leverage ratio as specified in the credit facility agreement.

~~NOTES~~The TOcredit ~~CONDENSED~~agreement ~~CONSOLIDATED~~also ~~FINANCIAL~~provides ~~STATEMENTS~~Standard ~~(UNAUDITED)~~Aero Holdings, Inc. with a $50.0 million revolving credit facility. There were borrowings of $10.0 outstanding under the revolving credit facility at June 30, 2006. As of August 14, 2006, there were no outstanding borrowings under the revolving credit facility. The revolving borrowings under the credit facility are denominated and are repayable in US dollars, and bear interest at 9.25% at June 30, 2006. The revolving credit facility will bear interest between 0.75% and 1.50% plus the Base Prime Rate or between 1.75% and 2.50% plus the Eurodollar rate. The rates are determined based on the Company’s leverage ratio as specified in the credit facility agreement. The related commitment fee will equal between 0.375% and 0.5% of the undrawn credit facility. The commitment fee is $0.1 million for the period January 1 to June 30, 2006.

e)In ~~New~~addition, ~~accounting~~$200 million ~~standards~~of senior subordinated unsecured notes were issued with an interest rate of 8.25%, maturing on September 1, 2014. Prior to September 1, 2007, the Company may redeem up to 35% of the original principal amount of the notes at a premium. Further, at any time on or after September 1, 2009, the Company may redeem any portion of the notes at pre-determined premiums.

InCertain ~~December 2004,~~of ~~the~~these ~~Financial~~facilities ~~Accounting~~contain ~~Standards~~covenants ~~Board (“FASB”) released Statement 123R, “Share-Based Payments”,~~ that isrestrict athe ~~revision~~Company’s ofability ~~FASB~~to ~~Statement No. 123, “Accounting~~raise ~~for~~additional ~~Stock-Based~~financings ~~Compensation”.~~in ~~This~~the ~~Statement~~future ~~supersedes~~and ~~APB~~the ~~Opinion~~Company’s ~~No. 25,~~ability ~~“Accounting for Stock Issued~~ to ~~Employees”,~~pay ~~and its related implementation guidance~~dividends. ~~Statement~~The ~~123R~~financial ~~requires~~covenants ~~companies~~are ~~to measure the cost of employee services received in exchange for an award of equity instruments~~ based on ~~the grant~~long-~~date~~term ~~fair~~solvency ~~value~~ratios ofcalculated ~~those~~from ~~instruments, except in certain circumstances. The standard is applicable to~~ the Company’s ~~as of the~~consolidated ~~beginning~~financial ~~of the first interim or annual reporting period beginning after December 15~~statements, ~~2005.~~ ~~The~~which ~~Company~~are ~~intends~~prepared toin ~~adopt~~accordance ~~the~~with ~~standard~~accounting onprinciples ~~a prospective basis as of January 1,~~generally ~~2006~~accepted ~~and~~in ~~does not expect~~ the ~~adoption~~United ofStates ~~the standard to have a significant impact on its financial position or results~~ of ~~operations~~America.

~~In November 2004, the FASB released Statement No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4”.~~ The ~~standard~~Company’s ~~adopts~~weighted ~~the~~average ~~view~~interest ~~related~~rate ~~to inventories that abnormal amounts~~ of ~~idle~~borrowings ~~capacity~~under ~~and spoilage costs should be excluded from~~ the ~~cost~~credit ofagreement ~~inventory~~was ~~and expensed when incurred~~6. ~~The provisions of~~97% for the ~~statement~~period ~~are~~January ~~applicable~~1 to ~~inventory costs incurred during fiscal years beginning after~~ June 1530, ~~2005. The Company intends to adopt the standard as of January 1,~~ 2006 ~~and does not expect the adoption of the standard to have an impact on its financial position or results of operations~~.

~~f) Comparative Figures~~9

~~Certain~~STANDARD ~~comparative~~AERO ~~figures~~HOLDINGS ~~have~~INC. NOTES ~~been~~TO ~~reclassified~~CONDENSED toCONSOLIDATED ~~conform~~FINANCIAL ~~with~~STATEMENTS ~~the current year’s~~(UNAUDITED) ~~financial statement presentation.~~

3 Inventories

6		Employee benefit plans

		The Company provides defined contribution pension plans and a defined benefit pension plan covering substantially all of its employees. The Company does not provide any other post retirement benefits or supplemental retirement plans.

		Costs for the defined contribution pension plans for each of the six months ended June 30, 2006 and June 30, 2005 were $3.3 million.

		Costs for the defined benefit pension plans for each of the six months ended June 30, 2006 and June 30, 2005 were $0.2 million.

7		Income taxes

		The Company’s effective tax rate was 8% and 18% for the three and six months ended June 30, 2006, respectively, which is lower than the estimated annual effective rate of 42% primarily because of a change in foreign jurisdiction future tax rates enacted in the second quarter and a change in tax law in the State of Texas.

		Similarly the Company’s effective tax rate was 1% and 23% for the three and six months ended June 30, 2005, respectively, which is lower than the estimated annual effective rate of 32% primarily because of a change in foreign jurisdiction future tax rates enacted in the second quarter and the impact of foreign exchange rates on deferred tax balances.

		The estimated annual effective rate is calculated quarterly based on the projected full year income projections by legal entity in each corresponding tax jurisdiction and the Company’s corporate structure. The effective rate will fluctuate primarily as changes in income by tax jurisdiction occur.

8		Commitments and contingencies

		*Commitments*

		The Company leases facilities, office equipment, machinery, computer, and rental engines under non-cancellable operating leases having initial terms of more than one year.

		*Contingent liabilities*

		The Company is involved, from time to time, in legal actions and claims arising in the ordinary course of business. While the ultimate result of these claims cannot presently be determined, management does not expect that these matters will have a material adverse effect on the financial condition, statement of operations or cash flows of the Company.

		The Company has facilities that are located on land that has been used for industrial purposes for an extended period of time. The Company has not been named as a defendant to any environmental suit. Management believes that the Company is currently in substantial compliance with environmental laws. The Company incurs capital and operating costs relating to environmental compliance on an ongoing basis. Management does not, however, believe that the Company will be required under existing environmental laws to expend amounts that would have a material adverse effect to its financial condition or results of operations as a whole.

	June 30,		December 31,
	2005		2004
	(Successor)		(Successor)
Raw materials	$	76,302	$	74,897
Work in process		73,724		71,978
	$	150,026	$	146,875

10STANDARD AERO HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

9		Subsequent event

		*Kelly Air Force Base subcontract*

		During the fourth quarter of 2005, Kelly Aviation Center, L.P. (“KAC”) indicated it disagreed with the Company’s interpretation regarding the terms of the subcontract with KAC under which the Company provides maintenance, repair and overhaul (“MRO”) services for U.S. Government T56 engines managed by the U.S. Air Force and that it did not intend to make a decision whether to exercise the option to extend the subcontract for periods beyond February 2007. On January 25, 2006, the Company was formally notified by KAC that it did not intend to extend the subcontract beyond February 2007.

		On July 11, 2006, the Company reached agreement with KAC regarding the terms of the subcontract. In connection with the agreement, the parties have amended the terms of the KAC subcontract, which was filed by the Company as Exhibit 10.21 to its Registration Statement on Form S-4 filed with the Commission on July 14, 2005.

		The following are the material terms of the amendment to the KAC subcontract:

~~STANDARD~~• ~~AERO~~The ~~HOLDINGS~~amendment provides that each extension of KAC’s prime contract with the U.S. Air Force, ~~INC~~Oklahoma City Air Logistic Center will result in the KAC subcontract being extended as well. As a result, the KAC subcontract has been extended until February of 2010 and will be extended for additional years to February 2014 if and when annual option years are awarded to the prime contractor. • The amendment provides that commencing in the U.S. government’s fiscal year ending September 30, 2007, the Company will be subject to annual performance evaluations based on objective criteria. In the event that the Company fails to perform satisfactorily it will be required to pay liquidated damages to KAC. These liquidated damages are initially capped at $2 million in any year, but may be as high as $4 million in certain circumstances if the Company fails to perform satisfactorily in successive years. Based on the past five years of performance on the contract, the Company estimates that it would have incurred an aggregate of approximately $500,000 of liquidated damages had the performance evaluation criteria been in place during those years. • The amendment provides for a commitment by the Company to provide cost savings to KAC in the form of a reduction in the prices that the Company charges to KAC for MRO services. The revised terms will result in a pre-determined cost savings for the twelve months ended September 30, 2007. The cost savings to KAC for each 12-month period thereafter will be determined by a formula that includes several variables.

~~NOTES~~During TOthe ~~CONDENSED~~year ~~CONSOLIDATED~~ended ~~FINANCIAL~~December 31, ~~STATEMENTS~~2005, ~~(UNAUDITED)~~the Company recorded impairment charges on intangible assets and goodwill and reviewed for impairment certain other long-lived asset groups due to the potential loss of or changes to the subcontract. These impairment reviews were based on a series of probability-weighted cash flow forecasts. These projections were based on several different potential outcomes that were weighted based upon management’s best estimate of future cash flows using all evidence available about the situation that prevailed as of December 31, 2005. The Company’s estimates used during the year ended December 31, 2005 have not materially changed during the three and six-month periods ended June 30, 2006.

~~4 Intangible assets~~11

~~Intangible~~STANDARD ~~assets~~AERO ~~are~~HOLDINGS ~~comprised~~INC. NOTES ~~of:~~TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

	Gross carrying		Accumulated		Net carrying
10	Stock based compensation
At June 30, 2005 (Successor)	amount		Amortization		amount
	Certain employees of the Company are eligible to participate in the Company’s parent Standard Aero Acquisition Holdings, Inc.’s (SAAHI) Stock Option Plan (the “Plan”) which was approved by the Company’s Board of Directors in December 2004. A total of 425,000 stock options have been approved for issuance under this Plan. As of June 30, 2006, SAAHI has 177,036 stock options outstanding, each of which may be used to purchase one share of SAAHI common stock. The options have a ten year life and an exercise price of one hundred dollars per share, which was equivalent to the exercise price at that date. Approximately 32% of the options are time vesting options that will vest on or prior to December 31, 2008. Approximately 46% of the options are performance vesting options that will vest on the day immediately preceding the seventh anniversary of the date of grant, provided the option holder remains continuously employed with the Company. However, all or a portion of such performance vesting options may vest and become exercisable over a five-year period, starting with 2004, if certain performance targets relating to earnings and debt repayment are met. Approximately 22% of the options are performance vesting options that will vest between December 31, 2006 and December 31, 2008 if certain performance targets relating to earnings are met. In addition, these options vest upon the occurrence of certain stated liquidity events, as defined in the Plan.
Definite lived intangible assets subject to amortization:
	The following is a summary of the stock options:
Customer relationships	$	98,000	$	6,837	$	91,163
OEM authorizations and licenses		38,350		2,522		35,828
Technology and other		7,900		1,317		6,583
		144,250		10,676		133,574
Indefinite lived intangible assets not subject to amortization:
Trademarks		97,300		—		97,300
Total intangible assets	$	241,550	$	10,676	$	230,874

	Gross carrying		Accumulated		Net carrying
	Six months ended June 30,
At December 31, 2004 (Successor)	amount		amortization		amount
	2006		2005
Definite lived intangible assets subject to amortization:
Opening balance as of January 1		192,398		206,071
Customer relationships	$	98,000	$	2,735	$	95,265
Granted		—		3,000
OEM authorizations and licenses		38,350		1,008		37,342
Exercised		—		—
Technology and other		7,900		527		7,373
Cancelled		15,362		—
		144,250		4,270		139,980
Outstanding as of June 30		177,036		209,071
Indefinite lived intangible assets not subject to amortization:
Weighted average remaining life as of June 30	4.5 years		5.5 years
Trademarks		97,300		—		97,300
Options exercisable as of June 30		40,710		17,952
Total intangible assets	$	241,550	$	4,270	$	237,280
Weighted average exercise prices	$100 per share		$100 per share
Aggregate intrinsic value		—		—

The Successor’s amortization expense for the period from January 1, 2005 to June 30, 2005 was $6,406. The Predecessor’s amortization expense for the period January 1, 2004 to June 30, 2004 was $2,810.

11		Related party transactions

		At June 30, 2006, the Company has an outstanding payable of $3.9 million to its parent, Standard Aero Acquisition Holdings, Inc. (SAAHI), for cash advanced by SAAHI. The payable is non-interest bearing and has no repayment terms, however is payable on demand.

		The Carlyle Group charges the Company a monthly management fee of $125,000.

~~The estimated amortization expense for each five succeeding years of the Successor will be~~12 ~~approximately $11,611.~~

~~Amortization~~STANDARD ofAERO ~~OEM~~HOLDINGS ~~authorizations~~INC. NOTES ~~and~~TO ~~licenses~~CONDENSED isCONSOLIDATED ~~included~~FINANCIAL ~~within~~STATEMENTS ~~cost of revenues.~~(UNAUDITED)

12		Guarantees

		The Company issues letters of credit, performance bonds, bid bonds or guarantees in the ordinary course of its business. These instruments are generally issued in conjunction with contracts or other business requirements. The total of these instruments outstanding at June 30, 2006 was approximately $4.7 million (June 30, 2005 — $3.8 million).

		Warranty guarantee

		Reserves are recorded to reflect the Company’s contractual liabilities relating to warranty commitments to customers. Warranty coverage of various lengths and terms is provided to customers depending on standard offerings and negotiated contractual agreements.

		Changes in the carrying amount of accrued warranty costs for the six-month period ended June 30 are summarized as follows:


	2006			2005

	(In thousands)
Balance at December 31	$	(3,986	)	$	(6,907	)
Warranty costs incurred		1,530			1,329
Warranty accrued		(1,502	)		(174	)


Balance at June 30	$	(3,958	)	$	(5,752	)

STANDARD AERO HOLDINGS, INC.

13		Segment information

		The Company has two principal operating segments, which are Aviation Maintenance Repair and Overhaul (Aviation MRO) and Enterprise Services. The Aviation MRO segment provides gas turbine engine maintenance repair and overhaul services primarily for the aviation market. The Enterprise Services segment provides services related to the design and implementation of lean manufacturing operational redesigns. These operating segments were determined based on the nature of the products and services offered. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. The Company’s chief executive officer has been identified as the chief operating decision-maker. The Company’s chief operating decision-maker directs the allocation of resources to operating segments based on profitability and cash flows of each respective segment.

		Certain administrative and management services are shared by the segments and are allocated based on direct usage, revenue and employee levels. Corporate management expenses and interest expense are not allocated to the segments.

		There are no revenues between segments.

		For the three months ended June 30, 2006

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


			Enterprise
	Aviation MRO		Services			Unallocated			Total

	(In thousands)
Revenues	$	191,365	$	9,006		$	—		$	200,371
Income (loss) before income taxes		20,241		(64	)		(12,342	)		7,835

~~5 Long-term debt~~13

~~Long-term~~STANDARD ~~debt~~AERO isHOLDINGS ~~summarized~~INC. NOTES asTO ~~follows:~~CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

	June 30,		December 31,
	2005		2004
	(Successor)		(Successor)
Term loans	$	270,000	$	285,000
Senior subordinated notes		200,000		200,000
Obligations under capital leases		3,395		4,246
		473,395		489,246
Less: Current portion		1,825		1,985
Long-term debt	$	471,570	$	487,261

For the three months ended June 30, 2005

As a result of the acquisition of the MRO Division of Dunlop Standard Aerospace Group Limited, the Company entered into a credit agreement on August 24, 2004.


			Enterprise
	Aviation MRO		Services			Unallocated			Total

	In thousands)
Revenues	$	171,550	$	231		$	—		$	171,781
Income (loss) before income taxes		15,878		(1,434	)		(11,259	)		3,185

~~The~~For ~~Company had outstanding bank term loans of $270 million at June 30, 2005. The Company has provided as collateral for~~ the ~~loan~~six ~~substantially~~months ~~all~~ended of its assets. The term of the loans is eight years repayable by installments of $43.3 million in 2011 and $226.7 million in 2012. At the option of the Company, borrowing under the term loans bears interest at Base Prime Rate or Eurodollar rate plus an applicable margin. The bank term loans of $270 million were denominated and are repayable in US dollars, and bear interest at 5.68% at June 30, 2005 (4.99% at December 31, 2004). As of April 1, 2005, borrowing under the term loans will bear interest between 1.25% and 1.5% plus the Base Prime Rate or between 2.25% and 2.5% plus the Eurodollar rate. The applicable margin is determined based on the Company’s leverage ratio as specified in the credit facility agreement. 2006

The credit agreement also provides Standard Aero Holdings, Inc. with a $50.0 million revolving credit facility. At the option of the Company, borrowing under the revolving credit facility will bear interest at 1.50% plus the Base Prime Rate or 2.50% plus the Eurodollar rate. The related commitment fee is equal to 0.5% of the undrawn credit facility. There were no borrowings outstanding under the revolving credit facility at June 30, 2005. As of April 1, 2005, borrowing under the revolving credit facility will bear interest between 0.75% and 1.50% plus the Base Prime Rate or between 1.75% and 2.5% plus the Eurodollar rate. The related commitment fee will equal between 0.375% and 0.5% of the undrawn credit facility. The rates are determined based on the Company’s leverage ratio as specified in the credit facility agreement.


			Enterprise
	Aviation MRO		Services			Unallocated			Total

	(In thousands)
Revenues	$	368,635	$	17,534		$	—		$	386,169
Income (loss) before income taxes		39,384		(547	)		(25,350	)		13,487

InFor ~~addition, subordinated unsecured senior notes of $200.0 million were issued with an interest rate of 8.25%, maturing on September 1, 2014. Prior to September 1, 2007,~~ the ~~Company~~six ~~may redeem~~months upended toJune ~~35% of the original principal amount of the notes at a premium. Further~~30, ~~at any time on or after September 1, 2009, the Company may redeem any portion of the bond at pre-determined premiums.~~ 2005

Certain of these facilities contain covenants that restrict the Company’s ability to raise additional financings in the future, and the Company’s ability to pay dividends. The financial covenants are based on long-term solvency ratios calculated from the Company’s consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States.


			Enterprise
	Aviation MRO		Services			Unallocated			Total

	(In thousands)
Revenues	$	358,561	$	634		$	—		$	359,195
Income (loss) before income taxes		38,513		(2,682	)		(23,220	)		12,611

~~The Successor’s weighted average interest rate of borrowings under the credit agreement was~~14 ~~5.23% for the period January 1 to June 30, 2005.~~

12STANDARD AERO HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~Table~~14 Guarantor information Separate financial statements of ~~Contents~~the Guarantor Subsidiaries are not presented because guarantees of the Notes are full and unconditional and joint and several. The Guarantor Subsidiaries guarantee the senior subordinated notes. The Guarantor Subsidiaries are 100% owned by the Company.

~~STANDARD~~Condensed ~~AERO~~Consolidating ~~HOLDINGS~~Statements of Operations For the three months ended June 30, ~~INC.~~2006

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


				Subsidiary			Subsidiary			Combining
	Parent			Guarantors			Non-Guarantors			Adjustments			Total
	(In thousands)
Revenues	$	—		$	182,226		$	19,451		$	(1,306	)	$	200,371


Operating expenses
Cost of revenues		—			149,968			18,416			(1,306	)		167,078
Selling, general and administrative expense		1,488			10,939			1,331			—			13,758
Amortization of intangible assets		—			2,146			—			—			2,146


Total operating expenses		1,488			163,053			19,747			(1,306	)		182,982

Income (loss) from operations		(1,488	)		19,173			(296	)		—			17,389

Interest expense		8,577			991			(14	)		—			9,554


Income (loss) before income taxes		(10,065	)		18,182			(282	)		—			7,835

Income tax expense (benefit)		(3,920	)		4,334			178			—			592


Income (loss) before equity earnings of subsidiaries		(6,145	)		13,848			(460	)		—			7,243

Equity in earnings (losses) of subsidiaries		13,388			(290	)		—			(13,098	)		—


Net income (loss)	$	7,243		$	13,558		$	(460	)	$	(13,098	)	$	7,243

6The ~~Employee~~parent ~~benefit~~and ~~plans~~ certain of the Guarantor Subsidiaries file a consolidated tax return. The losses of the parent reduce the income taxes payable of the consolidated group. The taxes receivable of the parent are reported in the due from related parties.

~~The Company provides defined contribution pension plans and a defined benefit pension~~15 plan covering substantially all of its employees. The Company does not provide any other post retirement benefits or supplemental retirement plans. Contribution costs for the defined benefit and defined contribution pension plans incurred by the Successor for the six months ended June 30, 2005 were $3,447 and contribution costs incurred by the Predecessor for the six months ended June 30, 2004 were $2,319.

7STANDARD ~~Commitments~~AERO ~~and~~HOLDINGS ~~contingencies~~INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~Commitments~~Condensed Consolidating Statements of Operations For the three months ended June 30, 2005

The Company leases facilities, office equipment, machinery, computer, and rental engines under non-cancellable operating leases having initial terms of more than one year.


				Subsidiary			Subsidiary			Combining
	Parent			Guarantors			Non-Guarantors			Adjustments			Total
	(In thousands)
Revenues	$	—		$	145,952		$	27,405		$	(1,576	)	$	171,781

Operating expenses
Cost of revenues		—			121,146			25,008			(1,576	)		144,578
Selling, general and administrative expense		1,252			9,291			2,308			—			12,851
Amortization of intangible assets		—			2,446			—			—			2,446


Total operating expenses		1,252			132,883			27,316			(1,576	)		159,875


Income (loss) from operations		(1,252	)		13,069			89			—			11,906
Interest expense		8,206			299			216			—			8,721


Income (loss) before income taxes		(9,458	)		12,770			(127	)		—			3,185

Income tax expense (benefit)		(3,404	)		3,774			(331	)		—			39


Income (loss) before equity earnings of subsidiaries		(6,054	)		8,996			204			—			3,146

Equity in earnings (losses) of subsidiaries		9,200			(3	)		—			(9,197	)		—


Net income (loss)	$	3,146		$	8,993		$	204		$	(9,197	)	$	3,146

~~Contingent liabilities~~16

~~The~~STANDARD ~~Company~~AERO isHOLDINGS ~~involved, from time to time, in legal actions and claims arising in the ordinary course of business~~INC. ~~While the ultimate result of these claims cannot presently be determined,~~ ~~management~~NOTES ~~does~~TO ~~not~~CONDENSED ~~expect~~CONSOLIDATED ~~that~~FINANCIAL ~~these~~STATEMENTS ~~matters will have a material adverse effect on the~~(UNAUDITED) ~~financial condition, statement of operations or cash flows of the Company.~~

~~The~~Condensed ~~Company~~Consolidating ~~has~~Statements ~~facilities that are located on land that has been used for industrial purposes for an extended period~~ of ~~time. The Company has not been named as a defendant to any~~Operations ~~environmental~~For ~~suit. Although~~ the ~~Predecessor~~six ~~has,~~months ~~from~~ended ~~time to time~~June 30, ~~been required to pay~~2006 ~~fines in connection with violations of certain environmental requirements, management believes~~ that the Company is currently in substantial compliance with environmental laws. The Company incurs capital and operating costs relating to environmental compliance on an ongoing basis. Management does not, however, believe that the Company will be required under existing environmental laws to expend amounts that would have a material adverse effect to its financial condition or results of operations as a whole.

8 Stock options


				Subsidiary		Subsidiary			Combining
	Parent			Guarantors		Non-Guarantors			Adjustments			Total
	(In thousands)
Revenues	$	—		$	348,022	$	40,494		$	(2,347	)	$	386,169

Operating expenses
Cost of revenues		—			286,710		37,689			(2,347	)		322,052
Selling, general and administrative expense		3,507			20,831		2,973			—			27,311
Amortization of intangible assets		—			4,292		—			—			4,292


Total operating expenses		3,507			311,833		40,662			(2,347	)		353,655


Income (loss) from operations		(3,507	)		36,189		(168	)		—			32,514

Interest expense		16,216			2,796		15			—			19,027


Income (loss) before income taxes		(19,723	)		33,393		(183	)		—			13,487

Income tax expense (benefit)		(7,300	)		9,956		(186	)		—			2,470


Income (loss) before equity earnings of subsidiaries		(12,423	)		23,437		3			—			11,017

Equity in earnings (losses) of subsidiaries		23,440			213		—			(23,653	)		—


Net income (loss)	$	11,017		$	23,650	$	3		$	(23,653	)	$	11,017

~~Certain employees of the Company are eligible to participate in Standard Aero Acquisition~~17 Holdings, Inc.’s Stock Option and Purchase Plan (the “Plan”) which was approved by the Company’s Board of Directors in December 2004. A total of 425,000 stock options have been approved for issuance under this Plan. As of June 30, 2005, 206,071 stock options are outstanding, each of which may be used to purchase one share of Standard Aero Acquisition Holdings, Inc.’s common stock. The options have a ten year life and an exercise price of one hundred dollars per share, which was equivalent to the exercise price at that date. Approximately 31% of the options are time vesting options that will vest on or prior to December 31, 2008. Approximately 47% of the options are performance vesting options that will vest on the day immediately preceding the seventh anniversary of the date of grant, provided the option holder remains continuously employed with the Company. However, all or a portion of such performance vesting options may vest and become exercisable over a five-year period, starting with 2004, if certain performance targets relating to earnings and debt repayment are met. Approximately 22% of the options are performance vesting options that will vest between December 31, 2006 and December 31, 2008 if certain performance targets relating to earnings are met. In addition, these options vest upon the occurrence of certain stated liquidity events, as defined in the Plan.

~~Additional~~STANDARD ~~Stock~~AERO ~~Options~~HOLDINGS ~~were granted, under a new plan, to several of the board of Directors~~INC. ~~Under~~NOTES ~~this~~TO ~~plan~~CONDENSED ~~options~~CONSOLIDATED ~~have~~FINANCIAL aSTATEMENTS ~~ten year life and an exercise price of one hundred dollars per~~(UNAUDITED) ~~share. The options may be used to purchase one share of common stock and vest over a one year period, in four equal amounts on a three month basis.~~

13Condensed Consolidating Statements of Operations For the six months ended June 30, 2005


				Subsidiary			Subsidiary			Combining
	Parent			Guarantors			Non-Guarantors			Adjustments			Total
	(In thousands)
Revenues	$	—		$	311,232		$	53,089		$	(5,126	)	$	359,195


Operating expenses
Cost of revenues		—			254,058			49,434			(5,126	)		298,366
Selling, general and administrative expense		1,986			19,487			4,031			—			25,504
Amortization of intangible assets		—			4,892			—			—			4,892


Total operating expenses		1,986			278,437			53,465			(5,126	)		328,762


Income (loss) from operations		(1,986	)		32,795			(376	)		—			30,433

Interest expense		16,509			1,003			310			—			17,822


Income (loss) before income taxes		(18,495	)		31,792			(686	)		—			12,611

Income tax expense (benefit)		(6,470	)		10,061			(684	)		—			2,907


Income (loss) before equity earnings of subsidiaries		(12,025	)		21,731			(2	)		—			9,704

Equity in earnings (losses) of subsidiaries		21,729			(182	)		—			(21,547	)		—


Net income (loss)	$	9,704		$	21,549		$	(2	)	$	(21,547	)	$	9,704

~~STANDARD AERO HOLDINGS, INC.~~18

STANDARD AERO HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~The~~Condensed ~~following~~Consolidating isBalance aSheet June 30, ~~summary of the stock option grants:~~2006

Outstanding as of December 31, 2004		206,071
				Subsidiary		Subsidiary			Combining
Granted		3,000
	Parent			Guarantors		Non-Guarantors			Adjustments			Total
Exercised		—
	(In thousands)
Cancelled		—
ASSETS
Outstanding as of June 30, 2005		209,071
Current assets
Weighted average remaining life as of June 30, 2005		5.5
Cash and cash equivalents	$	259		$	4,993	$	1,739		$	—		$	6,991
Options exercisable as of June 30, 2005		17,952
Cash and cash equivalents (restricted)		—			23,492		—			—			23,492
Accounts receivable		—			116,232		18,609			—			134,841
Due from related party		35,672			153,311		495			(189,478	)		—
Inventories		—			111,411		32,403			—			143,814
Prepaid expenses and other current assets		564			6,091		1,375			—			8,030
Income taxes receivable		—			1,294		2,185			—			3,479
Deferred income taxes		—			2,316		708			—			3,024
Total current assets		36,495			419,140		57,514			(189,478	)		323,671
Deferred finance charges		8,695			8,104		—			—			16,799
Deferred income taxes		—			6,506		1,931			—			8,437
Property, plant and equipment, net		—			118,175		20,272			—			138,447
Intangible assets, net		—			185,361		4,002			—			189,363
Due from related party		—			5,642		—			(5,642	)		—
Goodwill		—			191,342		—			—			191,342
Investments in subsidiaries		722,380			38,830		—			(761,210	)		—
Total assets	$	767,570		$	973,100	$	83,719		$	(956,330	)	$	868,059
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities
Accounts payable	$	125		$	73,772	$	8,223		$	—		$	82,120
Other accrued liabilities		9,079			16,562		1,940			—			27,581
Due to related party		124,952			55,621		12,845			(189,478	)		3,940
Unearned revenue		—			34,961		5,360			—			40,321
Accrued warranty provision		—			2,869		1,089			—			3,958
Income taxes payable		—			6,453		102			—			6,555
Current portion of long-term debt		10,000			1,576		45			—			11,621
Total current liabilities		144,156			191,814		29,604			(189,478	)		176,096
Deferred income taxes		386			63,125		5,111			—			68,622
Due to related party		—			—		5,642			(5,642	)		—
Long-term debt		450,000			15		—			—			450,015
Total liabilities		594,542			254,954		40,357			(195,120	)		694,733
Stockholder’s equity Common stock		—			—		—			—			—
Additional paid in capital		215,000			709,656		47,612			(757,268	)		215,000
Retained earnings / (deficit)		(42,065	)		8,490		(4,548	)		(3,942	)		(42,065	)
Accumulated other comprehensive income		93			—		298			—			391
Total stockholder’s equity		173,028			718,146		43,362			(761,210	)		173,326
Total liabilities and stockholder’s equity	$	767,570		$	973,100	$	83,719		$	(956,330	)	$	868,059

~~The Company has elected to apply the provisions of APB No. 25. For the period from August 25,~~19 2004 to December 31, 2004, no stock option compensation expense was recognized in the determination of net income in the accompanying statement of operations. The weighted average fair value on the measurement date for the options granted in 2004 was $3,855 and the weighted average fair value per share was nineteen dollars per share. Had stock option compensation expense been determined pursuant to the methodology of SFAS No. 123, the Company would have recorded an after-tax compensation charge of approximately $253 in the six month period ending June 30, 2005.

~~The~~STANDARD ~~fair~~AERO ~~value~~HOLDINGS ~~of the options was estimated at the measurement date using the minimum value~~INC. ~~method,~~NOTES ~~and~~TO ~~assumed~~CONDENSED noCONSOLIDATED ~~dividends~~FINANCIAL orSTATEMENTS ~~volatility, a risk-free interest rate of 4.13% and an~~(UNAUDITED) ~~expected option life of 6 years.~~

9Condensed ~~Related~~Consolidating ~~party~~Balance ~~transactions~~Sheet December 31, 2005

At June 30, 2005, the Company has an outstanding payable of $3,940 to its parent, Standard Aero Acquisition Holdings, Inc. for cash advanced by Standard Aero Acquisition Holdings, Inc. The payable is non-interest bearing and has no repayment terms.


				Subsidiary			Subsidiary			Combining
	Parent			Guarantors			Non-Guarantors			Adjustments			Total
	(In thousands)
ASSETS
Current assets
Cash and cash equivalents	$	557		$	20,519		$	2,980		$	—		$	24,056
Accounts receivable		—			101,271			19,185			—			120,456
Due from related party		34,635			114,679			3,451			(152,765	)		—
Inventories		—			103,986			30,025			—			134,011
Prepaid expenses and other current assets		100			6,453			1,115			—			7,668
Income taxes receivable		—			1,389			2,422			—			3,811
Deferred income taxes		—			1,661			746			—			2,407


Total current assets		35,292			349,958			59,924			(152,765	)		292,409


Deferred finance charges		8,968			9,304			—			—			18,272
Deferred income taxes		—			6,068			1,852			—			7,920
Property, plant and equipment, net		—			115,884			21,084			—			136,968
Intangible assets, net		—			190,894			4,274			—			195,168
Due from related party		—			5,467			—			(5,467	)		—
Goodwill		—			192,301			—			—			192,301
Investments in subsidiaries		698,940			38,617			—			(737,557	)		—


Total assets	$	743,200		$	908,493		$	87,134		$	(895,789	)	$	843,038


LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities
Accounts payable	$	135		$	64,654		$	10,512		$	—		$	75,301
Other accrued liabilities		9,980			16,018			3,199			—			29,197
Due to related party		101,041			43,708			11,956			(152,765	)		3,940
Unearned revenue		—			7,791			6,405			—			14,196
Accrued warranty provision		—			2,782			1,204			—			3,986
Income taxes payable		—			9,151			172			—			9,323
Current portion of long-term debt		—			2,261			313			—			2,574


Total current liabilities		111,156			146,365			33,761			(152,765	)		138,517

Deferred income taxes		65			67,632			4,845			—			72,542
Due to related party		—			—			5,467			(5,467	)		—
Long-term debt		470,000			—			—			—			470,000


Total liabilities		581,221			213,997			44,073			(158,232	)		681,059


Stockholder’s equity
Common stock		—			—			—			—			—
Additional paid in capital		215,000			709,656			47,612			(757,268	)		215,000
Retained earnings / (deficit)		(53,082	)		(15,160	)		(4,551	)		19,711			(53,082	)
Accumulated other comprehensive income		61			—			—			—			61


Total stockholder’s equity		161,979			694,496			43,061			(737,557	)		161,979


Total liabilities and stockholder’s equity	$	743,200		$	908,493		$	87,134		$	(895,789	)	$	843,038

~~The Carlyle Group charges the Company a monthly management fee of $125. As at June 30, 2005,~~20 ~~the Company has prepaid $375 of its monthly management fees related to future periods.~~

10STANDARD ~~Guarantees~~AERO HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~The~~Condensed ~~Company~~Consolidating ~~issues~~Statement ~~letters~~ of ~~credit,~~Cash ~~performance~~Flows For ~~bonds, bid bonds or guarantees in~~ the ~~ordinary~~ ~~course~~six ofmonths ~~its~~ended ~~business. These instruments are generally issued in conjunction with contracts or other business requirements. The total of these instruments outstanding at~~ June 30, ~~2005 was approximately $3,800 (Successor) (2004 — $2,603 (Predecessor)).~~2006

In connection with the Acquisition, the Company and an affiliate of Meggitt entered into a separation agreement. The separation agreement provides, among other things, that the Company will indemnify Meggitt and its subsidiaries for liabilities relating to the MRO business and that Meggitt Acquisition Limited will indemnify the Company for liabilities arising out of the aerospace design and manufacturing business purchased by Meggitt. The separation agreement also requires that the Company indemnify Meggitt and its subsidiaries for 50% of the liabilities of Dunlop Standard Aerospace Group Limited and its subsidiaries assumed by Meggitt in connection with the Acquisition that relate to any former business or activity of Dunlop Standard Aerospace Group Limited other than the MRO business or the aerospace design and manufacturing business. As at June 30, 2005, there are no indemnification claims known to the Company, and accordingly, no amount has been accrued in these consolidated financial statements.


				Subsidiary			Subsidiary			Combining
	Parent			Guarantors			Non-Guarantors			Adjustments			Total
	(In thousands)
Operating activities
Net income (loss) for the period	$	11,017		$	23,650		$	3		$	(23,653	)	$	11,017
Adjustments to reconcile net income to net
Cash provided by (used in) operating activities
Depreciation and amortization		—			10,623			2,275			—			12,898
Amortization of deferred finance charges		273			1,200			—			—			1,473
Deferred income taxes		321			(5,600	)		225			—			(5,054	)
Gain on disposal of property, plant and equipment		—			(6	)		(3	)		—			(9	)
Foreign exchange (gain)/loss		(453	)		169			(144	)		—			(428	)
Equity in (losses) earnings of subsidiaries		(23,440	)		(213	)		—			23,653			—
Changes in assets and liabilities
Accounts receivable, net		—			(14,961	)		576			—			(14,385	)
Inventories		—			(7,425	)		(2,378	)		—			(9,803	)
Prepaid expenses and other current assets		21			362			38			—			421
Accounts payable and other accrued liabilities		(911	)		13,427			(4,708	)		—			7,808
Income taxes payable and receivable		—			(1,644	)		167			—			(1,477	)

Net cash (used in) provided by operating activities		(13,172	)		19,582			(3,949	)		—			2,461


Investing activities
Acquisitions of property, plant and equipment		—			(2,773	)		(283	)		—			(3,056	)
Proceeds on disposal of property, plant and Equipment		—			8			3			—			11
Acquisition of rental assets		—			(7,679	)		(1,500	)		—			(9,179	)
Proceeds on disposal of rental assets		—			2,894			767			—			3,661


Net cash used in investing activities		—			(7,550	)		(1,013	)		—			(8,563	)


Financing activities
Repayment of term loans and other, net		(20,000	)		(670	)		(268	)		—			(20,938	)
Increase in revolving credit facility		10,000			—			—			—			10,000
Change in due to and (from) related companies		22,874			(26,719	)		3,845			—			—

Net cash (used in) provided by financing activities		12,874			(27,389	)		3,577			—			(10,938	)

Effect of exchange rate changes on cash and cash equivalents		—			(169	)		144			—			(25	)

Net decrease in cash and cash equivalents		(298	)		(15,526	)		(1,241	)		—			(17,065	)
Cash and cash equivalents — Beginning of period		557			20,519			2,980			—			24,056


Cash and cash equivalents — End of period	$	259		$	4,993		$	1,739		$	—		$	6,991

1421

~~Table~~STANDARD ofAERO ~~Contents~~HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~STANDARD~~Condensed ~~AERO~~Consolidating ~~HOLDINGS~~Statement of Cash Flows For the six months ended June 30, ~~INC.~~2005

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


				Subsidiary			Subsidiary			Combining
	Parent			Guarantors			Non-Guarantors			Adjustments			Total
	(In thousands)
Operating activities
Net income (loss) for the period	$	9,704		$	21,549		$	(2	)	$	(21,547	)	$	9,704
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation and amortization		—			11,608			1,610			—			13,218
Amortization of deferred finance charges		916			853			—			—			1,769
Deferred income taxes		—			(1,154	)		(86	)		—			(1,240	)
Gain on disposal of property, plant and equipment					(9	)								(9	)
Foreign exchange loss		—			78			500			—			578
Equity in earnings (losses) of subsidiaries		(21,729	)		182			—			21,547			—
Changes in assets and liabilities
Accounts receivable, net		—			17,845			(7,875	)		—			9,970
Inventories		—			(2,859	)		249			—			(2,610	)
Prepaid expenses and other current assets		—			(1,739	)		336			—			(1,403	)
Accounts payable and other accrued liabilities		(1,277	)		(24,983	)		(5,930	)		—			(32,190	)
Income taxes payable and receivable		4,729			(7,809	)		(1,493	)		—			(4,573	)

Net cash (used in) provided by operating activities		(7,657	)		13,562			(12,691	)		—			(6,786	)


Investing activities
Acquisitions of property, plant and equipment		—			(5,353	)		(529	)		—			(5,882	)
Proceeds on disposal of property, plant and equipment		—			42			—			—			42
Acquisition of rental assets		—			(6,628	)		(2,665	)		—			(9,293	)
Proceeds on disposal of rental assets		—			4,015			715			—			4,730


											—
Net cash used in investing activities		—			(7,924	)		(2,479	)		—			(10,403	)


Financing activities
Repayment of term loans and other, net		(15,000	)		(639	)		(212	)		—			(15,851	)
Change in due to and (from) related companies		18,643			(26,651	)		13,818			—			5,810

Net cash (used in) provided by financing activities		3,643			(27,290	)		13,606			—			(10,041	)

Effect of exchange rate changes on cash and cash equivalents		—			(78	)		(500	)		—			(578	)

Net decrease in cash and cash equivalents		(4,014	)		(21,730	)		(2,064	)		—			(27,808	)
Cash and cash equivalents — Beginning of period		4,116			18,521			5,254			—			27,891


Cash and cash equivalents — End of period	$	102		$	(3,209	)	$	3,190		$	—		$	83

~~Warranty guarantee~~22

~~Reserves~~ITEM ~~are~~2. ~~recorded to reflect the Company~~MANAGEMENT’sS ~~contractual~~DISCUSSION ~~liabilities~~AND ~~relating~~ANALYSIS toOF ~~warranty commitments~~FINANCIAL toCONDITION ~~customers.~~AND ~~Warranty~~RESULTS ~~coverage of various lengths and terms is provided to~~OF ~~customers depending on standard offerings and negotiated contractual agreements.~~OPERATIONS

~~Changes~~Special inNote ~~the~~Regarding ~~carrying~~Forward ~~amount~~Looking ~~of accrued warranty costs are summarized as follows:~~Statements

Balance at December 31, 2003 (Predecessor)	$	(4,627	)
Warranty costs incurred		1,297
Warranty accrued		(1,853	)
Warranty reversal		1,245
Balance at June 30, 2004 (Predecessor)		(3,938	)
Balance at December 31, 2004 (Successor)		(6,907	)
Warranty costs incurred		1,329
Warranty accrued		(174	)
Balance at June 30, 2005 (Successor)	$	(5,752	)

Certain statements included in Management’s Discussion and Analysis of Financial Condition and Results of Operations, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements, including those risks and uncertainties described under the caption “— Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2005. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

~~11 Segment information~~Overview

~~The~~ We ~~Company has three principal operating segments, which~~ are ~~the~~a ~~Aviation~~leading ~~Maintenance Repair~~independent ~~and~~provider ~~Overhaul,~~of ~~Energy~~aftermarket ~~Services and Redesign Services. The Aviation Maintenance Repair and Overhaul segment provides gas turbine engine~~ maintenance repair and overhaul ~~services~~(“MRO”) ~~primarily~~services for ~~the~~gas ~~aviation~~turbine ~~market.~~engines ~~The~~used ~~Energy~~primarily ~~Services~~for ~~segment~~military, ~~provides~~regional ~~services for engines~~ and ~~other~~business ~~components that have a non-aviation application~~aircraft. ~~The Redesign Services segment~~We ~~provides~~also ~~services~~supply ~~related~~repair ~~to the design~~ and ~~implementation~~overhaul ~~of lean manufacturing operational redesigns. These operating segments were determined based on the nature of the products and~~ services ~~offered.~~for ~~Operating~~gas ~~segments~~turbine ~~are~~engines ~~defined~~used asin ~~components~~marine, ~~of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision~~co-~~maker~~generation ~~in deciding how to allocate resources~~ and ~~in assessing performance. The~~ ~~Company’s~~energy ~~chief~~supply, ~~executive~~as ~~officer~~well ~~has been identified~~ as ~~the~~consultancy ~~chief~~and ~~operating~~redesign ~~decision-maker. The~~services ~~Company’s~~related ~~chief~~to ~~operating decision-maker directs~~ the ~~allocation~~MRO ofprocess ~~resources to operating segments based on profitability~~ and ~~cash flows of each respective segment. These segments were~~ ~~adopted on December 20, 2004 by the Company~~facilities. ~~The Predecessor’s results have been restated to~~ ~~reflect the current segment structure.~~

~~The~~ Generally, ~~Company~~manufacturer ~~has~~specifications, ~~determined~~government ~~that~~regulations itand ~~has~~military ~~one~~maintenance regimens ~~reportable~~require ~~segment:~~that ~~Aviation~~engines ~~Maintenance Repair~~undergo ~~and~~MRO ~~Overhaul.~~servicing ~~Other~~at ~~Services~~regular ~~are~~intervals ~~comprised~~or ofupon ~~Redesign~~the ~~Services~~occurrence ~~and~~of certain ~~Energy~~events ~~Services; these~~during ~~operating~~the ~~segments~~serviceable ~~were~~life ~~not~~of ~~separately~~each ~~reported~~engine. asAs ~~they~~a doresult, ~~not~~the ~~meet~~aggregate ~~any~~volume of ~~the~~MRO ~~quantitative~~services ~~thresholds~~required ~~under~~for ~~Financial~~any ~~Accounting~~particular ~~Standards~~engine ~~Board~~platform ~~Statement~~is ~~No. 131 (Disclosures~~a ~~about~~function ~~Segments~~ of anthree ~~Enterprise and Related Information).~~factors:

~~Certain~~• ~~administrative~~the ~~and~~number ~~management~~of ~~services~~engines ~~are~~in ~~shared~~operation by (the ~~segments~~“installed ~~and~~base”); ~~are allocated~~• ~~based on direct usage, revenue and employee levels. Corporate management expenses are not allocated to~~ the ~~segments.~~age ~~Unallocated corporate assets~~ of the ~~Successor~~installed ~~relate primarily~~base; ~~to cash, deferred finance charges~~ and ~~deferred~~• ~~income~~the ~~taxes.~~utilization ~~Unallocated~~rate ~~assets~~ of the ~~Predecessor~~installed ~~relate to cash, deferred finance charges, deferred income taxes, indefinite lived intangibles and goodwill~~base.

~~There~~ Because ~~are~~we noprovide our MRO services with respect to specific engine platforms, the services we provide, and thus our revenues, ~~between~~are ~~segments~~influenced to a significant degree by the size, age and utilization rate of the installed base of those engine platforms.

15 We typically provide MRO services to our customers under “time-and-materials” arrangements, pursuant to which we charge our customers a price based on the specific work to be performed on each engine. In some cases, this price is based on negotiated hourly rates for labor and for replacement parts. We also provide MRO services under fixed price contracts or under fixed price per engine utilization arrangements, a variation of a fixed-price arrangement pursuant to which customers pay us a negotiated price per hour or cycle that each engine is operated.

~~Table of Contents~~23

~~STANDARD~~Kelly ~~AERO~~Air ~~HOLDINGS,~~Force ~~INC.~~Base Subcontract

~~NOTES~~ We TOgenerated ~~CONDENSED~~approximately ~~CONSOLIDATED~~28.0% ~~FINANCIAL~~and ~~STATEMENTS~~31.2% ~~(UNAUDITED)~~of our revenues for the six months ended June 30, 2006 and the year-ended December 31, 2005, respectively, by providing MRO services to the United States Air Force as a subcontractor to Kelly Aviation Center, L.P., or KAC, a joint venture between Lockheed Martin, General Electric and Rolls-Royce. The original subcontract was awarded in 1999 and ran through February 2006, and KAC previously exercised an option to extend the subcontract for one year to February 2007.

As On ofJanuary 25, ~~and~~2006, ~~for~~KAC ~~the~~informed ~~three~~us ~~months~~that ~~ended~~it ~~June 30,~~did ~~2005~~not ~~(Successor)~~intend to extend the subcontract beyond February 2007.

	Aviation
	maintenance
	repair and
	overhaul		Other Services			Unallocated			Total
Revenues	$	166,652	$	5,129		$	—		$	171,781
Income (loss) from operations		15,569		(1,811	)		(2,538	)		11,220
Depreciation and amortization		6,228		232			—			6,460
Total assets		849,018		28,412			27,310			904,740
Goodwill		240,490		—			—			240,490
Capital and intangible expenditures		7,884		429			13			8,326

On July 11, 2006, we reached agreement with KAC regarding the terms of the subcontract. In connection with the agreement, the parties have amended the terms of the KAC subcontract.

~~For~~ The following are the ~~three~~material ~~months~~terms ~~ended~~of ~~June 30,~~the ~~2004~~amendment ~~(Predecessor)~~to the KAC subcontract:

	Aviation
	maintenance
	repair and
	overhaul		Other Services			Unallocated			Total
Revenues	$	182,507	$	7,410		$	—		$	189,917
Income (loss) from operations		25,855		(1,229	)		(1,676	)		22,950
Depreciation and amortization		5,282		239			—			5,521
Goodwill		—		—			74,751			74,751
Capital and intangible expenditures		5,603		425			—			6,028

	•		The amendment provides that each extension of KAC’s prime contract with the U.S. Air Force, Oklahoma City Air Logistic Center will result in the KAC subcontract being extended as well. As a result, the KAC subcontract has been extended until February 2010 and will be extended for additional years to February 2014 if and when annual option years are awarded to the prime contractor.

	•		The amendment provides that commencing in the government’s fiscal year ending September 30, 2007, we will be subject to annual performance evaluations based on objective criteria. In the event that we fail to perform satisfactorily we will be required to pay liquidated damages to KAC. These liquidated damages are initially capped at $2.0 million in any year but may be as high as $4.0 million in certain circumstances if we fail to perform satisfactorily in successive years. Based on the past five years of performance on the contract, we estimate that we would have incurred an aggregate of approximately $500,000 of liquidated damages had the performance evaluation criteria been in place during those years.

	•		The amendment provides for a commitment by us to provide cost savings to KAC in the form of a reduction in the prices that we charge to KAC for MRO services. The revised terms will result in a pre-determined cost savings for the twelve months ended September 30, 2007. The cost savings to KAC for each 12-month period thereafter will be determined by a formula that includes several variables.

16While we expect that the cost savings commitment will materially reduce our revenues and Adjusted EBITDA (as defined in our senior credit facility) generated under the KAC subcontract, due to the variability of external factors affecting pricing and profitability under the subcontract, we cannot predict with certainty the impact of the amendment on our results of operations. However, we expect that the cost savings commitment will reduce our Net Income and Adjusted EBITDA generated under the KAC subcontract during 2006 by approximately $2.0 to $3.0 million and $4.0 to $5.0 million, respectively, and during 2007 by approximately $8.0 to $11.0 million and $14.0 to $17.0 million, respectively, in each case compared to expected results under the subcontract without the cost savings commitment and assuming historical MRO volumes. We do not anticipate that the cost savings commitment will result in noncompliance with the financial covenants in our senior credit facility.

~~Table~~Trends ofAffecting ~~Contents~~Our Business

~~STANDARD~~ Military ~~AERO~~MRO. ~~HOLDINGS~~The MRO services that we provide to military aviation end-users contributed in excess of 45% of our revenues for the year ended December 31, ~~INC~~2005. A significant portion of our military aviation end-user revenues are generated by the MRO services we provide directly or indirectly to the United States military, including those provided under the Kelly Air Force Base subcontract. The demand for these MRO services is driven to a large extent by U.S. military outsourcing practices, Department of Defense budgets, serviceable stock levels and the utilization rate of the types of aircraft engines for which we provide MRO services. Utilization and funding for the U.S. military has been at a historically high level during the past several years due to the increased operational tempo of the U.S. military related to the war on terror. We believe that this increased utilization and spending peaked during 2004 for the principal military engine that we service, the Rolls-Royce T56, which powers the C-130 Hercules, P-3 Orion, and C-2 Greyhound aircraft.

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~24

As We believe that there are over 3,800 T56 engines installed in the U.S. military fleet. The U.S. military utilization rate of this engine returned to pre-2001 levels during 2005 and ~~for~~we expect that its utilization rate will continue to gradually decline as P-3 Orions and C-130 models A through H are retired and replaced with the ~~six~~C-130J, ~~months~~which ~~ended~~is ~~June 30~~powered by the AE2100 engine. Nevertheless, ~~2005~~we ~~(Successor)~~expect that revenues lost due to the decreased size of the T56 installed base will be partially offset by revenues generated by providing MRO services for AE2100 engines.

	Aviation
	maintenance
	repair and
	overhaul		Other Services			Unallocated			Total
Revenues	$	349,156	$	10,039		$	—		$	359,195
Income (loss) from operations		37,888		(3,151	)		(5,398	)		29,339
Depreciation and amortization		12,725		493			—			13,218
Total assets		849,018		28,412			27,310			904,740
Goodwill		240,490		—			—			240,490
Capital and intangible expenditures		14,481		677			26			15,184

Our 2004 revenues benefited from the historically high utilization rate for aircraft equipped with the T56 engine and the conversion of certain parts from government supplied to contractor supplied. However, due to decreases in fleet utilization, some aircraft retirements and increases in serviceable engine stock levels, we have experienced a decrease in demand by the U.S. military for T56 MRO services in recent periods. As a result, our revenues from T56 MRO services were down approximately 13% in 2005 compared to 2004. Our T56 MRO revenues, Adjusted EBITDA and Net Income will also be affected by cost-savings commitments contained in the amended agreement made with KAC, see “Risk Factors” and “—Kelly Air Force Base Subcontract.” We do not anticipate that T56 MRO revenues, provided directly or indirectly, to the U.S. military will return to 2004 levels in the foreseeable future. Our T56 MRO services were approximately 3% higher for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 and 11% lower than the six months ended June 30, 2004.

~~For~~ We have benefited in recent periods from an increasing reliance by the ~~six~~U.S. ~~months~~military ~~ended~~on outsourcing ~~June 30~~its MRO services, ~~2004~~including ~~(Predecessor)~~aircraft engine MRO services such as those that we provide under the Kelly Air Force Base subcontract and our MRO redesign and transformation services. In the second quarter of 2005, the United States Air Force awarded Columbus, Ohio based Battelle a 10-year contract to redesign the MRO processes and industrial facilities at the Oklahoma City Air Logistics Center. Our Enterprise Services business was chosen to be the prime subcontractor to Battelle to provide a significant portion of the redesign and transformation services under that contract. Revenues under this contract commenced in the third quarter of 2005. We continue to perform transformation work for the USAF at the Ogden-Air Logistics Center and have teams in place pursuing similar transformation and process improvement requirements at other U.S. military bases.

	Aviation
	maintenance
	repair and
	overhaul		Other Services			Unallocated			Total
Revenues	$	353,881	$	13,987		$	—		$	367,868
Income (loss) from operations		47,068		(2,107	)		(2,887	)		42,074
Depreciation and amortization		9,668		483			—			10,151
Goodwill		—		—			74,751			74,751
Capital and intangible expenditures		10,432		777			7			11,216

In recent years the U.S. Department of Defense and foreign military organizations have started to award outsourcing contracts on the basis of performance based logistics (PBL), contractor logistics support (CLS), and other forms of performance-based, end-to-end support that bundle aircraft, engine, and other systems MRO and support into a single contract. This type of contracting trend may limit the number of potential prime contractors that qualify to bid on such contracts and may limit the number of engine-only outsourcing opportunities. In order to position ourselves to compete in this evolving military contracting environment, we intend to seek opportunities to partner with other types of service providers that will enable us to be part of a team that can provide bundled MRO and other aircraft services. On July 7, 2006 we were awarded a subcontract to support the U.S. Navy P&WC PT6A powered T-33 and T-34 trainer fleet of aircraft under CLS Sikorsky Support Services Inc. We currently provide PT6A engine maintenance and support on the US Army C-23 Sherpa fleet under a CLS prime contractor, M7 Aerospace.

Regional Jet Engine MRO. We have invested significant capital in our MRO programs for the AE3007 and CF34 engines, which are primarily used on 35- to 90-seat regional jets. Our investments in this regard have primarily been associated with obtaining OEM authorizations and licenses for these engines and in the advanced facilities in which we provide MRO services for them. We do not expect to begin to fully realize the benefit of our investment in the CF34 platform until 2007, when we expect that scheduled CF34 overhauls will increase. Until that time our gross profit margins will be offset by the fixed costs of this program. We expect that AE3007 revenues will continue to provide a significant portion of our revenues for the foreseeable future and that the AE3007 platform will continue to be an important part of our business strategy. However, AE3007 revenues were 31% lower in 2005 than they were in 2004 and were approximately 17% lower in the six months ended June 30, 2006 compared to the six months ended June 30, 2004 primarily as a result of changes Rolls-Royce made to the MRO service requirements for the engine. We do not expect AE3007 revenues to return to 2004 levels for the foreseeable future.

~~Table of Contents~~25

~~STANDARD~~ The ~~AERO~~demand ~~HOLDINGS~~for regional jet travel continued to increase during the second quarter of 2006, ~~INC~~and we expect it to continue to increase in the remainder of 2006 and the foreseeable future. Nevertheless, changes in competitive and economic factors affecting the major U.S. airlines, such as increased fuel costs, have created uncertainty as to the future characteristics of the regional jet business. Prospects for regional jet operators are uncertain as several major U.S. airlines review their business operations or reorganize under bankruptcy protection. Changes in the industry may, for instance, result in the renegotiation of capacity and codeshare agreements with regional air carriers in an effort by the major airlines to reduce expenses or could result in the failures of major airlines and potentially regional airlines. Alternatively, it may be that changes in the industry could allow the major U.S. airlines to increase their outsourcing to regional airlines, which could give the independent regional airlines the opportunity to expand their operations.

~~NOTES~~ We TObelieve ~~CONDENSED~~that ~~CONSOLIDATED~~changes ~~FINANCIAL~~in ~~STATEMENTS~~the ~~(UNAUDITED)~~regional jet market present both opportunities and risks for us and that, in any event, these changes will require us to remain nimble and focused on remaining competitive, flexible and responsive. To the extent that independent regional airlines are able to take advantage of these changes and grow their position in the market, we anticipate that the majority of their engine MRO work would be outsourced to OEMs and independent MRO service providers such as us. If major airlines begin to increase in-sourcing of regional jet operations, we expect they will outsource engine servicing to the extent that they do not have the capability or cannot be competitive. In any event, we expect that competition to provide MRO services would remain intense and that we would need to continue to take advantage of our many strengths and to be aggressive in bidding for opportunities to provide these MRO services. We believe that we would continue to occupy a strong position to compete for these workloads.

12 We ~~Guarantor~~do ~~Information~~not expect to be adversely affected by the announcement by both Bombardier and Embraer (the dominant regional jet manufacturers) that they intend to cease production of their 50-seat regional jets that use the CF34 and AE3007 engines. Over 2,000 of these regional jets have already been deployed into service and production and order book remains strong on CF34-powered 70- to 90-seat aircraft.

~~Separate~~ Turboprop ~~financial~~MRO. ~~statements~~We ofexperienced ~~the~~growth ~~Guarantor~~in ~~Subsidiaries~~revenues ~~are~~from ~~not~~providing ~~presented~~turboprop ~~because~~MRO services in 2005 ~~guarantees~~as a result of increased utilization of turboprop-powered aircraft, in part due to the ~~Notes~~superior fuel ~~are~~efficiency ~~full~~characteristics ~~and~~of ~~unconditional~~these ~~and~~engines ~~joint~~in some applications. Demand for new single engine turboprops remains strong, bolstered by increased production of training aircraft and ~~several~~a resurgence in the use of business aircraft using turboprop engines. ~~The~~Driven ~~Guarantor~~by high fuel prices, demand has ~~Subsidiaries~~also ~~guarantee~~increased for turboprops in the ~~senior~~commuter ~~subordinated~~and ~~notes~~small ~~issued~~regional airline markets, especially in Europe ~~connection~~and ~~with~~Asia. We expect these conditions to provide near term stability in the ~~Acquisition~~turboprop engine lines we service. Over the long term, however, we anticipate that the demand for turboprop MRO will ~~The~~decrease ~~Guarantor~~as ~~Subsidiaries~~aircraft using turboprop engines are ~~100%~~replaced ~~owned~~over time by jet-powered aircraft. Our turboprop MRO service revenues were approximately 6% lower in the ~~Company~~six months ended June 30, 2006 compared to the six months ended June 30, 2005 and 27% higher compared to the six months ended June 30, 2004.

~~Condensed~~Financial ~~Combining~~statement ~~Statements of Operations (Successor)~~presentation ~~For the three months ended June 30, 2005~~

				Subsidiary			Subsidiary			Combining
	Parent			Guarantors			Non-Guarantors			Adjustments			Total
Revenues	$	—		$	145,952		$	27,405		$	(1,576	)	$	171,781
Operating Expenses
Cost of revenues		—			(121,819	)		(25,021	)		1,576			(145,264	)
Selling, general and administrative expense.		(1,252	)		(9,304	)		(2,295	)		—			(12,851	)
Amortization of intangible assets		—			(2,446	)		—			—			(2,446	)
Total operating expenses		(1,252	)		(133,569	)		(27,316	)		1,576			(160,561	)
Income (loss) from operations		(1,252	)		12,383			89			—			11,220
Interest expense		(8,206	)		(125	)		(216	)		—			(8,547	)
Income (loss) before income taxes		(9,458	)		12,258			(127	)		—			2,673
Benefit (provision) for income taxes		3,404			(3,609	)		331			—			126
Income before equity earnings in Subsidiaries.		(6,054	)		8,649			204			—			2,799
Equity in Earnings of subsidiaries		8,853			(3	)		—			(8,850	)		—
Net income (loss)	$	2,799		$	8,646		$	204		$	(8,850	)	$	2,799

The following discussion provides a brief description of certain items that appear in our consolidated financial statements and the general factors that impact these items.

~~The~~ Revenues. ~~parent~~Revenues ~~and~~represents ~~certain~~gross ofsales ~~the~~principally ~~Guarantor~~resulting ~~Subsidiaries~~from ~~file~~the aMRO ~~consolidated~~services ~~tax return. The~~and ~~losses~~parts ofthat ~~the~~we ~~parent~~provide. ~~reduce~~Revenues ~~the~~related ~~income~~to ~~taxes~~our ~~payable~~Enterprise ofServices ~~the~~are ~~consolidated~~based ~~group.~~on ~~The~~services ~~taxes~~provided ~~receivable~~to of the ~~parent~~end ~~are~~customer ~~reported~~pursuant into the ~~due~~contractual ~~from~~terms ~~related~~and ~~parties~~conditions of the service agreements.

18 Cost of revenues. Cost of revenues includes all direct costs required to provide our MRO services. These costs include the cost of parts, labor for engine disassembly, assembly and repair, spare engines, subcontracted services and overhead costs directly related to the performance of MRO services. Overhead costs include the cost of our MRO facilities, engineering, quality and production management, commercial credit insurance, depreciation of equipment and facilities and amortization of the cost to acquire OEM authorizations. Cost of revenues related to our Enterprise services business include the cost of labor, subcontracted services and overhead costs directly related to the performance of these services.

~~Table of Contents~~26

~~STANDARD~~ Selling, ~~AERO~~general ~~HOLDINGS~~and administrative expense. Selling, ~~INC~~general and administrative (“SG&A”) expense includes the cost of selling our services to our customers and maintaining a global sales support network, including salaries of our direct sales force. General costs to support the administrative requirements of the business such as finance, accounting, human resources and general management are also included.

~~NOTES~~Critical TOaccounting ~~CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~policies

~~Condensed~~ The ~~Combining~~accounting ~~Statement~~policies discussed below are important to the presentation of ~~Operations~~our ~~(Predecessor)~~results of ~~For~~operations and financial condition and require the ~~three~~application ~~months~~of ~~ended~~judgment ~~June 30~~by our management in determining the appropriate assumptions and estimates. These assumptions and estimates are based on our previous experience, ~~2004~~trends in the industry, the terms of existing contracts and information available from other outside sources and factors. Adjustments to our financial statements are recorded when our actual experience differs from the expected experience underlying these assumptions. These adjustments could be material if our experience is significantly different from our assumptions and estimates. Below are those policies applied in preparing our financial statements that management believes are the most dependent on the application of estimates and assumptions.

	Subsidiary			Subsidiary			Combining
	Guarantors			Non-Guarantors			Adjustments			Total
Revenues	$	177,137		$	14,083		$	(1,303	)	$	189,917
Operating Expenses.
Cost of revenues		(142,231	)		(13,820	)		1,303			(154,748	)
Selling, general and administrative		(9,676	)		(1,855	)		—			(11,531	)
Amortization of intangible assets		(493	)		(195	)		—			(688	)
Total operating expenses		(152,400	)		(15,870	)		1,303			(166,967	)
Income (loss) from operations		24,737			(1,787	)		—			22,950
Interest expense		(1,921	)		25			—			(1,896	)
Income (loss) before income taxes		22,816			(1,762	)		—			21,054
Benefit (provision) for income taxes		(8,451	)		527			—			(7,924	)
Net income (loss)	$	14,365		$	(1,235	)	$	—		$	13,130

Revenue recognition. We generally recognize revenues generated by our services or parts sales when the services are completed or repaired parts are shipped to the customer. Amounts that are received in advance from our customers are recorded as unearned revenue. Lease income associated with the rental of engines or engine modules to customers is recorded based on engine usage as reported by the customer. In connection with fixed price per engine utilization contracts that we have with our customers, we recognize revenue and related cost of revenue when the services are completed or repaired parts are shipped to the customer. We estimate the profit margins on these contracts based on an estimate of the overall contract profitability. We receive payments from customers under these contracts in advance of completion of services or shipment of repaired parts to the customer, which are recorded as unearned revenue. These payments are based on contractual terms and conditions pursuant to which customers pay for services or products based on engine usage.

19 Reserve for warranty costs. We provide reserves to account for estimated costs associated with current and future warranty claims. Warranty claims arise when an engine we service fails to perform to required specifications during the relevant warranty period. The warranty reserve is provided for by increasing our cost of revenues by an estimate based on our current and historical warranty claims and associated repair costs.

~~Table~~ Reserve for doubtful accounts receivable. We provide a reserve for doubtful accounts receivable that accounts for estimated losses that result from our customers’ inability to pay for our MRO services. This reserve is based on a combination of ~~Contents~~our analyses of history, aging receivables, financial condition of a particular customer and political risk. Our estimates are net of credit insurance coverage that we maintain for most of our commercial customers. The provision for doubtful accounts receivable is charged against operating income in the period when such accounts are determined to be doubtful, and has historically been immaterial in amount. Nevertheless, we believe that ongoing analysis of this reserve is important due to the high concentration of revenues within our customer base.

~~STANDARD~~ Goodwill ~~AERO~~and ~~HOLDINGS~~intangible assets. Goodwill and other intangible assets with indefinite lives are not amortized, ~~INC~~but are subject to impairment testing both annually and when there is an indication that an impairment has occurred, such as an operating loss or a significant adverse change in our business. Impairment testing includes use of future cash flow and operating projections, which by their nature, are subjective. If we were to determine through such testing that an impairment has occurred, we would record the impairment as a charge against our income. We amortize intangible assets that we have determined to have definite lives, including OEM authorizations and licences, customer relationships, and technology and other over their estimated useful lives. We amortize intangible assets that have definite lives over periods ranging from one to 20 years. Our specific OEM licenses and authorizations are amortized over four to 17 years. All of our trademarks are classified as having indefinite lives.

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~27

~~Condensed~~ Impairment ~~Combining~~of ~~Statements~~long-lived ofassets. ~~Operations~~We ~~(Successor)~~review long-lived assets for impairment whenever ~~For~~events or changes in circumstances indicate that the ~~six~~carrying ~~months~~amount ~~ended~~of ~~June~~such assets may not be recoverable in accordance with SFAS No. 30144, ~~2005~~Accounting for the Impairment or Disposal of Long-Lived Assets. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted estimated future net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets and charged against our income.

				Subsidiary			Subsidiary			Combining
	Parent			Guarantors			Non-Guarantors			Adjustments			Total
Revenues	$	—		$	311,232		$	53,089		$	(5,126	)	$	359,195
Operating Expenses
Cost of revenues		—			(255,133	)		(49,562	)		5,126			(299,569	)
Selling, general and administrative expense		(1,986	)		(19,506	)		(3,903	)		—			(25,395	)
Amortization of intangible assets		—			(4,892	)		—			—			(4,892	)
Total operating expenses		(1,986	)		(279,531	)		(53,465	)		5,126			(329,856	)
Income (loss) from operations		(1,986	)		31,701			(376	)		—			29,339
Interest expense		(16,509	)		(656	)		(310	)		—			(17,475	)
Income (loss) before income taxes		(18,495	)		31,045			(686	)		—			11,864
Benefit (provision) for income taxes		6,470			(9,741	)		684			—			(2,587	)
Income before equity earnings in Subsidiaries		(12,025	)		21,304			(2	)		—			9,277
Equity in Earnings of subsidiaries		21,302			(182	)		—			(21,120	)		—
Net income (loss)	$	9,277		$	21,122		$	(2	)	$	(21,120	)	$	9,277

Inventory. We value our inventory at standard cost using the first-in first-out, or FIFO, method, and state our inventories at the lower of cost or net realizable value. In making such determinations, cost represents the actual cost of raw materials, direct labor and an allocation of overhead in the case of work in progress. We write down our inventory for estimated obsolescence or unmarketable inventory on a part-by-part basis using aging profiles. Aging profiles are determined based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected, then inventory adjustments may be required.

~~Condensed~~ Income ~~Combining~~taxes. ~~Statement~~We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of ~~Operations~~existing ~~(Predecessor)~~assets and ~~For~~liabilities and their respective tax bases. Deferred tax assets and liabilities are estimated using enacted tax rates expected to apply to taxable income in the ~~six~~years ~~months~~in ~~ended~~which ~~June 30~~those temporary differences are expected to be recovered or settled. We do not provide taxes on undistributed earnings of foreign subsidiaries that are considered to be permanently reinvested. If undistributed earnings were remitted, ~~2004~~foreign tax credits would substantially offset any resulting U.S. tax liability.

	Subsidiary			Subsidiary			Combining
	Guarantors			Non-Guarantors			Adjustments			Total
Revenues	$	339,119		$	30,951		$	(2,202	)	$	367,868
Operating Expenses
Cost of revenues		(275,284	)		(28,896	)		2,202			(301,978	)
Selling, general and administrative		(19,065	)		(3,375	)		—			(22,440	)
Amortization of intangible assets		(1,086	)		(290	)		—			(1,376	)
Total operating expenses		(295,435	)		(32,561	)		2,202			(325,794	)
Income (loss) from operations		43,684			(1,610	)		—			42,074
Interest expense		(3,738	)		(97	)		—			(3,835	)
Income (loss) before income taxes		39,946			(1,707	)		—			38,239
Benefit (provision) for income taxes		(14,955	)		537			—			(14,418	)
Net income (loss)	$	24,991		$	(1,170	)	$	—			23,821

Results of Operations

20Three Months Ended June 30, 2006 compared with the Three Months ended June 30, 2005

~~Table~~The offollowing ~~Contents~~table sets forth certain financial data for the periods indicated:

STANDARD AERO HOLDINGS, INC.


	Three months		Three months ended
	ended June 30, 2006		June 30, 2005
	(In thousands)
Revenues	$	200,371	$	171,781
Cost of revenues Cost of revenues		167,078		144,578

Gross profit		33,293		27,203
Selling, general and administrative expense		13,758		12,851
Amortization of intangible assets		2,146		2,446

Income from operations		17,389		11,906
Interest expense		9,554		8,721

Income before income taxes		7,835		3,185
Income tax expense		592		39

Net income	$	7,243	$	3,146

~~NOTES~~Revenues. TOTotal ~~CONDENSED~~revenues ~~CONSOLIDATED~~increased ~~FINANCIAL~~$28.6 million, ~~STATEMENTS~~or ~~(UNAUDITED)~~17%, to $200.4 million for the three months ended June 30, 2006 from $171.8 million for the three months ended June 30, 2005. This increase was primarily attributable to a $19.8 million increase in revenue in our Aviation MRO operating segment primarily attributable to an increase in our turbofan MRO revenues and increased revenues from our T56 military contracts partially offset by a decline in our regional airline and business aircraft turboprop service revenues during the period. Revenue in our Enterprise

~~Condensed Consolidating Balance Sheet (Successor)~~28 ~~June 30, 2005~~

			Subsidiary			Subsidiary			Combining
	Parent		Guarantors			Non-Guarantors			Adjustments			Total
Assets
Current Assets
Cash and cash equivalents	$	102	$	(3,209	)	$	3,190		$	—		$	83
Accounts Receivable		—		82,013			20,009			—			102,022
Due from related party		21,274		84,057			1,485			(106,816	)		—
Inventories		—		119,790			30,236			—			150,026
Prepaid expenses and other current assets		455		6,546			704			—			7,705
Income taxes receivable		—		1,282			5,943			—			7,225
Deferred income taxes		—		2,460			1,124			—			3,584
Total current assets		21,831		292,939			62,691			(106,816	)		270,645
Deferred charges		10,388		9,058			—			—			19,446
Deferred income taxes		—		3,545			—			—			3,545
Property, plant and equipment, net		—		119,095			20,645			—			139,740
Intangible assets, net		—		226,328			4,546			—			230,874
Due from related party		—		5,292			—			(5,292	)		—
Goodwill		—		240,490			—			—			240,490
Investments in subsidiaries		740,448		37,410			—			(777,858	)		—
Total assets	$	772,667	$	934,157		$	87,882		$	(889,966	)	$	904,740
Liabilities and stockholder’s equity
Current liabilities
Accounts payable	$	—	$	70,549		$	7,065		$	—		$	77,614
Other accrued liabilities		11,130		10,180			2,171			—			23,481
Unearned revenue		—		10,653			1,439			—			12,092
Accrued warranty provisions		—		3,481			2,271			—			5,752
Income taxes payable		—		6,542			98			—			6,640
Due to related party		71,904		17,789			21,063			(106,816	)		3,940
Current portion of long-term debt		—		1,356			469			—			1,825
Total current liabilities		83,034		120,550			34,576			(106,816	)		131,344
Deferred income taxes		—		77,198			4,995			—			82,193
Due to related party		—		—			5,292			(5,292	)		—
Long-term debt		470,000		1,570			—			—			471,570
Total liabilities		553,034		199,318			44,863			(112,108	)		685,107
Stockholder’s equity
Common Stock		—		—			—			—			—
Paid in capital		215,000		709,656			47,612			(757,268	)		215,000
Retained earnings (deficit)		4,595		25,183			(4,593	)		(20,590	)		4,595
Accumulated other comprehensive Income		38		—			—			—			38
Total stockholder’s equity		219,633		734,839			43,019			(777,858	)		219,633
Total liabilities and stockholder’s equity / divisional equity	$	772,667	$	934,157		$	87,882		$	(889,966	)	$	904,740

Services business increased $8.8 million as we were fully operational and earning revenues under our subcontract agreements with Battelle to provide redesign services to the United States Air Force at Tinker Air Force Base in Oklahoma City, Oklahoma and Hill Air Force Base in Ogden, Utah.

21Gross profit. Gross profit was $33.3 million, or 17% of total revenues, for the three months ended June 30, 2006 and was $27.2 million, or 16% of total revenues, for the three months ended June 30, 2005. Gross profit during the 2006 period was higher than in the 2005 period primarily due to increased revenues in our Enterprise Services and Aviation MRO businesses, a $3.5 million improvement in gross profit related to reductions in our overhead expenses and an adjustment to our inventory cost estimates, partially offset by a $1.4 million adverse change related to foreign exchange rates.

~~Table~~Selling, general and administration expense. SG&A expense was $13.8 million, or 7% of ~~Contents~~total revenues, for the three months ended June 30, 2006 and was $12.9 million, or 7% of total revenues, for the three months ended June 30, 2005. SG&A expense during the 2006 period reflects a $1.1 million increase in professional fees and a provision for uncollectable accounts, partially offset by a general reduction in expenses.

~~STANDARD~~Amortization ~~AERO~~of ~~HOLDINGS~~intangible assets. Amortization of intangible assets was $2.1 million for the three months ended June 30, ~~INC~~2006 and was $2.4 million for the three months ended June 30, 2005. The decrease in amortization of intangible assets during the 2006 period reflects that certain of our intangible assets have been fully amortized.

~~NOTES~~Income TOfrom ~~CONDENSED~~operations. ~~CONSOLIDATED~~Income ~~FINANCIAL~~from ~~STATEMENTS~~operations ~~(UNAUDITED)~~was $17.4 million, or 9% of total revenues, for the three months ended June 30, 2006 and was $11.9 million, or 7% of total revenues, for the three months ended June 30, 2005. Income from operations during the 2006 period was higher than in the 2005 period principally from the items described under gross profit.

~~Condensed~~Interest ~~Combining~~expense. ~~Balance~~Interest ~~Sheet~~expense ~~(Successor)~~was $9.6 million for the three months ended June 30, 2006 and ~~December~~was $8.7 31million for the three months ended June 30, ~~2004~~2005. The increase in interest expense reflects the increase in the weighted average interest rate to 7.06% for the 2006 period from 5.40% for the 2005 period on our senior indebtedness, partially offset by lower average debt levels during the period.

				Subsidiary		Subsidiary			Combining
	Parent			Guarantors		Non-Guarantors			Adjustments			Total
Assets
Current Assets
Cash and cash equivalents	$	4,116		$	18,521	$	5,254		$	—		$	27,891
Accounts Receivable		4,678			95,180		12,134			—			111,992
Due from related party		13,352			52,090		3,910			(69,352	)		—
Inventories		—			116,390		30,485			—			146,875
Prepaid expenses and other current assets		469			9,485		1,040			—			10,994
Income taxes receivable		4,729			—		4,563			(4,729	)		4,563
Deferred income taxes		—			2,670		1,448			—			4,118
Total current assets		27,344			294,336		58,834			(74,081	)		306,433
Deferred charges		11,304			9,911		—			—			21,215
Deferred income taxes		—			3,856		—			—			3,856
Property, plant and equipment, net		—			116,630		19,510			—			136,140
Intangible assets, net		—			232,461		4,819			—			237,280
Due from related party		—			5,117		—			(5,117	)		—
Goodwill		—			240,490		—			—			240,490
Investments in subsidiaries		719,146			37,592		—			(756,738	)		—
Total assets	$	757,794		$	940,393	$	83,163		$	(835,936	)	$	945,414
Liabilities and divisional equity
Current liabilities
Accounts payable	$	5,058		$	92,689	$	8,672		$	—		$	106,419
Other accrued liabilities		7,349			12,978		3,688			—			24,015
Due to related party		50,017			12,291		9,852			(69,352	)		2,808
Unearned revenue		—			9,126		3,393			—			12,519
Accrued warranty provisions		—			3,784		3,123			—			6,907
Income taxes payable		—			13,126		211			(4,729	)		8,608
Current portion of long-term debt		—			1,304		681			—			1,985
Total current liabilities		62,424			145,298		29,620			(74,081	)		163,261
Deferred income taxes		—			79,117		5,405			—			84,522
Due to related party		—			—		5,117			(5,117	)		—
Long-term debt		485,000			2,261		—			—			487,261
Total liabilities		547,424			226,676		40,142			(79,198	)		735,044
Stockholder’s equity
Common Stock		—			—		—			—
Paid in capital		215,000			709,656		47,612			(757,268	)		215,000
Retained earnings (deficit)		(4,682	)		4,061		(4,591	)		530			(4,682	)
Accumulated other comprehensive income		52			—		—			—			52
Total stockholder’s equity		210,370			713,717		43,021			(756,738	)		210,370
Total liabilities and stockholder’s	$	757,794		$	940,393	$	83,163		$	(835,936	)	$	945,414

Income tax expense. The effective tax rate for the three months ended June 30, 2006 was 8% as compared to the estimated annual effective rate of 42% primarily due to a change in foreign jurisdiction future tax rates enacted in the period and a change in tax law in the State of Texas. The effective tax rate for the three months ended June 30, 2005 was 1% as compared to the estimated annual effective rate of 32% primarily due to a change in foreign jurisdiction future tax rates enacted in the period and the impact of foreign exchange rates on deferred tax balances.

2229

~~Table~~Six ofMonths ~~Contents~~Ended June 30, 2006 compared with the Six Months ended June 30, 2005

~~STANDARD~~The ~~AERO~~following ~~HOLDINGS,~~table ~~INC.~~sets forth certain financial data for the periods indicated:

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


	Six months		Six months ended
	ended June 30, 2006		June 30, 2005
	(In thousands)
Revenues	$	386,169	$	359,195
Cost of revenues Cost of revenues		322,052		298,366

Gross profit		64,117		60,829
Selling, general and administrative expense		27,311		25,504
Amortization of intangible assets		4,292		4,892

Income from operations		32,514		30,433
Interest expense		19,027		17,822

Income before income taxes		13,487		12,611
Income tax expense		2,470		2,907

Net income	$	11,017	$	9,704

~~Condensed~~Revenues. ~~Consolidating~~Total ~~Statement~~revenues ofincreased ~~Operations~~$27.0 million, ~~(Successor)~~or 8%, to $386.2 million for the six months ~~For~~ended June 30, 2006 from $359.2 million for the six months ended June 30, 2005. This increase was primarily attributable to a $16.9 million increase in revenues in our Enterprise Services business as during the 2006 period we were fully operational and earning revenues under our subcontract agreements with Battelle to provide redesign services to the United States Air Force at Tinker Air Force Base in Oklahoma City, Oklahoma and Hill Air Force Base in Ogden, Utah. Revenue in our Aviation MRO operating segment increased $10.1 million primarily attributable to an increase in our turbofan service revenues, increased revenues from our T56 foreign military contracts offset by a decline in our regional airline and business aircraft turboprop service revenues during the period.

				Subsidiary			Subsidiary			Combining
	Parent			Guarantors			Non-Guarantors			Adjustments			Total
Cash provided by (used in)
Operating activities
Net income for the period	$	9,277		$	21,122		$	(2	)	$	(21,120	)	$	9,277
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization		—			11,608			1,610			—			13,218
Amortization of deferred charges		916			853			—			—			1,769
Deferred income taxes		—			(419	)		(86	)		—			(505	)
Gain on disposal of property, plant and equipment		—			(9	)		—			—			(9	)
Equity in earnings of subsidiaries		(21,302	)		182			—			21,120			—
Changes in assets and liabilities
Accounts receivable		—			13,167			(7,875	)		—			5,292
Inventories		—			(3,400	)		249			—			(3,151	)
Prepaid expenses		—			2,939			336			—			3,275
Accounts payable and other accrued Liabilities		(1,277	)		(23,714	)		(5,930	)		—			(30,921	)
Income taxes payable		4,729			(8,845	)		(1,493	)		—			(5,609	)
Net cash provided by operating activities		(7,657	)		13,484			(13,191	)		—			(7,364	)
Investing activities
Acquisition of intangibles — licenses		—			—			—			—			—
Acquisitions of rental assets and spare engines		—			(6,628	)		(2,665	)		—			(9,293	)
Acquisitions of property, plant and equipment		—			(5,353	)		(529	)		—			(5,882	)
Proceeds on disposal of rental assets and Spare engines		—			4,015			715			—			4,730
Proceeds on disposal of property, plant and Equipment		—			42			—			—			42
Net cash used in investing activities		—			(7,924	)		(2,479	)		—			(10,403	)
Financing activities
Repayment of debt		(15,000	)		(639	)		(212	)		—			(15,851	)
Change in due to (from) related companies		18,643			(26,651	)		13,818			—			5,810
Net cash (used in) provided by financing Activities		3,643			(27,290	)		13,606			—			(10,041	)
Net (decrease) increase in cash and cash Equivalents		(4,014	)		(21,730	)		(2,064	)		—			(27,808	)
Cash and cash equivalents — beginning of Period		4,116			18,521			5,254			—			27,891
Cash and cash equivalents — end of period	$	102		$	(3,209	)	$	3,190		$	—		$	83

Gross profit. Gross profit was $64.1 million, or 17% of total revenues, for the six months ended June 30, 2006 and was $60.8 million, or 17% of total revenues, for the six months ended June 30, 2005. Gross profit during the 2006 period was higher than in the 2005 period primarily due to increased revenues in our Enterprise Services business, a $2.4 million improvement in gross profit related to reductions in our overhead expenses and an adjustment to our inventory cost estimates, offset by an adverse mix and price change in our Aviation MRO business and a $2.3 million adverse change related to foreign exchange rates.

23Selling, general and administration expense. SG&A expense was $27.3 million, or 7% of total revenues, for the six months ended June 30, 2006 and was $25.5 million, or 7% of total revenues, for the six months ended June 30, 2005. SG&A expense during the 2006 period reflects a $2.3 million increase in professional fees and a provision for uncollectable accounts, partially offset by a general reduction in expenses.

~~Table~~Amortization of ~~Contents~~intangible assets. Amortization of intangible assets was $4.3 million for the six months ended June 30, 2006 and was $4.9 million for the six months ended June 30, 2005. The decrease in amortization of intangible assets during the 2006 period reflects that certain of our intangible assets have been fully amortized.

~~STANDARD~~Income ~~AERO~~from ~~HOLDINGS~~operations. Income from operations was $32.5 million, ~~INC~~or 8% of total revenues, for the six months ended June 30, 2006 and was $30.4 million, or 8% of total revenues for the six months ended June 30, 2005. Income from operations during the 2006 period was higher than in the 2005 period principally from the items described under gross profit.

~~NOTES~~Interest TOexpense. ~~CONDENSED~~Interest ~~CONSOLIDATED~~expense ~~FINANCIAL~~was ~~STATEMENTS~~$19.0 million ~~(UNAUDITED)~~for the six months ended June 30, 2006 and was $17.8 million for the six months ended June 30, 2005. The increase in interest expense reflects the increase in the weighted average interest rate to 6.97% for the 2006 period from 5.23% for the 2005 period on our senior indebtedness, partially offset by lower average debt levels during the period.

~~Condensed Consolidating Statement of Operations (Predecessor) For the six months ended June~~ 30~~, 2004~~

	Subsidiary			Subsidiary			Combining
	Guarantors			Non-Guarantors			Adjustments		Total
Cash provided by (used in)
Operating activities
Net income for the period		24,991			(1,170	)		—		23,821
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		8,677			1,474			—		10,151
Amortization of deferred charges		272			—			—		272
Deferred income taxes		(3,345	)		(78	)		—		(3,423	)
Other		47			—			—		47
Changes in assets and liabilities
Accounts receivable		(30,148	)		(3,690	)		—		(33,838	)
Inventories		(23,570	)		(12,373	)		—		(35,943	)
Prepaid expenses		(1,430	)		1,827			—		397
Accounts payable and other accrued liabilities		50,923			15,819			—		66,742
Income taxes receivable and payable		5,538			(6,195	)		—		(657	)
Net cash provided by operating activities		31,955			(4,386	)		—		27,569
Investing activities
Acquisitions of intangibles – licenses		—			(125	)		—		(125	)
Acquisition of rental assets and spare engines		(6,551	)		(338	)		—		(6,889	)
Acquisition of property, plant and equipment		(4,077	)		(125	)		—		(4,202	)
Proceeds on disposal of rental assets and spare engines		4,278			567			—		4,845
Proceeds from disposals of property, plant and equipment		12			—			—		12
Net cash used in investing activities		(6,338	)		(21	)		—		(6,359	)
Financing activities
Repayment of debt		(591	)		(252	)		—		(843	)
Change in due to (from) related companies		(8,891	)		11,257			—		2,366
Net cash (used in) provided by financing activities		(9,482	)		11,005			—		1,523
Net (decrease) increase in cash and cash equivalents		16,135			6,598			—		22,733
Cash and cash equivalents – beginning of period		15,188			7,510			—		22,698
Cash and cash equivalents – end of period		31,323			14,108			—		45,431

Income tax expense. The effective tax rate for the six months ended June 30, 2006 was 18% as compared to the estimated annual effective rate of 42% primarily due to a change in foreign jurisdiction future tax rates enacted in the period and a change in tax law in the State of Texas. The effective tax rate for the six months ended June 30, 2005 was 23% as compared to the estimated annual effective rate of 32% primarily due to a change in foreign jurisdiction future tax rates enacted in the period and the impact of foreign exchange rates on deferred tax balances.

24Segment Results of Operations

~~Table~~Three ofMonths ~~Contents~~Ended June 30, 2006 compared to the Three Months ended June 30, 2005

~~STANDARD~~The ~~AERO~~Company ~~HOLDINGS~~has determined that it operates in two operating segments: (1) Aviation MRO, ~~INC~~and (2) Enterprise Services. The following table reconciles segment revenue and income from operations to total revenue and net income:

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


	Three months			Three months ended
	ended June 30, 2006			June 30, 2005
	(In thousands)
Revenues:
Aviation MRO	$	191,365		$	171,550
Enterprise Services		9,006			231

Total revenue		200,371			171,781


Segment Income (loss) from Operations:
Aviation MRO		20,241			15,878
Enterprise Services		(64	)		(1,434	)

Segment income from operations		20,177			14,444
Corporate expenses		2,788			2,538
Interest expense		9,554			8,721

Income before income taxes		7,835			3,185
Income tax expense		592			39

Net income	$	7,243		$	3,146

13Aviation Subsequent Event In July 2005 the Company instituted a workforce reduction program, to address volume reductions. As a result there was a reduction of approximately 100 employees with an estimate cost of $2.0 million.MRO

25Three Months Ended June 30, 2006 compared to the Three Months ended June 30, 2005

~~Table~~Revenues. Aviation MRO revenues increased $19.8 million, or 12%, to $191.4 million for the three months ended June 30, 2006 from $171.6 million for the three months ended June 30, 2005. The Aviation MRO revenue increase was primarily attributable to a $10.3 million increase in our turbofan revenues as a result of ~~Contents~~increased inputs on the AE3007 engine platform and demand for our CF34 MRO services. Our military T56 MRO services increased $6.3 million during the period primarily due to increased T56 revenues under our foreign military contracts during the period and increased revenues from the United States Air Force under our subcontract agreement with KAC. Revenues from our non-aviation engine platforms increased $4.3 million during the period due to volumes under new contracts and timing of maintenance events under certain service contracts. Revenues from our regional airline and business aircraft turboprop end users declined $2.7 million during the period primarily on the PW100 engine program.

~~ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~31

~~You~~Segment ~~should~~income ~~read~~from ~~the~~operations. ~~following~~Aviation ~~discussion~~MRO ~~together~~segment ~~with~~income ~~the~~from ~~financial~~operations ~~statements~~was ~~and related notes included elsewhere in this report~~$20.2 million ~~The results discussed below are not necessarily indicative of~~for the ~~results~~three tomonths beended ~~expected~~June 30, in2006 ~~any~~and ~~future~~was ~~periods~~$15. ~~This report contains “forward-looking statements” within the meaning of Section~~9 ~~27A~~million offor the ~~Securities~~three ~~Act~~months ofended ~~1933 and Section~~June ~~21E of the Securities~~30, ~~Exchange Act of 1934~~2005. ~~All~~The ~~statements~~increase ~~other~~in ~~than~~Aviation ~~statements~~MRO ofsegment ~~historical~~income ~~fact~~from ~~are~~operations ~~“forward-looking statements”~~during ~~for purposes of federal and state securities laws, including any projections of earnings, revenues or other financial items; any statements of~~ the ~~plans,~~2006 ~~strategies~~period ~~and objectives~~resulted offrom ~~management~~increases ~~for~~in ~~future~~gross ~~operations;~~profit ~~any~~associated ~~statements~~with ~~concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of~~ the ~~foregoing.~~increased ~~Forward-looking statements~~revenues ~~may~~during ~~include~~ the ~~words “may~~period,~~” “will,” “estimate,” “intend,” “continue,” “believe,”~~ ~~“expect”~~improvements ~~or “anticipate” and other similar words. Such forward-looking statements may be contained~~ in ~~“Management’s~~our ~~Discussion~~overhead and ~~Analysis~~SG&A ofexpenses ~~Financial Condition~~ and ~~Results~~an ofadjustment ~~Operations,”~~to ~~among other places. Although we believe that the expectations reflected in any of~~ our ~~forward-looking statements~~inventory ~~are~~cost ~~reasonable~~estimates, ~~actual results could differ materially from those projected or assumed~~ inpartially ~~any~~offset ofby ~~our~~a ~~forward-looking~~provision ~~statements.~~for ~~Our~~uncollectable ~~future~~accounts ~~financial condition~~ and ~~results~~an ~~of operations,~~adverse ~~as well as any forward-looking statements, are subject to~~ change ~~and~~in ~~to inherent risks~~foreign ~~and~~exchange ~~uncertainties~~rates. ~~We do not intend, and undertake no obligation, to update any forward-looking~~ ~~statement.~~

~~Basis~~Enterprise ~~of Presentation~~Services

OnThree ~~August 24,~~Months ~~2004~~Ended ~~Standard Aero Holdings~~June 30, ~~Inc.~~2006 ~~(“we”~~compared orto the ~~“Successor”)~~Three ~~acquired~~Months ~~the~~ended ~~maintenance~~June 30, ~~repair~~ ~~and overhaul, or MRO, business of Dunlop Standard Aerospace Group Limited (“Dunlop Standard”~~2005 ~~or the “Predecessor”). We refer to this transaction as the “Acquisition.”~~

~~The following discussion and analysis of our financial condition and results of operations covers periods and portions of periods prior to the consummation of the Acquisition~~Revenues. ~~Prior~~Enterprise toServices ~~the Acquisition,~~revenues the MRO business of Dunlop Standard was not operated as a stand-alone business, but as part of Dunlop Standard’s broader operations. The discussion and analysis of historical periods ending prior to the Acquisition does not reflect the impact that the Acquisition had on us, including increased ~~levels of indebtedness and the impact of purchase accounting~~$8.8 million ~~Additionally, due~~ to the Acquisition, and the resultant application of purchase accounting, Dunlop Standard’s pre-Acquisition combined financial statements and our post-Acquisition consolidated financial statements have been prepared on different bases of accounting and therefore, are not necessarily comparable$9.0 million ~~In the presentation below, the results of operations~~ for the ~~period~~three ~~from January 1,~~months ~~2004~~ended ~~through~~ June 30, ~~2004~~2006 ~~reflect~~from ~~the~~$0.2 million ~~results of Dunlop Standard, and the results of operations~~ for the ~~period~~three ~~from~~months ~~January 1,~~ended ~~2005 through~~ June 30, 2005. ~~reflect~~This ~~our~~increase ~~results, which represent the~~was ~~consolidated~~primarily ~~results~~a ofresult ~~operations~~ of ~~us and~~ our ~~subsidiaries.~~subcontract ~~The~~agreements ~~period~~with ~~from~~Battelle ~~January 1,~~to ~~2004 through~~provide ~~August 24,~~redesign ~~2004~~services ~~is referred~~ to as the United ~~2004~~States ~~Predecessor~~Air ~~period~~Force ~~and~~at ~~the~~Tinker ~~period~~Air ~~from~~Force ~~August 25,~~Base ~~2004~~in ~~through~~Oklahoma ~~December 31~~City, ~~2004~~Oklahoma isand ~~referred~~Hill toAir asForce ~~the~~Base in ~~2004~~Ogden, ~~Post-Acquisition period~~Utah.

~~Overview~~Segment loss from operations. Enterprise Services segment loss from operations was $0.07 million for the three months ended June 30, 2006 and was a loss of $1.4 million for the three months ended June 30, 2005. The decrease in loss from operations is a result of our revenue generating activities under our Battelle contracts.

WeSix ~~are~~Months aEnded ~~leading independent provider of aftermarket MRO services for gas turbine engines used primarily for military~~June 30, ~~regional~~2006 ~~and~~compared ~~business aircraft. We also supply repair and overhaul services for gas turbine engines used in co-generation and energy supply as well as consultancy and redesign services related~~ to the ~~MRO~~Six ~~process~~Months ~~and~~ended ~~facilities.~~June 30, 2005

~~Our~~The ~~Aviation~~Company ~~MRO~~has ~~segment~~determined isthat ~~our~~it ~~only~~operates ~~reportable~~in ~~segment.~~two ~~Our Redesign Services and Energy Services~~ operating segments: ~~are not reportable and have been combined and disclosed in “Other Services” as they do not meet any of the quantitative thresholds under SFAS No.~~(1) ~~131, Disclosures about Segments of an Enterprise and Related Information. Our~~ Aviation MRO ~~segment involves the comprehensive MRO services that we provide on a wide range of aircraft engines~~, ~~modules~~ and ~~accessories for military,~~(2) ~~regional~~Enterprise ~~and business aircraft~~Services. ~~Our~~The ~~Other~~following ~~Services~~table ~~include~~reconciles ~~the~~segment ~~MRO~~revenue ~~services, control systems~~ and ~~engineering~~ ~~services~~income wefrom ~~provide~~operations to ~~the power generation, mechanical drive and cogeneration markets.~~ ~~Our~~total ~~Other~~revenue ~~Services also include our Redesign Services business through which we provide consulting services to transform~~ and ~~optimize~~net ~~efficiencies in the MRO process and facilities of certain of our~~income:


	Six months			Six months ended
	ended June 30, 2006			June 30, 2005
	(In thousands)
Revenues:
Aviation MRO	$	368,635		$	358,561
Enterprise Services		17,534			634

Total revenue		386,169			359,195


Segment Income (loss) from Operations:
Aviation MRO		39,384			38,513
Enterprise Services		(547	)		(2,682	)

Segment income from operations		38,837			35,831
Corporate expenses		6,323			5,398
Interest expense		19,027			17,822

Income before income taxes		13,487			12,611
Income tax expense		2,470			2,907

Net income	$	11,017		$	9,704

~~Table of Contents~~32

~~customers.~~Aviation MRO

~~Generally,~~Six ~~manufacturer~~Months ~~specifications~~Ended June 30, ~~government~~2006 ~~regulations~~compared ~~and~~to ~~military maintenance regimens require that engines undergo MRO servicing at regular intervals or upon~~ the ~~occurrence~~Six ofMonths ~~certain events~~ended ~~during the serviceable life of each engine. As a result~~June 30, ~~the aggregate volume of MRO~~2005 ~~services required for any particular engine platform is a function of three factors:~~

•Revenues. Aviation MRO revenues increased $10.1 million, or 3%, to $368.6 million for the ~~number~~six months ofended ~~engines~~June 30, 2006 from $358.6 million for the six months ended June 30, 2005. The Aviation MRO revenue increase was primarily attributable to a $5.5 million increase in ~~operation~~our (turbofan revenues as a result of increased inputs for our MRO services on the ~~“installed~~AE3007 ~~base”);~~engine •platform. Our military T56 MRO services increased $4.8 million during the ~~age~~period ofprimarily due to increased T56 revenues under our foreign military contracts during the ~~installed~~period. ~~base;~~Revenues ~~and~~from •our non-aviation engine platforms increased $4.5 million during the ~~utilization~~period ~~rate~~due to volumes under new contracts and timing of ~~the~~maintenance ~~installed~~events ~~base~~under certain service contracts. Revenues from our regional airline and business aircraft turboprop end users declined $5.3 million during the period.

~~Because~~Segment weincome ~~provide~~from operations. Aviation MRO ~~Services~~segment ~~with~~income ~~respect~~from tooperations ~~specific~~was ~~engine~~$39.4 million ~~platforms~~for the six months ended June 30, 2006 and was $38.5 million for the ~~services~~six ~~we provide~~months ended June 30, ~~and~~2005. The ~~thus~~increase ~~our~~in Aviation MRO segment income from operations during the 2006 period resulted from increased gross profit associated with the increased revenues, ~~are~~during ~~influenced~~the toperiod aand ~~significant~~improvements ~~degree~~in our overhead and SG&A expenses offset by ~~the~~adverse ~~size,~~contract ~~age~~price and mix changes, a provision for ~~utilization~~uncollectable ~~rate~~accounts ofand ~~the~~an ~~installed~~adverse ~~base~~change ofin ~~those~~foreign ~~engine~~exchange ~~platforms~~rates.

WeEnterprise ~~typically provide MRO services to our customers under “time-and-materials” arrangements pursuant~~Services to which we charge our customers a price based on the specific work to be performed on each engine. In some cases, this price is based on negotiated hourly rates for labor and for replacement parts. We also provide MRO services under fixed price contracts or under fixed price per engine utilization arrangements, a variation of a fixed-price arrangement pursuant to which customers pay us a negotiated price per hour or cycle that each engine is operated and we assume responsibility for all MRO services for that engine.

~~Restatement~~Six Months Ended June 30, 2006 compared to the Six Months ended June 30, 2005

~~Overview~~Revenues. Enterprise Services revenues increased $16.9 million to $17.5 million for the six months ended June 30, 2006 from $0.6 million for the six months ended June 30, 2005. This increase was primarily a result of our subcontract agreements with Battelle to provide redesign services to the United States Air Force at Tinker Air Force Base in Oklahoma City, Oklahoma and Hill Air Force Base in Ogden, Utah.

InSegment ~~the~~loss ~~course~~from ofoperations. ~~reviewing~~Enterprise ~~our~~Services ~~financial~~segment ~~statements~~loss ~~for~~from ~~the~~operations ~~period~~was ~~covered by this report, our independent auditors identified errors with respect to our valuation of certain foreign deferred tax liabilities~~$0.6 million ~~After initial discussions with our audit committee, our management reviewed these~~for ~~matters in further detail, and after completing its analysis, recommended to~~ the ~~audit~~six ~~committee that~~months ~~our~~ended ~~previously disclosed financial results be restated to correct these errors. The audit committee agreed with this recommendation and determined at a meeting on August~~June 1430, ~~2005,~~2006 ~~that we would restate our financial statements for the 2004 Post-Acquisition period~~ and ~~the~~was ~~first~~a ~~quarter of~~loss ~~2005 and reclassify certain line items in our consolidated statements~~ of ~~operations~~$2.7 million for the ~~2004 Predecessor~~six ~~Period~~months ~~and the years~~ ended ~~December~~June 3130, ~~2002 and 2003~~ 2005. The ~~audit~~decrease ~~committee also determined that,~~ in ~~light~~loss offrom ~~the~~operations ~~restatement~~is ~~and~~a ~~the~~result ~~reclassification,~~of ~~the~~our ~~financial~~revenue ~~statements~~generating ~~and~~activities under ~~other~~our ~~information~~Battelle ~~referred to above should no longer be relied upon~~contracts.

~~Accounting~~Liquidity ~~Errors~~ and ~~Reclassification~~capital resources

WeLiquidity ~~conduct the majority of our transactions in U.S. dollars and, therefore, both we and our~~requirements subsidiaries use the U.S. dollar as our functional currency to measure our transactions. In connection with the Acquisition, we established certain deferred tax liabilities on our consolidated balance sheet. Since the Acquisition, the deferred tax liabilities attributed to certain of our Canadian operations and our Dutch operations were recorded as if such liabilities were in U.S. dollars. These deferred tax liabilities should have been computed in Canadian dollars and Euros respectively, and remeasured into U.S. dollars. Since the value of these currencies moved against the U.S. dollar, a foreign exchange gain or loss should have been recorded in our consolidated income statements for the periods ended December 31, 2004 and March 31, 2005. In addition, at the time of the Acquisition, the deferred tax liabilities attributable to indefinite life assets relating to our Canadian operations were computed using the regular tax rate whereas the liabilities should have been computed using the capital gains rate, which is substantially lower. As a result, the deferred tax liabilities and goodwill recorded on our consolidated balance sheet should have been lower. Additionally, in determining the deferred tax liability related to our Dutch operations for the period ending December 31, 2004, we failed to give effect to a recent reduction in the applicable tax rate. As a result, the deferred tax liability for our Dutch operations for the period was overstated.

27Our principal cash requirements are to fund working capital, to fund capital expenditures and to service our indebtedness.

~~Table~~In recent periods and during the period ended June 30, 2006, our capital expenditures have been divided between annual capital projects, net rental engine pool investments and continuing investments in our CF34 program. During the period ended June 30, 2006, we made capital expenditures (including the net change in our rental engine pool) of ~~Contents~~$8.6 million. We expect to make approximately $15.0 million in net capital expenditures in 2006.

~~Under~~Our ~~Statement~~indebtedness ofat ~~Financial Accounting Standards No.~~August ~~109~~14, ~~Accounting~~2006 ~~for~~consisted ~~Income Taxes, a company has the option~~ of ~~including gains or losses resulting from changes in deferred foreign tax~~: liabilities either in pre-tax income or in the benefit or provision for income taxes line item of the consolidated statements of operations. Prior to the restatement, we included such gain or losses in the selling, general and administrative expense line item of our consolidated statements of operations. We have now determined that it is more meaningful and useful to our investors to present such gains and losses in the benefit or provision for income taxes line item. Therefore, the changes to our consolidated statements of operations resulting from the restatement will be included in the benefit or provisions for income taxes line item in each period presented. As a result of this change in presentation, we also reclassified similar exchange gains or losses from the selling, general and administrative expense line item to the benefit or provision for income taxes line item for the years ended December 31, 2002 and 2003 and the period from 2004 Predecessor Period.

~~Effects~~• our senior credit facilities, consisting of ~~Restatement~~an eight-year term loan facility, under which we had outstanding indebtedness of $250.0 million, and ~~Reclassification~~ a $50.0 million six-year revolving credit facility, under which we had no outstanding indebtedness; • $1.6 million in capital lease obligations; and • $200.0 million in aggregate principal amount of our 81/4% senior subordinated notes due 2014.

~~In order to correct the accounting errors identified in our financial statements, we have~~33 recalculated the relevant deferred tax liabilities using the correct tax rates in Canadian dollars and euros, as appropriate, at December 31, 2004 and March 31, 2005 and converted those local currency deferred tax liabilities into U.S. dollars. As a result of these recalculations, during the 2004 Post-Acquisition period, the U.S. dollar recorded amount of the Canadian and Dutch deferred tax liabilities decreased by $7.5 million, or 8.9%, from $84.1 million to $76.5 million and during the first quarter of 2005, the U.S. dollar recorded amount of the Canadian and Dutch deferred tax liabilities decreased by $7.8 million, or 9.4%, from $83.3 million to $75.5 million.

~~The~~Restricted ~~following~~cash ~~tables~~represents ~~set forth~~ the ~~effects~~balance of ~~the~~payments ~~restatement~~made ~~and~~by ~~the~~certain ~~reclassification~~of on our ~~previously~~ ~~disclosed~~customers ~~consolidated~~in ~~statements~~advance of ~~operations for~~ the ~~three months ended March 31,~~MRO ~~2004~~services ~~and~~to ~~2005,~~be ~~the~~performed ~~2004~~under ~~Post-Acquisition~~contract. ~~period,~~These ~~the~~amounts ~~2004~~remain ~~Predecessor~~in ~~Period~~a ~~and~~trust ~~the~~account ~~years~~until ~~ended~~such time ~~December 31,~~as ~~2002~~we ~~and~~perform ~~2003.~~a ~~The~~MRO ~~restatement~~service ~~has~~covered nounder ~~effect~~the oncontract ~~our~~and ~~consolidated~~upon ~~statement~~completion, ofthe ~~cash~~funds are ~~flows~~transferred ~~nor~~to ~~does~~us. itAt ~~have~~June 30, ~~any~~2006 ~~effect~~our onrestricted ~~the~~cash ~~timing~~balance orwas ~~amount of our cash flows~~$23.5 million.

	Three Months Ended					August 25 -			January 1 –
	March 31					December 31,			August 24,			Year Ended December 31,
	2005		2004			2004			2004			2003			2002
	Successor		Predecessor			Successor						Predecessor
						(In millions)
Increase (decrease) in:
Selling, general and administrative expense	$	0.0	$	(0.2	)	$	1.4		$	(0.2	)	$	1.8		$	2.1
Total operating expenses		0.0		(0.2	)		1.4			(0.2	)		1.8			2.1
Income from operations		0.0		(0.2	)		1.4			(0.2	)		1.8			2.1
Income before income taxes		0.0		(0.2	)		1.4			(0.2	)		1.8			2.1
Provision for income taxes		0.3		0.2			(2.9	)		0.2			(1.8	)		(2.1	)
Net income (loss)	$	0.3	$	0.0		$	(1.5	)	$	0.0		$	0.0		$	0.0

Based on our current operations, we believe that cash on hand, together with cash flows from operations and borrowings under the revolving credit portion of our new senior credit facilities, will be adequate to meet our working capital, capital expenditure, debt service and other cash requirements for the next 12 months. However, our ability to make scheduled payments of principal, pay interest, refinance our indebtedness, including the senior subordinated notes, to comply with the financial covenants under our debt agreements and to fund our other liquidity requirements will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot assure you that our business will generate cash flows from operations or that future borrowings will be available under our new senior credit facilities in an amount sufficient to enable us to service our indebtedness, including the notes, or to fund our other liquidity needs. Any future acquisitions, joint ventures or other similar transactions will likely require additional capital and there can be no assurance that any such capital will be available to us on acceptable terms, if at all.

~~Trends~~Senior ~~Affecting~~credit ~~Our Business~~facilities

WeBorrowings ~~believe~~under ~~that~~our senior credit facilities bear interest at either a floating base rate or a LIBOR rate plus, in each case, an applicable margin. At June 30, 2006, our ~~relationships~~borrowings under our senior credit facilities bore interest based on LIBOR. In addition, we pay a commitment fee in respect of unused revolving commitments. Subject to certain exceptions, our senior credit facilities require mandatory prepayments of the loans with 50% of our ~~military~~annual excess cash flow (as defined in the senior credit facilities) and ~~regional~~with ~~airline~~the ~~customers~~net cash proceeds of certain assets sales or other asset dispositions and issuances of debt securities. The obligations under our senior credit facilities are guaranteed by all of our existing and future wholly-owned U.S. and Canadian subsidiaries (except for unrestricted subsidiaries) and by our parent, ~~which~~and ~~were~~are ~~the~~secured by a ~~primary~~security ~~drivers~~interest in substantially all of our ~~revenues~~assets ~~during~~and the ~~past~~assets ~~several~~of ~~years~~our direct and indirect restricted U.S. subsidiaries that are guarantors, ~~will~~including ~~continue~~a topledge ~~provide~~of ~~areas~~all of our capital stock, ~~opportunity~~the ~~for~~capital stock of each of our restricted U.S. subsidiaries and 65% of the capital stock of certain of our non-U.S. subsidiaries that are directly owned by us or one of our restricted U.S. subsidiaries.

~~The~~We ~~utilization~~made ~~rate~~optional ofprepayments ~~aircraft~~under ~~engines for~~ the ~~U.S.~~term ~~military~~loan ~~has~~portion ~~been~~of ~~significantly~~our ~~affected during~~senior ~~the~~credit ~~past~~facilities ~~several years by the increased operational tempo~~ of ~~the U~~$40.~~S. military related to~~0 ~~the~~million ~~war~~in on2004, ~~terror~~$15.0 million ~~This increased tempo has led to an increase~~ in ~~required~~2005, ~~aircraft engine MRO services and U~~$15.S.0 million ~~government~~on ~~funding~~January 27, ~~for~~2006 ~~these~~and ~~services~~$5.0 million ~~While our combined 2004 revenues benefited~~on ~~from this trend~~February 24, ~~we do not expect that the operating tempo or funding level of the U~~2006.S. ~~military~~These ~~to continue~~prepayments tohave bebeen asapplied ~~high~~against ~~during~~our ~~2005 and in~~ future ~~periods~~scheduled asprepayments itand we ~~was~~will ~~during~~not ~~2004. We~~ have ~~also benefited~~a ~~from~~scheduled anpayment ~~increasing~~until ~~reliance by the U~~December 2011.~~S. military on outsourcing maintenance and repair~~ ~~services, including~~

28From time to time we have drawn down on our revolving credit facility in order to provide short term liquidity. Such borrowings have ranged from $2.0 million to $16.0 million and have been repaid within approximately 12 weeks from the draw down date.

~~Table~~We have entered into interest rate hedging arrangements for the purpose of ~~Contents~~reducing our exposure to adverse fluctuations in interest rates. On October 12, 2004, we entered into a series of sequential collar transactions. The following table summarizes our outstanding collar transactions:

aircraft engine MRO services and MRO redesign services and we expect that this trend will continue. The United States Air Force recently awarded Battelle Columbus Operations a 10-year contract to design, develop, construct, install, implement and deliver a lean and cellular transformation of the aircraft, engines and commodities MRO processes and industrial facilities at the Oklahoma City Air Logistics Center. Our Redesign Services business has been chosen to be a subcontractor to Battelle Columbus Operations to provide a significant portion of the redesign services under that contract. We expect revenues will commence in the 3rd quarter of 2005. Our contracts with military aviation end-users contributed significantly to our revenues in recent periods. The growth in this portion of our combined 2004 revenue base was largely due to the expansion of the scope of services provided under our Kelly Air Force Base contract. While we expect that the Kelly Air Force Base contract will continue to contribute significantly to our revenues during 2005, we anticipate that 2005 revenues under this contract will be lower than they were during 2004.


Notional Amount		Term	Floor Strike Rate	Cap Strike Rate

$	75,000,000	March 27, 2006 – December 27, 2006	2.40% (plus applicable margin)	5.25% (plus applicable margin)

~~The principal military engine that we service for military customers is the Rolls-Royce T56, which~~34 powers the C-130 Hercules, P-3 Orion, and E2C Hawkeye aircraft. We provide T56 MRO services under long-term contracts to the U.S. Air Force and Navy, the Canadian Air Force and to other militaries throughout the world. We believe that there are over 3,800 T56 engines installed in the U.S. military fleet. The T56 installed base is expected to gradually decline as P-3 Orions and C-130 models A through H are retired and replaced with the C-130J, which is powered by the AE2100 engine. However, we expect that revenues lost due to the decreased size of the T56 installed base will be partially offset by revenues generated by providing MRO services for AE2100 engines.

WeSenior ~~believe~~credit ~~that~~agreement wecovenant ~~occupy a strong position in the regional jet MRO market. Since their~~compliance introduction in the 1990s, regional jets have been replacing older turboprop-powered aircraft. As a result of this trend, our revenues generated by our MRO services of turboprop engines have been relatively flat in recent years and despite a recent uptick in revenues from providing MRO services on turboprop aircraft, we expect the demand for these services to decline in the future. We anticipate, however, that over time the aggregate revenues generated by providing MRO services to the large and growing fleet of regional jet aircraft using the CF34 and the large installed base of AE3007 engines should more than offset expected declines in MRO services for turboprop engines. We have invested significant capital in obtaining the OEM authorizations and licenses for the AE3007 and CF34 engines and in the advanced facilities in which we provide MRO services for them. We do not expect to fully realize the benefit of our investment in the CF34 platform until 2007, when we expect the first significant volumes of CF34 overhauls, and until such time our gross profit margins will be impacted by the fixed costs of this program. In 1999 we started to realize significant revenues from the AE3007 platform, which was introduced in 1995, and anticipate that the age and utilization rates of this engine will necessitate scheduled maintenance. We expect that AE3007 revenues will continue to provide a significant portion of our revenues during 2005 and for the foreseeable future and that the AE3007 platform will continue to be an important part of our business strategy. However, we anticipate that AE3007 revenues will be lower in 2005 and in future periods than they were in 2004 as a result of Rolls-Royce’s recent modifications to the MRO workscope requirements for the AE3007 engine platform.

WeOur ~~routinely~~senior ~~review~~credit ~~the~~facilities ~~size~~contain ofvarious ~~our~~restrictive ~~workforce~~operating and ~~make~~financial ~~adjustments~~covenants. Compliance wewith ~~deem~~these ~~appropriate~~covenants ~~based~~is onessential ~~MRO volumes~~to ~~for~~our ~~specific~~ability ~~contracts~~to ~~and~~continue ~~engine~~to ~~platforms.~~meet Asour aliquidity needs, ~~result~~as ofa ~~downward~~failure ~~adjustments~~ to ~~the size~~comply ofcould ~~our~~result ~~workforce,~~in wea ~~incur~~default ~~severance~~under ~~and~~our ~~related~~senior ~~expenses~~credit ~~consisting~~facilities ofand permit ~~voluntary~~our ~~severance incentive~~senior ~~costs~~lenders ~~and~~to ~~involuntary~~accelerate ~~workforce~~the ~~reduction~~maturity ~~costs.~~of ~~Total~~our ~~staff~~indebtedness. ~~adjustment~~Such ~~charges~~an ~~amounted~~acceleration of toour ~~$0.2 million~~indebtedness ~~for~~would ~~the~~have ~~three~~a ~~and~~material ~~six~~adverse ~~months~~affect ~~ended~~on ~~June 30,~~our ~~2005~~liquidity, ~~the~~including ~~majority~~on ofour ~~which~~ability ~~were~~to ~~recorded~~make topayments ~~cost~~on ofour ~~revenues.~~other Inindebtedness ~~July 2005,~~and weour ~~instituted~~ability ato ~~workforce~~operate ~~reduction~~our ~~program~~business. toWe believe that ~~specifically~~the ~~address~~two ~~volume~~most ~~reductions~~material infinancial ~~certain~~covenants ofunder our ~~engine~~senior ~~programs.~~credit Asfacility aare ~~result~~the ~~of this~~consolidated ~~program,~~leverage weratio ~~expect~~and tothe ~~reduce~~consolidated ~~staff~~net byinterest ~~approximately~~coverage ~~100~~ratio, ~~employees.~~which ~~The~~are ~~total~~both ~~staff~~based ~~adjustment~~on Adjusted ~~charges~~EBITDA, weas ~~estimate~~defined ~~to incur~~ in ~~2005~~our ~~will~~senior becredit ~~approximately $2~~facilities.~~0 million.~~

~~Effect~~The consolidated leverage ratio measures the ratio of our outstanding debt net of cash at fiscal-year end to our Adjusted EBITDA for the ~~Acquisition~~fiscal year then ended, and requires the ratio not exceed certain limits. This covenant required us to have a ratio of outstanding debt net of cash to Adjusted EBITDA of no more than 5.75 to 1 at June 30, 2006. At June 30, 2006, our outstanding debt net of cash was $454.6 million and Adjusted EBITDA for the last twelve months ended June 30, 2006 was $100.8 million, resulting in a consolidated leverage ratio at June 30, 2006 of 4.51 to 1, compared to outstanding debt net of cash of $448.5 million at December 31, 2005 and Adjusted EBITDA of $97.8 million for the year ended December 31, 2005, resulting in a consolidated leverage ratio at December 31, 2005 of 4.58 to 1.

AsThe aconsolidated ~~result~~net ofinterest ~~the~~coverage ~~Acquisition,~~ratio ~~our~~covenant ~~assets~~measures ~~and~~the ~~liabilities~~ratio ~~were~~of ~~adjusted~~our toAdjusted ~~their~~EBITDA ~~fair market~~for ~~values~~any asperiod of ~~the~~four ~~closing~~consecutive ~~date~~quarters ofto ~~the~~our ~~Acquisition.~~cash ~~The~~interest ~~inventory~~expense ~~valuation~~during ~~caused~~the ansame ~~increase~~four inquarters. ~~our~~The ~~cost~~minimum ofinterest ~~revenues~~coverage ~~due~~ratio tocovenant ~~increased~~required ~~carrying~~us ~~value~~to ofhave ~~our~~a ~~inventory~~ratio ~~and~~of ~~work~~Adjusted inEBITDA ~~progress.~~to ~~This~~cash ~~resulted~~interest inexpense anof ~~$21~~at least 2.~~4 million~~25 ~~reduction~~to in1 ~~our~~at ~~income~~June 30, ~~from~~2006. ~~operations~~For ~~that~~the wefour ~~would~~quarters ~~otherwise~~ended ~~have~~June 30, 2006, ~~recorded~~our incash ~~the~~interest ~~2004~~expense ~~Post-Acquisition~~was ~~period~~$35. ~~Additionally~~0 million, ~~the~~resulting ~~excess~~in ofan ~~total~~interest ~~purchase~~coverage ~~price over~~ratio ~~the fair value~~ of ~~our~~2.88 ~~assets~~to ~~and liabilities~~ 1 at ~~closing~~June 30, ~~was~~2006, ~~allocated~~compared to ~~goodwill~~cash ~~and~~interest ~~other intangible~~expense ~~assets~~of $33.5 million ~~Goodwill~~for ~~and~~the ~~other~~four ~~intangible~~quarters ~~assets with indefinite lives are subject to~~ended ~~periodic~~December 31, ~~impairment~~2005, ~~review.~~resulting ~~Intangible~~in ~~assets~~an ~~with~~interest ~~definite~~coverage ~~lives~~ratio ~~are~~of ~~amortized~~2.92 ~~and~~to ~~charged~~1 asat ~~an expense~~December 31, ~~against operating income~~2005.

29We are currently in compliance in all material respects with the covenants in the senior credit facilities. We do not anticipate that the cost savings commitment under the KAC settlement will result in noncompliance with the financial covenants in our senior credit facility. For additional discussion of the risks associated with such non-compliance, see “Risk Factors” and “—Kelly Air Force Base Subcontract.”

~~Table~~We have included information concerning Adjusted EBITDA because we use this measure to evaluate our compliance with covenants governing our indebtedness and because of ~~Contents~~the importance of that compliance to our liquidity and our business. Under our senior credit facilities, Adjusted EBITDA represents net income before provision for income taxes, interest expense, and depreciation and amortization and also adds or deducts, among other things, unusual or non-recurring items, restructuring charges, transaction fees, and management fees pursuant to our management agreement with The Carlyle Group. Adjusted EBITDA is not a recognized term under GAAP. Adjusted EBITDA should not be considered in isolation or as an alternative to net income, net cash provided by operating activities or other measures prepared in accordance with GAAP. Additionally, Adjusted EBITDA is not intended to be a measure of free cash flow available for management’s discretionary use, as such measure does not consider certain cash requirements such as working capital, capital expenditures, tax payments and debt service requirements. Adjusted EBITDA, as included herein, is not necessarily comparable to similarly titled measures reported by other companies.

~~As set forth in greater detail in the table below, as a result of the application of purchase~~35 accounting, our intangible assets with definite lives were fair valued from a gross carrying amount of $114.3 million prior to the consummation of the Acquisition to $144.3 million after the consummation of the Acquisition, and were assigned new amortization periods.

			Weighted
	Gross		average
	carrying		amortization
(In millions of dollars)	value		period
Customer relationships	$	98.0	17.4 years
OEM authorizations		38.4	14.2 years
Technology		2.0	5 years
Databases		5.9	5 years

The following table presents a reconciliation of Adjusted EBITDA, as defined in the senior credit facilities to net income:

In addition, goodwill and trademarks increased from $74.8 million and $42.0 million, respectively, prior to the consummation of the Acquisition to $240.5 million and $97.3 million, respectively, after the consummation of the Acquisition. Annual amortization for 2005 of intangible assets, reflecting new carrying values and average amortization periods, will be $9.8 million versus $2.8 million for the period under the Predecessor’s carrying values and amortization periods. These intangible assets are subject to annual impairment testing.


			July 1 -			Last 12 months
	January 1 –		December			ended
	June 30, 2006		31, 2005			June 30, 2006
	(In millions)
Net income (loss)	$	11.0	$	(58.9	)	$	(47.9	)
Add:
Depreciation and amortization		12.9		12.1			24.2
Interest expense, net		19.0		18.6			37.6
Provision (benefit) for income taxes		2.5		(3.2	)		(0.7	)
Non-recurring expenses (1)		1.9		6.2			8.1
Non-recurring impairment (2)		—		77.1			77.1
Management fee		0.7		0.9			1.6

Adjusted EBITDA	$	48.0	$	52.8		$	100.8

We incurred transaction fees of approximately $54.1 million, including deferred financing fees, fees paid to Carlyle and other fees and expenses as a result of the Acquisition. Those fees related to the Acquisition were capitalized as part of the purchase price and allocated to our net assets in accordance with purchase accounting, and those fees associated with financing the Acquisition were capitalized as deferred financing expense and are amortized over the applicable term of the related financings. Transaction fees and expenses that were not capitalized as part of the purchase price or deferred financing were expensed.

(1)		We incurred $1.9 million in professional fees and other costs associated with the KAC contractual review during the period ended June 30, 2006. We incurred $3.7 million in employee exit costs and $2.5 million in non-recurring professional fees associated with contractual review, potential acquisitions and the exchange offer of our senior subordinated notes during the period July 1, 2005 to December 31, 2005.

(2)		We incurred $77.1 million in goodwill and intangible asset impairment in accordance with SFAS 144 and SFAS 142 related to the potential loss of, or changes to, the Kelly Air Force Base subcontract during the period July 1, 2005 to December 31, 2005.

~~As discussed below in “Liquidity and Capital Resources,’’ we incurred significant indebtedness in~~36 ~~connection with the consummation of the Acquisition, and our total indebtedness and related interest expenses are significantly higher than prior to the Acquisition.~~

~~Financial~~Senior ~~statement~~subordinated ~~presentation~~notes

~~The~~Our ~~following~~senior ~~discussion~~subordinated ~~provides~~notes ahave ~~brief~~an ~~description~~interest rate of ~~certain~~81/4% ~~items~~and ~~that~~mature ~~appear~~on inSeptember 1, ~~our~~2014. We are ~~consolidated~~required ~~financial~~to ~~statements~~make interest payments on these notes each year on March 1 and September 1. Prior to September 1, 2007 we may redeem up to 35% of the ~~combined~~original ~~financial~~principal ~~statements~~amount of ~~Dunlop~~the ~~Standard~~notes ~~and~~at a ~~general~~premium ~~factors~~with the proceeds of certain equity issuances. Additionally, at any time on or after September 1, 2009, we may redeem all or a portion of the notes at pre-determined premiums. The notes are guaranteed on a senior subordinated basis by all of our subsidiaries that ~~impact~~provide guarantees ~~these~~under ~~items~~our senior credit facilities.

~~Revenues.~~Cash ~~Revenues represents gross sales principally resulting from the MRO services and parts~~flows ~~that we provide. Revenues related to our Other Services are based on services provided to the end customer pursuant to the contractual terms and conditions of the service agreements.~~

~~Cost~~The offollowing ~~revenues.~~table ~~Cost~~sets offorth ~~revenues includes all direct costs required to provide~~ our ~~MRO~~combined ~~services. These~~cash ~~costs~~flows ~~include the cost of parts, labor~~ for ~~engine disassembly, assembly and repair, spare engines, and overhead costs directly related to~~ the ~~performance~~periods ~~of MRO services. Overhead costs~~indicated: also include the cost of our MRO facilities, engineering, quality and production management, commercial credit insurance, depreciation of equipment and facilities and amortization of the cost to acquire OEM authorizations. Cost of revenues related to our MRO Redesign Services business include the cost of labor, subcontracted services and overhead costs directly related to the performance of MRO redesign services.


	Six months			Six months ended
	ended June 30, 2006			June 30, 2005
	(In thousands)
Net cash provided by (used in) operating activities	$	2,461		$	(6,786	)
Net cash used in investing activities		(8,563	)		(10,403	)
Net cash used in financing activities		(10,938	)		(10,041	)
Effect of exchange rate changes on cash and cash equivalents		(25	)		(578	)

Net decrease in cash and cash equivalents	$	(17,065	)	$	(27,808	)

~~Table~~Net ofcash ~~Contents~~provided by (used in) operating activities

~~Selling,~~Net ~~general~~cash ~~and~~provided ~~administrative~~by ~~expense.~~operating ~~Selling,~~activities ~~general~~for ~~and~~the ~~administrative~~six ~~(‘‘SG&A’’)~~months ~~expense~~ended June 30, 2006 was $2.4 million. ~~includes~~The ~~the~~net ~~cost~~cash ofprovided ~~selling~~was ~~our~~primarily ~~services~~attributable to ~~our~~net ~~customers~~income and ~~maintaining~~ a ~~global~~$7.8 million ~~sales~~increase ~~support~~in ~~network,~~accounts ~~including~~payable ~~salaries~~levels. ofThis ~~our~~net ~~direct~~cash ~~sales~~provided ~~force.~~by ~~General~~operating ~~costs~~activities towas ~~support~~offset ~~the~~by ~~administrative~~a $14.4 ~~requirements~~million increase in accounts receivable as a result of the ~~business~~increased ~~such~~revenues asduring ~~finance,~~the ~~accounting~~period and a $9.8 million increase in inventory, ~~human~~primarily ~~resources~~work ~~and~~in ~~general~~process, ~~management are~~as ~~also~~shop ~~included~~levels continue to be strong.

~~Critical~~Net ~~accounting~~cash ~~policies~~used in operating activities for the six months ended June 30, 2005 was $6.8 million. The net cash used was a result of a $2.6 million increase in inventory levels and a decrease in accounts payable associated with the repayment of $24.7 million payable relating to our use of U.S. government-owned inventory at the former Kelly Air Force Base. At June 30, 2005 the remaining payable owing to Kelly Aviation Center L.P. under the Kelly Air Force Base subcontract was approximately $12.3 million. This was offset by net income during the period and a decrease of $10.0 million in accounts receivable.

~~The~~Net ~~accounting~~cash ~~policies~~used ~~discussed below are important to the presentation of our results of operations and financial condition and require the application of judgment by our management~~ in ~~determining~~ ~~the~~investing ~~appropriate assumptions and estimates. These assumptions and estimates are based on~~activities our previous experience, trends in the industry, the terms of existing contracts and information available from other outside sources and factors. Adjustments to our financial statements are recorded when our actual experience differs from the expected experience underlying these assumptions. These adjustments could be material if our experience is significantly different from our assumptions and estimates. Below are those policies applied in preparing our financial statements that management believes are the most dependent on the application of estimates and assumptions.

~~Revenue~~Historically, ~~recognition.~~net Wecash ~~generally~~used ~~recognize~~in ~~revenues~~investing ~~generated~~activities byhas ~~our~~been ~~services~~for orcapital ~~parts~~expenditures ~~sales~~on ~~when~~property, ~~the~~plant ~~services~~and ~~are~~equipment, ~~completed~~rental orengines ~~repaired~~and ~~parts~~OEM ~~are~~authorizations, ~~shipped~~offset toby ~~the~~proceeds ~~customer.~~from ~~Amounts~~the ~~that are received~~disposition inof ~~advance~~property, ~~from~~plant ~~our~~and ~~customers~~equipment ~~are~~and ~~recorded~~rental asengines. ~~unearned~~Net ~~revenue.~~cash ~~Lease~~used ~~income~~in ~~associated~~investing ~~with~~activities for the ~~rental~~six ofmonths ~~engines~~ended orJune 30, ~~engine~~2006 ~~modules~~was to$8.6 million, ~~customers~~which iswas ~~recorded~~primarily ~~based~~due onto ~~engine~~capital ~~usage as reported by~~expenditures ~~the~~related ~~customer.~~to Innet ~~connection~~changes ~~with~~in ~~fixed~~our ~~price~~rental ~~per~~ engine ~~utilization~~pool. ~~services~~Net ~~that~~cash weused ~~provide, we receive payments from customers~~ in ~~advance~~investing ofactivities ~~completion~~for ofthe six ~~services~~month orperiod ~~shipment~~ended ofJune 30, ~~repaired~~2005 ~~parts to~~was ~~the customer~~$10.4 million, which ~~are~~was ~~recorded~~primarily asdue ~~unearned~~to ~~revenue. These payments are based on contractual~~capital ~~terms~~expenditures ~~and~~related ~~conditions pursuant~~ to ~~which~~our ~~customers~~CF34 ~~pay~~program ~~for~~and ~~services~~net orchanges ~~products~~in ~~based~~our onrental ~~aircraft usage~~engine pool.

~~Reserves for losses on fixed-price work orders. Losses on work orders generally result from~~37 fixed-price agreements that we have with customers and result when the costs of providing MRO services under a particular work order exceed the agreed-upon price for the parts and services under the underlying agreement. We provide a reserve for losses on work orders in the event that a loss on a particular work order becomes probable and estimable. We are unable to estimate the existence or size of losses until engines are delivered to us, despite our prior experience under a particular contract. This is due to the fact that the number of engines that will be delivered under the contract is unknown and the condition of each engine and the required MRO services vary from engine to engine. As a result, loss reserves only reflect our estimate of losses we expect to incur on engines already delivered to and inspected by us. The reserve is provided by increasing our cost of revenues by a reasonable estimate of the probable loss.

~~Reserve~~Net ~~for~~cash ~~warranty~~used ~~costs.~~in Wefinancing ~~provide reserves to account for costs associated with warranty~~activities claims. Warranty claims arise when an engine we service fails to perform to required specifications during the relevant warranty period. The warranty reserve is provided for by increasing our cost of revenues by an amount based on our current and historical warranty claims and associated repair costs.

~~Reserve~~Net ~~for~~cash ~~doubtful~~used ~~accounts~~in ~~receivable.~~financing Weactivities ~~provide~~during athe ~~reserve~~six ~~for~~months ~~doubtful~~ended ~~accounts~~June 30, ~~receivable that~~2006 ~~accounts~~was ~~for~~$10.9 million. On ~~estimated~~January 26, ~~losses~~2006 ~~that~~we ~~result~~made ~~from~~an ~~our~~optional ~~customers’~~prepayment ~~inability~~of ~~to pay for our MRO services~~$15.0 million ~~This~~and ~~reserve is based~~ on ~~a combination of our analyses of history~~February 28, ~~aging~~2006 ~~receivables,~~we ~~financial~~made ~~condition~~an ofoptional aprepayment ~~particular~~of ~~customer and political risk~~$5.0 million ~~Our~~under ~~estimates~~the ~~are~~term ~~net~~loan ofportion ~~credit insurance coverage that we maintain for most~~ of our ~~commercial~~senior ~~customers~~credit facilities. ~~The~~These ~~provision~~payments ~~for uncollectible~~have ~~accounts~~been ~~receivable~~applied ~~is charged~~ against ~~operating~~our ~~income~~future inscheduled ~~the~~prepayments, ~~period~~and ~~when~~we ~~such~~do ~~accounts~~not ~~are~~have ~~determined~~a toscheduled bepayment ~~uncollectible,~~until ~~and~~December 2011. ~~has~~At ~~historically~~June 30, ~~been immaterial in amount. Nevertheless~~2006, we ~~believe~~had ~~that ongoing analysis of this reserve is important due to the high~~$10.0 million ~~concentration~~outstanding ofon ~~revenues within~~ our ~~customer~~revolving ~~base~~credit facility.

~~Goodwill~~Net ~~and~~cash ~~intangible~~used ~~assets.~~in ~~Goodwill~~financing ~~and~~activities ~~other~~during ~~intangible~~the ~~assets~~six ~~with~~months ~~indefinite~~ended ~~lives are not amortized~~June 30, ~~but~~2005 ~~are~~was ~~subject~~$10.0 million. On toFebruary 28, ~~impairment~~2005, ~~testing~~we ~~both~~made ~~annually and earlier when there is~~ an ~~indication~~ ~~that~~optional anprepayment ~~impairment~~of ~~has~~$15.0 million ~~occurred,~~under ~~such~~the asterm anloan ~~operating loss or a significant adverse~~portion ~~change~~of in our ~~business.~~senior ~~Impairment~~credit ~~testing~~facilities. ~~includes~~This ~~use~~payment ofwas ~~future~~applied ~~cash~~against ~~flow~~our ~~and~~future ~~operating~~scheduled ~~projections,~~prepayments. ~~which~~In byMarch 2005 ~~their~~we ~~nature,~~received ~~are~~a ~~subjective.~~payment Ifof we$4.7 million ~~were~~as toa ~~determine~~result ~~through~~of ~~such~~the ~~testing~~final ~~that~~post-closing anadjustments ~~impairment~~to ~~has~~the ~~occurred,~~purchase weprice ~~would~~paid ~~record~~in the ~~impairment~~acquisition asof athe ~~charge~~maintenance, ~~against our income. We~~repair ~~amortize~~and ~~intangible~~overhaul ~~assets~~businesses ~~that~~of weDunlop ~~have~~Standard ~~determined~~Aerospace toGroup ~~have~~Limited ~~definite~~from ~~lives,~~Meggitt ~~such as OEM~~PLC. ~~authorizations, technology~~

31ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

~~Table~~Market risk is the potential economic loss that may result from adverse changes in the fair value of ~~Contents~~financial instruments. Our results could be impacted by changes in interest rates or foreign currency exchange rates. We use financial instruments to hedge our exposure to fluctuations in interest rates and foreign currency exchange rates. We do not hold financial instruments for trading purposes. Our policies are reviewed on a regular basis.

~~and~~ Interest ~~databases~~rate ~~over~~risks. ~~their~~We ~~estimated~~are ~~useful~~subject ~~lives~~to interest rate risk in connection with borrowings under our senior credit facilities. WeAs ~~amortize~~of ~~intangible~~June 30, ~~assets~~2006, ~~that~~we have ~~definite~~$250.0 million outstanding under the ~~lives~~term-loan ~~over~~portion ~~periods~~of ~~ranging~~our ~~from~~senior ~~one~~credit tofacilities, ~~20 years~~bearing ~~with~~interest aat ~~weighted~~variable ~~average~~rates. Each change of 120.~~6 years~~125% in interest rates would result in a $0.3 million ~~Our~~change in annual interest expense on ~~specific~~term-loan ~~OEM~~borrowings. ~~licenses~~In ~~and~~addition, ~~authorizations~~any ~~are~~borrowings ~~amortized~~under ~~over~~the ~~four~~revolving tocredit ~~17 years~~portion of the senior credit facilities will bear interest at variable rates. ~~The~~Assuming ~~Predecessor~~the revolving credit facility is ~~amortized~~fully ~~its~~drawn, ~~intangibles~~each ~~that~~0.125% ~~have~~change ~~definite~~in ~~lives~~interest ~~over~~rates would result in a ~~period~~$0.1 million ~~ranging~~change ~~from~~in ~~three~~annual interest expense on our revolving loan facility. Any debt we incur in the future may also bear interest at floating rates. Pursuant to ~~40 years~~the terms of our credit agreement we have entered into ~~with~~interest arate ~~weighted~~hedging ~~average~~arrangements for the purpose of 31reducing our exposure to adverse fluctuations in interest rates.~~5 years,~~ ~~and~~The ~~specific~~credit ~~OEM~~agreement ~~licenses~~requires ~~and~~that ~~authorizations~~50% ~~were~~of ~~amortized~~total debt is fixed and, or, covered ~~over~~under ~~three~~interest torate 10protection arrangements described in Item ~~years.~~2, ~~All~~“Management’s Discussion and Analysis of ~~our~~Financial ~~trademarks~~Condition ~~are~~and ~~classified~~Results asof ~~having~~Operations– ~~indefinite~~Liquidity ~~lives~~and Capital Resources.”

~~Impairment~~ Derivatives ofused ~~long-lived~~to ~~assets.~~hedge ~~We review long-lived assets for impairment whenever events or changes in circumstances indicate that~~ the ~~carrying~~variable ~~amount~~cash offlows ~~such~~associated ~~assets may not be recoverable in accordance~~ with ~~SFAS No~~$75.0 ~~144,~~million ~~Accounting for the Impairment or Disposal~~ of ~~Long~~existing variable-~~Lived~~rate ~~Assets. Recoverability~~debt ofwith ~~assets~~interest torate becollars ~~held and used is measured by a comparison of the carrying amount of an asset to undiscounted estimated future net cash flows expected to be generated by the assets. If such assets~~ are ~~considered~~as ~~to be impaired, the impairment to be recognized is measured by the~~follows ~~amount by which the carrying amount of the assets exceeds the fair value of the assets and charged against our income.~~

Inventory. We value our inventory on an ongoing basis using the first-in first-out, or FIFO, method, and state our inventories at the lower of cost or net realizable value. In making such determinations, cost represents the actual cost of raw materials, direct labor and an allocation of overhead in the case of work in progress and finished goods. We write down our inventory for estimated obsolescence or unmarketable inventory on a part-by-part basis using aging profiles. Aging profiles are determined based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected, then inventory adjustments may be required.

Maximum interest

Minimum interest

Notional amount

Period hedged by interest rate collar

rate⁽¹⁾

$75.0 million

March 27, 2006 – December 27, 2006

5.25

2.40

~~Income~~(1) Maximum ~~taxes. We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Deferred tax assets~~ and ~~liabilities~~minimum ~~are~~interest ~~recognized~~rates ~~for~~exclude the ~~future~~effect ~~tax consequences attributable to differences between financial statement carrying amounts~~ of ~~existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are estimated using enacted tax rates expected to apply to taxable income in~~ the ~~years~~Company’s ~~in which those temporary~~credit ~~differences~~spread ~~are expected to be recovered or settled. We do not provide taxes~~ on ~~undistributed earnings~~the ofvariable ~~foreign~~rate ~~subsidiaries that are considered to be permanently reinvested~~debt. ~~If undistributed~~ ~~earnings were remitted, foreign tax credits would substantially offset any resulting U.S. tax liability.~~

~~Results~~ Currency risks. Our assets and liabilities in foreign currencies are translated at the period-end rate. Exchange differences arising from this translation are recorded in our statement of operations. Currency exposures can arise from revenues and purchase transactions denominated in foreign currencies. Generally, transactional currency exposures are naturally hedged; that is, revenues and expenses are approximately matched, but where appropriate, are covered using forward exchange contracts and options. We expect to continue to enter into financial hedges, primarily option contracts, to reduce foreign exchange volatility. We are exposed to credit losses in the event of non-performance by the other party to the derivative financial instruments. We mitigate this risk by entering into agreements directly with a number of major financial institutions that meet our credit standards and that we expect to fully satisfy their contractual obligations. We view derivative financial instruments purely as a risk management tool and, therefore, do not use them for speculative trading purposes. At June 30, 2006, we had purchased foreign

~~Three Months Ended June 30, 2005 compared with Three Months Ended June 30, 2004~~38

~~The~~currency ~~following~~option ~~table~~contracts ~~sets~~with ~~forth~~an ~~certain~~aggregate ~~financial~~notional ~~data~~amount ~~for~~of $15.7 million to buy Canadian Dollars at 1.15 and sold option contracts with an aggregate notional amount of $15.3 million to sell Canadian Dollars at 1.1772. In addition, we had purchased foreign currency option contracts with an aggregate notional amount of $6.7 million to buy Euros at 1.21 and sold option contracts with an aggregate notional amount of $6.5 million to sell Euros at 1.19. To the ~~periods~~extent ~~indicated:~~the hedges are ineffective, gains and losses on the contracts are recognized in the current period.

32ITEM 4. CONTROLS AND PROCEDURES.

~~Table~~Evaluation of ~~Contents~~Disclosure Controls and Procedures

	Three months ended
	June 30,
(In thousands of dollars)	2005			2004
	(Successor)			(Predecessor)
Revenues	$	171,781		$	189,917
Cost of revenues		(145,264	)		(154,748	)
Gross profit		26,517			35,169
Selling, general and administrative expense		(12,851	)		(11,531	)
Amortization of intangible assets		(2,446	)		(688	)
Income from operations		11,220			22,950
Interest expense		(8,547	)		(1,896	)
Income before income taxes		2,673			21,054
Benefit (provision) for income taxes		126			(7,924	)
Net income	$	2,799		$	13,130

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

~~Revenues.~~We ~~Total~~carried ~~revenues~~out ~~decreased~~an ~~$18.1 million~~evaluation, orunder ~~10%,~~the tosupervision ~~$171.8 million~~and ~~for~~with the ~~three~~participation ~~months ended~~of ~~June 30~~our management, including ~~2005~~our ~~from~~Chief ~~$189.9 million~~Executive ~~for~~Officer ~~the~~and ~~three~~Chief ~~months~~Financial ~~ended June 30~~Officer, ~~2004.~~of ~~This~~the ~~decrease~~effectiveness ~~was~~of the ~~primarily~~design ~~attributable~~and tooperation aof ~~$15.8 million~~our ~~decline~~disclosure incontrols ~~our~~and ~~Aviation~~procedures ~~MRO~~as ~~segment~~of asJune 30, ~~demand~~2006. ~~for~~Based ~~our~~upon that ~~military~~evaluation, ~~MRO~~our ~~services~~management ~~declined~~concluded ~~due~~that toour ~~reductions~~disclosure ~~during~~controls ~~the~~and ~~2005~~procedures ~~period~~were innot effective at the ~~operational~~reasonable ~~tempo and~~assurance ~~funding~~level as of ~~the~~June 30, ~~United~~2006 ~~States~~due ~~military~~to ~~and~~the ~~increases~~restatement inof ~~serviceable~~previously ~~engine~~issued financial ~~inventory~~statements ~~levels~~and the existence of the ~~United~~material ~~States~~weaknesses ~~Air~~in ~~Force.~~our ~~Our~~internal ~~Other~~control ~~Services~~over financial ~~revenue~~reporting ~~declined~~at ~~$2.3~~June ~~million~~30, ~~during~~2006 ~~the~~described ~~quarter~~below. asNotwithstanding wethe ~~experienced~~material aweaknesses ~~reduction~~discussed inbelow, ~~demand~~the Company’s management ~~for~~has ~~our~~concluded ~~Energy~~that ~~Services and~~ the ~~contracts~~consolidated ~~for~~financial ~~our Redesign~~statements ~~services~~included ~~neared~~in ~~completion.~~this WeQuarterly ~~believe~~Report ~~the~~on ~~revenues~~Form 10-Q ~~for~~fairly ~~our~~present ~~Redesign~~in ~~Services~~all ~~will~~material ~~continue~~respects tothe ~~increase~~Company’s financial incondition, ~~2005~~results ~~as a result~~ of ~~our~~operations ~~subcontract~~and ~~agreement~~cash ~~with~~flows ~~Battelle~~for ~~Columbus Operations to~~the ~~provide~~periods ~~services~~presented toin ~~the~~conformity ~~United~~with ~~States Air Force~~GAAP.

~~Gross~~Material ~~profit. Gross profit was $26.5 million, or 15% of total revenues, for the three months ended~~Weaknesses June 30, 2005 and was $35.2 million, or 19% of total revenues, for the three months ended June 30, 2004. The decrease in gross profit resulted primarily from the lower revenues described above and increased costs associated with our Redesign Services business in support of the bid for the Battelle Columbus project. In addition, as a result of the reduced demand for our services, we experienced a narrowing of our gross profit margin during the 2005 period due to a reduction in our labour and overhead efficiencies.

~~Selling,~~ As ~~general~~previously ~~and~~reported ~~administration~~in ~~expense.~~our ~~SG&A~~annual ~~expense~~report ~~was~~on ~~$12.8 million,~~Form or10-K ~~7% of total revenues,~~ for the ~~three~~fiscal ~~months~~year ended ~~June~~ December 3031, 2005, ~~and~~management ~~was~~concluded ~~$11.5 million,~~that ortwo 6%material ofweaknesses ~~total~~in ~~revenues, for~~our ~~the~~internal ~~three~~control ~~months~~over ~~ended~~financial reporting ~~June~~existed at December 3031, ~~2004~~2005. ~~SG&A~~The ~~for~~Public ~~the~~Company ~~2005~~Accounting Oversight ~~period~~Board’s ~~includes~~Audit ~~increases~~Standard inNo. 2 ~~SG&A~~defines ~~expense~~a ~~due~~material toweakness ~~professional~~as ~~fees~~a ~~associated~~control ~~with~~deficiency, ~~our~~or ~~financing~~combination ~~activities~~of ~~and~~control ~~our~~deficiencies, ~~compliance~~that ~~with~~results in more than ~~the~~a ~~rules~~remote ~~and~~likelihood ~~regulations~~that a material misstatement of the ~~Securities~~annual ~~and~~or ~~Exchange~~interim ~~Commission.~~financial ~~Our~~statements ~~SG&A~~will ~~expenses~~not ~~also~~be prevented ~~increased~~or asdetected. weThe ~~incurred~~following ~~management~~material ~~fees~~weaknesses ~~from~~have ~~our~~been ~~parent~~identified ~~company~~as ~~associated~~having ~~with~~been ~~the~~in ~~Acquisition~~existence as of December 31, 2004 and through June 30, 2006.

~~Amortization~~• ofWe ~~intangible~~failed ~~assets.~~to ~~Amortization~~maintain effective controls over the valuation and presentation of ~~intangible~~our ~~assets~~loss-contract ~~was~~accrued $2liability.~~4 million~~ ~~for~~Specifically, ~~the three~~our ~~months~~controls ~~ended~~over ~~June 30,~~the ~~2005~~application and ~~was~~monitoring ~~$0.7 million,~~of ~~for~~accounting ~~the~~policies ~~three~~with ~~months~~respect ~~ended~~to ~~June 30,~~loss ~~2004. The~~contracts ~~amortization~~acquired ofin ~~intangible~~connection ~~assets~~with ~~during~~a ~~the~~purchase ~~2005~~business ~~period~~combination ~~reflects~~were ~~the~~ineffective ~~change~~to inensure ~~carrying~~that ~~values and~~such ~~amortization~~contracts ~~periods~~were asrecorded ain ~~result~~accordance ofwith ~~the~~generally ~~Acquisition~~accepted accounting principles.

~~Income~~ In ~~from~~connection ~~operations.~~with ~~Income~~the ~~from~~audit ~~operations~~of ~~was~~our ~~$11.2 million,~~financial orstatements 7%for ofthe ~~total~~year ~~revenues~~ended December 31, ~~for~~2005 and the ~~three~~preparation ~~months~~of ~~ended~~our ~~June 30,~~Annual ~~2005~~Report ~~and~~on ~~was~~Form ~~$22.9 million~~10-K for 2005, orour ~~12%~~independent ofregistered ~~total~~public ~~revenues~~accounting firm, PricewaterhouseCoopers LLP (“PwC”), identified errors with respect to our valuation and accounting for a loss-making contract at the ~~three months~~time ~~ended~~of ~~June 30,~~the acquisition in August 2004 and our recording of losses under that loss-contract in subsequent periods. ~~Income~~Our ~~from~~management ~~operations~~determined ~~during~~that these errors resulted because our controls over the ~~three~~application ~~months~~and ~~ended~~monitoring ~~June 30,~~of ~~2005~~accounting policies ~~decreased~~applicable ~~primarily~~to ~~due~~loss contracts acquired in purchase business combinations were ineffective to ensure ~~the~~that ~~decreased~~such ~~gross~~contracts ~~profit~~were ~~associated~~recorded in accordance with ~~the~~generally ~~decreased~~accepted ~~revenues,~~accounting aprinciples. ~~reduction~~This control deficiency resulted in the restatement of our ~~labour~~consolidated ~~and~~financial ~~overhead~~statements ~~efficiencies~~for the restated periods as awell ~~result~~as ofan audit adjustment to the ~~lower~~2005 ~~demand~~annual ~~for~~consolidated ~~our~~financial ~~services~~statements. asAdditionally, ~~well~~this ancontrol ~~increase~~deficiency could result in ~~amortization~~a ~~expense~~misstatement of the inventory, goodwill, accrued liabilities, cost of revenues and ~~professional~~interest ~~fees~~expense accounts that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency constitutes a material weakness.

33 • We failed to maintain effective controls over the valuation of discounts for parts that are recorded within our accounts receivable account. Specifically, we lacked effective controls, including monitoring, to ensure that our receivable account relating to the embodiment discount was appropriately valued and recorded.

~~Table~~During the fourth quarter of ~~Contents~~2005 our senior accounting staff identified errors that occurred in the fourth quarter of 2004 with respect to the calculation of a discount that we receive from one of our major parts manufacturers that is recorded within our accounts receivable account. Our management determined that these errors resulted because our controls and procedures in effect at the time of the miscalculation, which required that the calculation of the discount to be reconciled and confirmed on a monthly basis by a member of our accounting staff located outside of our corporate headquarters in Winnipeg, were not being observed. Our management also determined that our senior accounting staff in Winnipeg failed to monitor the operation of the control that was in place, and as a result the error

~~Interest expense. Interest expense was $8.5 million for the three months ended June 30, 2005 and~~39 ~~was $1.9 million, for the three months ended June 30, 2004. The increase reflects the incurrence of increased total indebtedness in connection with the Acquisition.~~

~~Six~~remained ~~Months~~undetected ~~Ended~~until ~~June 30,~~almost a year after it occurred. This control deficiency resulted in the restatement of our consolidated financial statements for 2004 and each of the first three quarters of 2005. ~~compared~~Additionally, ~~with~~this ~~Six~~control ~~Months~~deficiency ~~Ended~~could ~~June 30~~result in a misstatement of accounts receivable and cost of revenues that would result in a material misstatement of our annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management ~~2004~~determined that this control deficiency constitutes a material weakness.

~~The~~Plans ~~following table sets forth certain financial data~~ for ~~the periods indicated:~~Remediation

	Six months ended
	June 30,
(In thousands of dollars)	2005			2004
	(Successor)			(Predecessor)
Revenues	$	359,195		$	367,868
Cost of revenues		(299,569	)		(301,978	)
Gross profit		59,626			65,890
Selling, general and administrative expense		(25,395	)		(22,440	)
Amortization of intangible assets		(4,892	)		(1,376	)
Income from operations		29,339			42,074
Interest expense		(17,475	)		(3,835	)
Income before income taxes		11,864			38,239
Provision for income taxes		(2,587	)		(14,418	)
Net income	$	9,277		$	23,821

To remediate the material weakness relating to valuation of the Loss Contract, we are developing a written policy that requires:

~~Revenues.~~• that ~~Total~~certain ~~revenues~~members ~~decreased~~of $8.7 million, or 2%, to $359.2 million for the six months ended June 30, 2005 from $367.9 million for the six months ended June 30, 2004. This decrease was attributable to a $4.8 million decline in our ~~Aviation~~accounting ~~MRO~~staff ~~segment~~receive ~~resulting~~training ~~from~~regarding ~~lower demand for our military MRO services due to~~ the ~~reductions~~application in the U.S. military’s operational tempo, military funding and the U.S. Air Force’s increase in serviceable engine inventories discussed above, partially offset by an increase in our turbofan and turboprop MRO services. Our Other Services revenue declined $3.9 million during the quarter as we experienced a reduction in demand for our Energy Services and the contracts for our Redesign Services are near completion. We believe the revenues for our Redesign Services will continue to increase in 2005 as a result of ~~our subcontract~~SFAS ~~agreement with Battelle Columbus Operations to provide services to the United States Air Force.~~141;

~~Gross~~• our ~~profit.~~accounting ~~Gross~~staff ~~profit~~to ~~was~~take ~~$59.6 million,~~prescribed orsteps ~~17%~~in ofthe ~~total~~event ~~revenues,~~of ~~for~~certain ~~the~~non-routine ~~six months ended June 30~~transactions, which ~~2005~~steps ~~and~~will ~~was~~include: ~~$65.9 million,~~engaging orexternal ~~18%~~accounting ~~of total revenues~~advisors, ~~for~~establishing ~~the~~working ~~six months ended June 30~~groups, ~~2004.~~action ~~The~~plans, ~~decrease~~or inmonitoring ~~gross~~meetings ~~profit~~based ~~resulted~~on ~~primarily from~~ the ~~lower~~nature ~~revenues~~of ~~described~~the ~~above~~event, ~~and increased~~in ~~costs~~each ~~associated~~case ~~with our Redesign Services business~~ in ~~support~~an ofeffort ~~the bid for the~~to ~~Battelle~~ensure ~~Columbus~~that ~~project.~~individuals Infrom ~~addition, as a result of~~ the ~~reduced~~appropriate ~~demand~~departments ~~for~~are ~~our services~~involved, ~~we experienced~~communication ais ~~we experienced a narrowing of our gross profit margin during the 2005 period due to a~~thorough, ~~reduction~~and inaction ~~our~~items ~~labour~~are ~~and~~addressed; ~~overhead efficiencies.~~and

~~Selling,~~• that ~~general~~significant and ~~administration~~nonrecurring ~~expense.~~events ~~SG&A~~be ~~expense~~brought ~~was~~to ~~$25.4 million, or 7% of total revenues, for~~ the ~~six~~attention ~~months ended June 30, 2005 and was $22.4 million, or 6%~~ of ~~total~~senior ~~revenues, for~~management ~~the six months ended June 30, 2004. The increase is primarily attributed to increases in professional fees associated with our financing activities~~ and ~~our compliance with~~ the ~~rules and~~ ~~regulations~~audit ~~of the Securities and Exchange Commission~~committee. ~~Our SG&A expenses also increased as we~~ ~~incurred management fees from our parent company associated with the Acquisition.~~

34To remediate the material weakness relating to the recording of the receivable account related to the embodiment discount, we have put in place procedures and have adopted a written policy regarding the calculation of the discount, which requires:

~~Table~~• that the calculation of ~~Contents~~the discount be performed by a member of our accounting team and be confirmed by our assistant controller and that each of them be properly trained with respect to such calculation and confirmation;

~~Amortization~~• that ~~of intangible assets. Amortization of intangible assets was $4.9 million for~~ the ~~six months~~confirmation ~~ended June 30, 2005 and was $1.4 million, for the six months ended June 30, 2004. The amortization~~ of ~~intangible assets during~~ the ~~2005~~discount ~~period~~calculation ~~reflects~~has ~~the~~been ~~change~~centralized in ~~carrying~~Winnipeg; ~~values~~ and ~~amortization periods as a result of the Acquisition.~~

~~Income~~• that ~~from~~issues ~~operations.~~arising ~~Income~~with ~~from~~respect ~~operations~~to ~~was~~calculation ~~$29.3 million, or 8%~~ of ~~total revenues, for~~ the ~~six~~ ~~months~~discount ~~ended~~be ~~June 30,~~brought ~~2005~~to ~~and was $42.1 million, or 12% of total revenues, for~~ the ~~six~~attention ~~months ended June 30, 2004. Income from operations decreased as a result~~ of ~~decreased gross profit~~ ~~associated~~senior ~~with~~management ~~the decreased revenues, a reduction in our labour~~ and ~~overhead efficiencies as a result of~~ the ~~lower~~audit ~~demand for our services as well an increase in amortization expense and professional fees~~committee.

~~Interest~~Although ~~expense~~we have implemented and continue to implement remediation efforts, a material weakness indicates that there is more than a remote likelihood that a material misstatement of our financial statements will not be prevented or detected in a future period. ~~Interest~~In ~~expense~~addition, ~~was~~we ~~$17~~cannot assure you that we will not in the future identify additional material weaknesses or significant deficiencies in our internal controls over financial reporting that we have not discovered to date.~~5 million~~ ~~for~~We are taking steps to improve our internal control over financial reporting to comply with our obligations under the ~~six~~Exchange ~~months~~Act. ~~ended~~The ~~June 30,~~remediation ~~2005~~efforts we have taken and ~~was~~continue to take are $3subject to continued management review supported by confirmation and testing by management and audit committee oversight.~~8 million~~ As a result, ~~for~~additional ~~the~~changes ~~six~~are ~~months~~expected ~~ended~~to ~~June 30,~~be ~~2004~~made to our internal control over financial reporting. ~~The~~Other ~~increase~~than ~~reflects~~the foregoing initiatives since the ~~incurrence~~date of the ~~increased~~evaluation ~~total~~supervised ~~indebtedness~~by our management, there have been no material changes in ~~connection~~our ~~with~~disclosure controls ~~the~~and ~~Acquisition~~procedures, or our internal control over financial reporting, that have materially affected, or are reasonably likely to materially affect, our disclosure controls and procedures or our internal control over financial reporting.

35Changes in Internal Control over Financial Reporting

~~Table~~ There ofwere ~~Contents~~no changes in our internal control over financial reporting during the Company’s most recent fiscal quarter have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

~~Segment Results of Operations~~40

~~The~~PART ~~Company~~II ~~has~~OTHER ~~one reportable segment, Aviation MRO. The Redesign Services and Energy Services~~INFORMATION operating segments are not reportable and have been combined and disclosed in “Other Services” as they do not meet any of the thresholds under SFAS No. 131. The following table reconciles segment revenue and income from operations to total revenue and net income:

	Three months ended
	June 30,
(In thousands of dollars)	2005			2004
	(Successor)			(Predecessor)
Revenues:
Aviation MRO	$	166,652		$	182,507
Other Services		5,129			7,410
Total Revenue		171,781			189,917
Segment Income (Loss) From Operations:
Aviation MRO		15,569			25,855
Other Services		(1,811	)		(1,229	)
Segment income from operations		13,758			24,626
Corporate expenses		(2,538	)		(1,676	)
Income from operations		11,220			22,950
Interest expense		(8,547	)		(1,896	)
Income before income taxes		2,673			21,054
Provision for income taxes		126			(7,924	)
Net income	$	2,799		$	13,130

ITEM 1. LEGAL PROCEEDINGS

~~Aviation~~We ~~MRO~~are, from time to time, involved in certain legal proceedings arising in the normal course of our business. These proceedings primarily involve commercial claims, product liability claims, personal injury claims and workers compensation claims. We establish reserves in a manner that is consistent with Generally Accepted Accounting Principles for costs associated with such matters when liability is probable and those costs are capable of being reasonably estimated. We cannot predict the outcome of these lawsuits, legal proceedings and claims with certainty. Nevertheless, other than described below, we do not believe that the outcome of any currently existing proceedings, either individually or in the aggregate, is likely to have a material adverse effect on our business or our consolidated financial position.

~~Three~~ITEM ~~Months~~1A. ~~Ended~~RISK ~~June 30, 2005 compared with Three Months Ended June 30, 2004~~FACTORS

~~Revenues.~~ Investors ~~Revenues~~should ~~generated~~carefully byconsider ~~our Aviation MRO segment decreased $15.9 million, or 9%, to $166.7 million for~~ the ~~three~~updated ~~months~~risk ~~ended~~factor ~~June 30,~~below ~~2005~~and ~~from $182.5 million for~~ the ~~three~~other ~~months~~risk ~~ended June 30,~~factors ~~2004. This decrease was primarily attributable to a decline~~ in our ~~military~~Annual ~~MRO~~Report ~~services~~on as the operational tempo and funding of the United States military has reduced while serviceable engine inventory levels of the United States Air Force have increased during the quarter. Revenues from regional turbofan end users decreased $11.0Form ~~million~~10-K, ~~primarily~~in asaddition ato ~~result of Rolls Royce modifying~~ the ~~MRO~~other ~~workscope~~information ~~requirements~~in ~~for the AE3007 engine platform which has reduced the scope of~~ our ~~MRO revenues. The decline in revenue has been partially offset by an increase in revenue~~Annual ~~from~~Report ~~regional airline turboprop end users. Revenues increased $11.8 million for these services driven largely by increased utilization~~ and ~~improving economic conditions for turboprop aircraft. In addition, our helicopter engine platform generated a $4.4 million increase~~ in ~~revenues,~~this ~~which was~~quarterly ~~primarily~~report ~~attributable~~on ~~to our U~~Form 10-Q.~~S. Army T703 contract.~~

~~Segment income from operations. Segment income from operations generated by our Aviation MRO~~ ~~segment~~A ~~was~~significant ~~$15.6 million,~~portion ~~or 9%~~ of ~~Aviation~~our ~~MRO~~ revenues ~~for~~are ~~the~~derived ~~three~~under ~~months~~a ~~ended~~single ~~June 30,~~contract ~~2005 and~~that ~~was~~has ~~$25.8 million,~~been orthe ~~14%~~subject of ~~Aviation~~a ~~MRO~~dispute ~~revenues,~~and ~~for~~that ~~the~~may ~~three months ended June 30, 2004.~~be ~~Segment~~terminated ~~income from operations decreased for the reasons discussed above~~ in ~~SG&A~~certain ~~expense~~circumstances, ~~and~~some ~~the increase in amortization~~ of ~~intangible~~which ~~assets~~are ~~resulting~~beyond ~~from the Acquisition~~our control.

36 Approximately 31.2% and 28.0% of our revenues for the year ended December 31, 2005 and the six months ended June 30, 2006, respectively, were generated from providing MRO services to the U.S. Air Force pursuant to our contract with Kelly Aviation Center, LP, or KAC. While we anticipate that the proportion of our revenues that we earn under the Kelly Air Force Base subcontract will be reduced in future periods due to the amendment to the subcontract as described in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Kelly Air Force Base Subcontract,” this subcontract will remain a key to our future prospects and the loss of, or further materially adverse changes to, the amended Kelly Air Force Base subcontract would have a material adverse effect on our revenues and liquidity. Additionally, if this subcontract is terminated for any reason, including future disputes with KAC, because KAC is not awarded further extensions under the prime contract with the U.S. Air Force, as a result of its expiration or otherwise, our results of operations and liquidity would be materially adversely affected. For further discussion, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Kelly Air Force Base Subcontract” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”

~~Table of Contents~~41

~~The~~ITEM ~~results~~6. ~~of operations of our Other Services were not material to our business during the~~EXHIBITS ~~three months ended June 30, 2005 and the three months ended June 30, 2004.~~

Six Months Ended June 30, 2005 compared with Six Months Ended June 30, 2004


Exhibit
Number		Description
3.1		Certificate of Incorporation of Standard Aero Holdings, Inc. (incorporated by reference to Exhibit 3.1 of Standard Aero Holdings, Inc.’s Registration Statement No. 333-124394).

3.2		Bylaws of Standard Aero Holdings, Inc. (incorporated by reference to Exhibit 3.17 of Standard Aero Holdings, Inc.’s Registration Statement No. 333-124394).

4.1		Senior Subordinated Note Indenture with respect to the 8 ¹/₄% Senior Subordinated Notes due 2014, between Standard Aero Holdings, Inc., Wells Fargo Bank Minnesota, National Association, as trustee, and the Guarantors listed on the signature pages thereto, dated as of August 20, 2004 (incorporated by reference to Exhibit 4.1 of Standard Aero Holdings, Inc.’s Registration Statement No. 333-124394).

4.2		Supplemental Indenture, dated as of August 24, 2004, among Dunlop Standard Aerospace (Nederland) BV and Standard Aero BV, Standard Aero Holdings, Inc. and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.2 of Standard Aero Holdings, Inc.’s Registration Statement No. 333-124394).

4.3		Supplemental Indenture, dated as of August 24, 2004, among Dunlop Standard Aerospace (US) Inc., Dunlop Standard Aerospace (US) Legal Inc., Standard Aero, Inc., Dunlop Aerospace Parts, Inc., Standard Aero (San Antonio) Inc., Standard Aero (Alliance) Inc., Standard Aero Canada, Inc., 3091781 Nova Scotia Company, 3091782 Nova Scotia Company, 3091783 Nova Scotia Company, Standard Aero Limited, Not FM Canada Inc., Standard Aero Holdings, Inc. and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.3 of Standard Aero Holdings, Inc.’s Registration Statement No. 333-124394).

4.4		Supplemental Indenture, dated as of March 3, 2005, among Standard Aero (US), Inc. (f/k/a Dunlop Standard Aerospace (U.S.) Inc.); Standard Aero (US) Legal, Inc. (f/k/a Dunlop Standard Aerospace (US) Legal, Inc.); Standard Aero Inc.; Standard Aero Materials, Inc. (f/k/a Dunlop Aerospace Parts Inc.); Standard Aero (San Antonio) Inc.; Standard Aero (Alliance) Inc.; Standard Aero Canada, Inc.; 3091781 Nova Scotia Company; 3091782 Nova Scotia Company; 3091783 Nova Scotia Company; Standard Aero Limited; Not FM Canada Inc.; Standard Aero (Netherlands) B.V. (f/k/a Dunlop Standard Aerospace (Nederland) BV) and Standard Aero BV, Standard Aero Holdings, Inc. and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.4 of Standard Aero Holdings, Inc.’s Registration Statement No. 333-124394).

4.5		Supplemental Indenture, dated as of March 31, 2005, among Standard Aero (US), Inc. (f/k/a Dunlop Standard Aerospace (U.S.) Inc.); Standard Aero (US) Legal, Inc. (f/k/a Dunlop Standard Aerospace (US) Legal, Inc.); Standard Aero Inc.; Standard Aero Materials, Inc. (f/k/a Dunlop Aerospace Parts Inc.); Standard Aero (San Antonio) Inc.; Standard Aero (Alliance) Inc.; Standard Aero Canada, Inc.; 3091781 Nova Scotia Company; 3091782 Nova Scotia Company; 3091783 Nova Scotia Company; Standard Aero Limited; Not FM Canada Inc. and Standard Aero Redesign Services Inc., Standard Aero Holdings, Inc. and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.5 of Standard Aero Holdings, Inc.’s Registration Statement No. 333-124394).

10.1		Amendment No. 92 to Subcontract No. LMKAC-98-0001 between Standard Aero and Lockheed, dated as of July 11, 2006.*

31.1		Certification of Chief Executive Officer pursuant to Rule 15d-14(a) (17 CFR 240.15d-14(a)).

31.2		Certification of Chief Financial Officer pursuant to Rule 15d-14(a) (17 CFR 240.15d-14(a)).

32.1		Certification of Chief Executive Officer pursuant to Rule 15d-14(b) (17 CFR 240.15d-14(b)) and 18 U.S.C. Section 1350.

32.2		Certification of Chief Financial Officer pursuant to Rule 15d-14(b) (17 CFR 240.15d-14(b)) and 18 U.S.C. Section 1350.

~~The~~* ~~following~~Portions ~~table~~have ~~reconciles~~been ~~segment~~omitted ~~revenue~~pursuant ~~and income from operations~~ to ~~total~~a ~~revenue~~request ~~and~~for ~~net~~confidential treatment. ~~income:~~

	Six months ended
	June 30,
(In thousands of dollars)	2005			2004
	(Successor)			(Predecessor)
Revenues:
Aviation MRO	$	349,156		$	353,881
Other Services		10,039			13,987
Total Revenue		359,195			367,868
Segment Income (Loss) From Operations:
Aviation MRO		37,888			47,068
Other Services		(3,151	)		(2,107	)
Segment income from operations		34,737			44,961
Corporate expenses		(5,398	)		(2,887	)
Income from operations		29,339			42,074
Interest expense		(17,475	)		(3,835	)
Income before income taxes		11,864			38,239
Provision for income taxes		(2,587	)		(14,418	)
Net income	$	9,277		$	23,821

~~Aviation MRO~~SIGNATURES

~~Six~~Pursuant ~~Months~~to ~~Ended~~the ~~June 30,~~requirements ~~2005~~of ~~compared~~the ~~with~~Securities ~~Six~~Exchange ~~Months~~Act ~~Ended~~of ~~June 30~~1934, ~~2004~~the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Revenues. Revenues generated by our Aviation MRO segment decreased $4.7 million, or 1%, to $349.2 million for the six months ended June 30, 2005 from $353.9 million for the six months ended June 30, 2004. This decrease was primarily attributable to a decline in our military MRO services as the operational tempo and funding of the United States military has reduced while serviceable engine inventory levels of the United States Air Force have increased during the period. Revenues from regional turbofan end users decreased $12.5 million primarily as a result of Rolls Royce’s recent modifications of the MRO workscope requirements for the AE3007 engine platform which has reduced the scope of our MRO revenues under this contract. The decline in revenue has been partially offset by an increase in revenue from regional airline and business aircraft turboprop end users. Revenues increased $22.8 million for these services driven largely by improving economic conditions for turboprop aircraft. In addition, our helicopter engine platform generated a $9.5 million increase in revenues, which was primarily attributable to our U.S. Army T703 contract and improving economics.


	STANDARD AERO HOLDINGS, INC.

Dated: August 14, 2006	/s/ DAVID SHAW

	Name:	David Shaw
	Title:	Chief Executive Officer
		(principal executive officer)

Dated: August 14, 2006	/s/ BRADLEY BERTOUILLE

	Name:	Bradley Bertouille
	Title:	Chief Financial Officer
		(principal financial and accounting
		officer)

~~Segment income from operations. Segment income from operations generated by our Aviation MRO~~43 ~~segment was $37.9 million, or 11% of Aviation MRO revenues, for the six months ended June 30, 2005 and was $47.1 million, or~~

13% of Aviation MRO revenues, for the six months ended June 30, 2004. Segment income from operations decreased for the reasons discussed above in SG&A and the increase in amortization of intangible assets resulting from the Acquisition.

The results of operations of our Other Services were not material to our business during the six months ended June 30, 2005 and the six months ended June 30, 2004.

Factors That May Affect Future Results

Our operating results and financial position may be adversely affected or fluctuate as a result of general economic conditions, commercial airline environment and military funding and other factors, including: (1) revenues generated by providing MRO services to the U.S. Government, its agencies and its contractors may not continue at levels previously experienced; (2) OEMs may modify pricing, modify workscope requirements or reduce the volumes of engines subcontracted to us, either because of decreased demand by their end users or because of an increase in the volume of MRO services directly performed by the OEMs; (3) limited access to the debt and equity capital markets and the restricted ability to draw down funds under financing agreements; (4) inability to comply with restrictive and financial covenants contained in certain of our loan agreements; (5) changes in or inability to comply with laws and regulations that may affect our aviation MRO activities that are subject to licensing, certification and other regulatory requirements imposed by the Federal Aviation Administration and other regulatory agencies, both domestic and foreign; (6) competition from other companies, including service divisions of OEMs, other independent MRO service providers and in-house maintenance services of the commercial airlines, some of which have greater financial resources than us; (7) exposure to product liability and property claims that may be in excess of our liability insurance coverage; and (8) our operations may prove harmful to the environment which could expose us to fines and damages that could require expensive remediation.

Liquidity and Capital Resources

Liquidity Requirements

Our principal cash requirements are for working capital, to fund capital expenditures and to service our indebtedness. We expect to satisfy our cash requirements with cash on hand, cash flows from operations and borrowings under the revolving credit portion of our senior credit facilities.

We incurred substantial indebtedness in connection with the Acquisition. Our indebtedness at July 31, 2005 consisted of:

• our senior credit facilities, consisting of an eight-year term loan facility, under which we had outstanding indebtedness of $270.0 million and a $50.0 million six-year revolving credit facility, under which we had $12.5 million outstanding indebtedness; • $3.4 million in capital lease obligations; and • $200.0 million in aggregate principal amount of our 81/4% Senior Subordinated Notes due 2014.

Senior Credit Facilities

Borrowings under our senior credit facilities bear interest at either a floating base rate or a LIBOR rate plus, in each case, an applicable margin. At June 30, 2005, our borrowings under our senior credit facilities bore interest based on LIBOR. In addition, we pay a commitment fee in respect of unused revolving commitments at a rate equal to 0.5% per annum. Subject to certain exceptions, our senior credit facilities require mandatory prepayments of the loans with 50% of our annual excess cash flow (as defined in the senior credit facilities) and with the net cash proceeds of certain assets sales or other asset dispositions and issuances of debt securities. The obligations under our senior credit facilities are guaranteed by all of our existing and future wholly owned U.S. and Canadian subsidiaries (except for unrestricted subsidiaries) and by our parent, and are secured by a security interest in

substantially all of our assets and the assets of our direct and indirect restricted U.S. subsidiaries that are guarantors, including a pledge of all of our capital stock, the capital stock of each of our restricted U.S. subsidiaries and 65% of the capital stock of certain of our non-U.S. subsidiaries that are directly owned by us or one of our restricted U.S. subsidiaries.

We made optional prepayments under the term loan portion of our senior credit facilities of $10.0 million on October 27, 2004, $30.0 million on December 29, 2004 and of $15.0 million on February 28, 2005. These prepayments have been applied against our future scheduled prepayments and we will not have a scheduled prepayment until December 2011.

From time to time we have drawn down on our revolving credit facility in order to provide short term liquidity. Such borrowings have ranged from $2.0 million to $12.5 million and have been repaid in each case in fewer than 45 days. Our borrowings outstanding on the revolving credit facility are expected to be repaid during the remainder of 2005.

Pursuant to the terms of our senior credit agreement we have entered into interest rate hedging arrangements for the purpose of reducing our exposure to adverse fluctuations in interest rates. On October 12, 2004, we entered into a series of sequential collar transactions. The following table summarizes the collar transactions:

Notional Amount	Term	Floor Strike Rate	Cap Strike Rate
$75,000,000	March 28, 2005 – September 26, 2005	2.00% (plus applicable margin)	3.50% (plus applicable margin)
$75,000,000	September 27, 2005 – March 26, 2006	2.00% (plus applicable margin)	4.25% (plus applicable margin)
$75,000,000	March 27, 2006 – December 27, 2006	2.40% (plus applicable margin)	5.25% (plus applicable margin)

Senior Subordinated Notes

Our senior subordinated notes have an interest rate of 8.25% and mature on September 1, 2014. We are required to make interest payments on these notes each year on March 1 and September 1 and commenced making such payments on March 1, 2005. Prior to September 1, 2007 we may redeem up to 35% of the original principal amount of the notes at a premium with the proceeds of certain equity issuances. Additionally, at any time on or after September 1, 2009, we may redeem all or a portion of the notes at pre-determined premiums. The notes are guaranteed on a senior subordinated basis by all of our subsidiaries that provide guarantees under our senior credit facilities.

We expect to make capital expenditures (including the net change in our rental engine pool) of approximately $15.0 million in 2005, of which $10.4 million had been spent in the six months ended June 30, 2005. For 2005 these capital expenditures will be divided between annual capital projects, net rental engine pool investments and continuing investments in our CF34 program.

Based on our current operations, we believe that cash on hand, together with cash flows from operations and borrowings under the revolving credit portion of our new senior credit facilities, will be adequate to meet our working capital, capital expenditure, debt service and other cash requirements for the foreseeable future. However, our ability to make scheduled payments of principal of, pay interest on, and to refinance, our indebtedness, including the senior subordinated notes, to comply with the financial covenants under our debt agreements and to fund our other liquidity requirements will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot assure you that our business will generate cash flows from operations or that future borrowings will be available under our senior credit facilities in an amount sufficient to enable us to service our indebtedness, including the notes, or to fund our other liquidity needs. Any future acquisitions, joint ventures or other similar transactions will likely require additional capital and there can be no assurance that any such capital will be available to us on acceptable terms, if at all.

In connection with the Acquisition, we also entered into a management agreement with TC Group Management, L.L.C., an affiliate of The Carlyle Group. Pursuant to this agreement, and subject to certain conditions, we pay TC Group Management an annual management fee of $1.5 million. We also have employee benefit obligations, which will require us to make future payments.

Covenant Compliance

Our senior credit facilities contain various restrictive operating and financial covenants, including covenants that are based on Adjusted EBITDA, as defined in our senior credit facilities. These covenants include a consolidated leverage ratio covenant that measures the ratio of our outstanding debt net of cash for any period of four consecutive quarters to our Adjusted EBITDA during the same four quarters. This consolidated leverage ratio covenant required us to have a ratio of outstanding debt net of cash to Adjusted EBITDA of no more than 6.25 to 1 at June 30, 2005. Our actual consolidated leverage ratio at June 30, 2005 was 4.54 to 1.

These covenants also include a minimum consolidated net interest coverage ratio covenant that measures the ratio of our Adjusted EBITDA for any period of four consecutive quarters to our interest expense during the same four quarters. The minimum interest coverage ratio covenant required us to have a ratio of Adjusted EBITDA to interest expense ratio of at least 2.00 to 1 at June 30, 2005. Our actual interest coverage ratio was 3.74 to 1 at June 30, 2005.

We are currently, and for at least the next twelve months expect to remain, in compliance in all material respects with the covenants in the senior credit facilities and the indenture governing our 81/4% Senior Subordinated Notes due 2014.

We have included information concerning Adjusted EBITDA because we use this measure to evaluate our compliance with covenants governing our indebtedness Under our senior credit facilities, Adjusted EBITDA represents net income before provision for income taxes, interest expense, net, and depreciation and amoritzation and also adds or deducts, among other things, unusual or non-recurring items, restructuring, transaction fees, expenses and management fees pursuant to our management agreement with Carlyle. Adjusted EBITDA is not a recognized term under GAAP. Adjusted EBITDA should not be considered in isolation or as an alternative to net income, net cash provided by operating activities or other measures prepared in accordance with GAAP. Additionally, Adjusted EBITDA is not intended to be a measure of free cash flow available for management’s discretionary use, as such measure does not consider certain cash requirements such as capital expenditures, tax payments and debt service requirements. Adjusted EBITDA, as included herein, is not necessarily comparable to similarly titled measures reported by other companies.

The following table presents a reconciliation of Adjusted EBITDA, as defined in the senior credit facilities to net income:

			August 25 –			July 1 –
	January 1 – June		December 31,			August 24,		Last 12 Months
	30, 2005		2004			2004		June 30, 2005
(In millions)	Successor		Successor			Predecessor		Combined(5)
Net income	$	9.3	$	(4.7	)	$	9.4		14.0
Add:
Depreciation and amortization		13.2		9.1			4.1		26.4
Interest expense, net		17.5		13.7			1.0		32.2
Provision for income taxes		2.6		(0.2	)		1.4		3.8
Expenses associated with the disposal of Dunlop Standard (1)		—		—			2.3		2.3
Expenses associated with Acquisition (2)		—		2.4			—		2.4
Effect of write-up of inventory and work in progress (3)		—		21.4			—		21.4
Non-recurring expenses (4)		0.6		—			—		0.6
Management fee		0.8		0.5			—		1.3
Adjusted EBITDA	$	43.9	$	42.2		$	18.2	$	104.3

(1) The Predecessor incurred approximately $2.3 million in compensation expenses associated with the disposal of Dunlop Standard.

(2)		We incurred approximately $2.4 million in fees and other expenses associated with negotiating, financing and consummating the Acquisition that were not capitalized as part of the purchase price or as deferred financing charges.
(3)		As a result of the Acquisition and the requirements of purchase accounting, our assets and liabilities, including the amounts recorded for inventory and work in process, were adjusted to their fair market values as of the closing date.
(4)		We incurred $0.2 million in severance costs during the quarter ended June 30, 2005. We expect to incur an additional $1.8 million in severance costs during the remainder of 2005. We have also incurred $0.4 million in costs associated with the exchange offer of our senior subordinated notes and expect additional costs during the remainder of 2005.
(5)		Successor and Predecessor results have been combined to give twelve month’s results as required under the senior credit facilities.

Cash Flows

The following table sets forth our combined cash flows for the six months ended June 30, 2005 and June 30, 2004:

	Six months ended
	June 30,
	2005			2004
(In thousands of dollars)	(Successor)			(Predecessor)
Net cash provided by (used in) operating activities		(7,364	)	$	27,569
Net cash used in investing activities		(10,403	)		(6,359	)
Net cash provided from (used in) financing activities		(10,041	)		1,523
Net increase (decrease) in cash and cash equivalents		(27,808	)	$	22,733

Net Cash (Used in) Provided by Operating Activities

Net cash used in operating activities for the six months ended June 30, 2005 was $7.4 million. The net cash used was a result of a $3.2 million increase in inventory levels and a decrease in accounts payable associated with the repayment of $24.7 million payable relating to our use of U.S. government-owned inventory at the former Kelly Air Force base. At June 30, 2005 the remaining payable owing to Kelly Aviation Center L.P. under the Kelly Air Force Base contract was approximately $12.3 million; this amount is expected to be paid by September 30, 2005. This was offset by net income during the period and a decrease of $5.3 in accounts receivable.

Net cash provided by operating activities for the six months ended June 30, 2004 was $27.6 million. The cash generated during this period was primarily attributable to net income and a $66.7 million increase in accounts payable. The primary reason for the increase was the payable to Kelly Aviation Center L.P discussed above. This was offset by an increase in accounts receivable of approximately $33.8 million as well as an increase in inventories of $35.9 million associated with the increase in revenues in 2004.

Net Cash Used in Investing Activities

Historically, net cash used in investing activities has been for capital expenditures on property, plant and equipment, rental engines and OEM authorizations, offset by proceeds from the disposition of property, plant and equipment and rental engines. Net cash used in investing activities for the six months ended June 30, 2005 was $10.4 million, which was primarily due to capital expenditures related to our CF34 program and net changes in our rental engine pool. Net cash used in investing activities for the six-month periods ended June 30, 2004 was $6.3 million and also related to our CF34 program and net changes in our rental engine pool.

Net Cash Provided by (Used in) Financing Activities

Net cash used in financing activities during the six months ended June 30, 2005 was $10.0 million. On February 28, 2005 we made an optional prepayment of $15.0 million under the term loan portion of our senior credit facilities. This payment has been applied against our future scheduled prepayments and we do not have a scheduled payment until December 2011. In March 2005 we received a payment of $4.7 million as a result of the final post-closing adjustments to the purchase price paid in the Acquisition.

Net cash used in financing activities during the six months ended June 30, 2004 was $1.5 million. Prior to the Acquisition, cash provided by or used in financing activities represented payments to or funding from our former parent company.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Market risk is the potential economic loss that may result from adverse changes in the fair value of financial instruments. Our results could be impacted by changes in interest rates or foreign currency exchange rates. We use financial instruments to hedge our exposure to fluctuations in interest rates and foreign currency exchange rates. We do not hold financial instruments for trading purposes. Our policies are reviewed on a regular basis.

Interest rate risks. We are subject to interest rate risk in connection with borrowings under our senior credit facilities. As of June 30, 2005, we have $270.0 million outstanding under the term-loan portion of our senior credit facilities, bearing interest at variable rates. Each change of 0.125% in interest rates would result in a $0.4 million change in annual interest expense on term-loan borrowings. In addition, any borrowings under our revolving credit portion of the senior credit facilities will bear interest at variable rates. Assuming that our revolving credit facility is fully drawn, each 0.125% change in interest rates would result in a $0.1 million change in annual interest expense on our revolving loan facility. Any debt we incur in the future may also bear interest at floating rates. Pursuant to the terms of our credit agreement we have entered into interest rate hedging arrangements for the purpose of reducing our exposure to adverse fluctuations in interest rates. The credit agreement requires that 50% of total debt is fixed and, or, covered under interest rate protection arrangements described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations– Liquidity and Capital Resources.”

Derivatives used to hedge the variable cash flows associated with $75.0 million of existing variable-rate debt with interest rate collars are as follows:

Notional		Maximum			Minimum
amount	Period hedged by interest rate collar	interest rate(1)			interest rate(1)
$75.0 million	March 28, 2005 — September 26, 2005		3.50	%		2.00	%
$75.0 million	September 27, 2005 — March 26, 2006		4.25	%		2.00	%
$75.0 million	March 27, 2006 — December 27, 2006		5.25	%		2.40	%

(1) Maximum and minimum interest rates exclude the effect of the Company’s credit spread on the variable rate debt.

Currency risks. Our assets and liabilities in foreign currencies are translated at the period-end rate. Exchange differences arising from this translation are recorded in our statement of operations. Currency exposures can arise from revenues and purchase transactions denominated in foreign currencies. Generally, transactional currency exposures are naturally hedged; that is, revenues and expenses are approximately matched, but where appropriate, are covered using forward exchange contracts. We expect to continue to enter into financial hedges, primarily forward contracts, to reduce foreign exchange volatility. We are exposed to credit losses in the event of non-performance by the other party to the derivative financial instruments. We mitigate this risk by entering into agreements directly with a number of major financial institutions that meet our credit standards and that we expect to fully satisfy their contractual obligations. We view derivative financial instruments purely as a risk management tool and, therefore, do not use them for speculative trading purposes. At June 30, 2005, we did not have any outstanding foreign currency exchange contracts.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2005, the end of the period covered by this report. Based upon that evaluation, our management concluded that our disclosure controls and procedures were not effective due to inadequate controls and procedures relating to our determination and review of our quarterly and annual tax provisions in accordance with GAAP. Management concluded that these inadequate controls and procedures constituted a material weakness in our internal control over financial reporting. Public Company Accounting Oversight Board’s Auditing Standard No. 2 defines a material weakness as a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim statements will not be prevented or detected. This material weakness resulted in errors in our financial statements that required us to restate our consolidated financial statements for the period from August 25, 2004 to December 31, 2004 and for the first quarter of 2005 and to record audit adjustments in the second quarter of 2004 to correct the income tax provision and related balance sheet accounts. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Restatement.”

In connection with our efforts to remediate this material weakness, we retained the former senior manager for U.S. and cross-border tax from a Big Four accounting firm as our Director of Tax Accounting on August 15, 2005. We are also implementing comprehensive tax accounting policies and formal sign-off procedures to ensure that our accounting personnel consult with our new Director of Tax Accounting and, if appropriate, outside consultants in connection with the calculation of non-routine tax items and the determination of gains or losses related thereto. Management expects that these policies and procedures will be fully implemented by the end of the third quarter of 2005. Management also believes that the retention of our new Director of Tax Accounting and implementation of comprehensive tax accounting policies and procedures have enhanced our internal control over financial reporting relating to the determination and review of our quarterly and annual tax provisions. However, management has not had sufficient experience with the new personnel and procedures to determine whether these steps are sufficient to remediate the material weakness or whether our disclosure controls and procedures are effective at the reasonable assurance level as of the date hereof.

We are committed to maintaining effective internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. In addition to the steps described above that we have taken to remediate the material weakness, our accounting personnel report regularly to the audit committee of our board of directors on all accounting and financial matters. Our audit committee also actively communicates with and oversees the engagement of our independent registered public accounting firm. However, internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives due to its inherent limitations because internal control involves human diligence and compliance and is subject to lapses in judgment and breakdowns from human failures. Nonetheless, these inherent limitations are known features of the financial reporting process, and it is possible to design procedural safeguards that reduce, but do not eliminate, this risk. Additionally, we may in the future have one or more additional material weaknesses in our internal control over financial reporting. Failure to implement and maintain effective internal control over financial reporting could result in a material misstatement in our financial statements.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2005 that materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

We currently and from time to time are involved in litigation and are the subject of threats of litigation that are incidental to the conduct of our business. However, we are not a party to any lawsuit or other proceedings, or the subject of any threatened lawsuit or other proceedings, which, in the opinion of management, is likely to have a material adverse effect on our financial condition or results of operations.

ITEM 6. EXHIBITS.

Exhibit
Number		Description
3.1		Certificate of Incorporation of Standard Aero Holdings, Inc. (incorporated by reference to Exhibit 3.1 of Standard Aero Holdings, Inc.’s Registration Statement No. 333-124394).
3.2		Bylaws of Standard Aero Holdings, Inc. (incorporated by reference to Exhibit 3.17 of Standard Aero Holdings, Inc.’s Registration Statement No. 333-124394).
4.1		Senior Subordinated Note Indenture with respect to the 8 1/4 % Senior Subordinated Notes due 2014, between Standard Aero Holdings, Inc., Wells Fargo Bank Minnesota, National Association, as trustee, and the Guarantors listed on the signature pages thereto, dated as of August 20, 2004 (incorporated by reference to Exhibit 4.1 of Standard Aero Holdings, Inc.’s Registration Statement No. 333-124394).
4.2		Supplemental Indenture, dated as of August 24, 2004, among Dunlop Standard Aerospace (Nederland) BV and Standard Aero BV, Standard Aero Holdings, Inc. and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.2 of Standard Aero Holdings, Inc.’s Registration Statement No. 333-124394).
4.3		Supplemental Indenture, dated as of August 24, 2004, among Dunlop Standard Aerospace (US) Inc., Dunlop Standard Aerospace (US) Legal Inc., Standard Aero, Inc., Dunlop Aerospace Parts, Inc., Standard Aero (San Antonio) Inc., Standard Aero (Alliance) Inc., Standard Aero Canada, Inc., 3091781 Nova Scotia Company, 3091782 Nova Scotia Company, 3091783 Nova Scotia Company, Standard Aero Limited, Not FM Canada Inc., Standard Aero Holdings, Inc. and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.3 of Standard Aero Holdings, Inc.’s Registration Statement No. 333-124394).
4.4		Supplemental Indenture, dated as of March 3, 2005, among Standard Aero (US), Inc. (f/k/a Dunlop Standard Aerospace (U.S.) Inc.); Standard Aero (US) Legal, Inc. (f/k/a Dunlop Standard Aerospace (US) Legal, Inc.); Standard Aero Inc.; Standard Aero Materials, Inc. (f/k/a Dunlop Aerospace Parts Inc.); Standard Aero (San Antonio) Inc.; Standard Aero (Alliance) Inc.; Standard Aero Canada, Inc.; 3091781 Nova Scotia Company; 3091782 Nova Scotia Company; 3091783 Nova Scotia Company; Standard Aero Limited; Not FM Canada Inc.; Standard Aero (Netherlands) B.V. (f/k/a Dunlop Standard Aerospace (Nederland) BV) and Standard Aero BV, Standard Aero Holdings, Inc. and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.4 of Standard Aero Holdings, Inc.’s Registration Statement No. 333-124394).
4.5		Supplemental Indenture, dated as of March 31, 2005, among Standard Aero (US), Inc. (f/k/a Dunlop Standard Aerospace (U.S.) Inc.); Standard Aero (US) Legal, Inc. (f/k/a Dunlop Standard Aerospace (US) Legal, Inc.); Standard Aero Inc.; Standard Aero Materials, Inc. (f/k/a Dunlop Aerospace Parts Inc.); Standard Aero (San Antonio) Inc.; Standard Aero (Alliance) Inc.; Standard Aero Canada, Inc.; 3091781 Nova Scotia Company; 3091782 Nova Scotia Company; 3091783 Nova Scotia Company; Standard Aero Limited; Not FM Canada Inc. and Standard Aero Redesign Services Inc., Standard Aero Holdings, Inc. and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.5 of Standard Aero Holdings, Inc.’s Registration Statement No. 333-124394).

Exhibit
Number		Description
31.1		Certification of Chief Executive Officer pursuant to Rule 15d-14(a) (17 CFR 240.15d-14(a)).
31.2		Certification of Chief Financial Officer pursuant to Rule 15d-14(a) (17 CFR 240.15d-14(a)).
32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 15d-14(b) (17 CFR 240.15d-14(b)) and 18 U.S.C. Section 1350.

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 the undersigned thereunto duly authorized.

	STANDARD AERO HOLDINGS, INC.
Dated: August 24, 2005	/s/ DAVID SHAW
	Name:	David Shaw
	Title:	Chief Executive Officer
		(principal executive officer)
Dated: August 24, 2005	/s/ BRADLEY BERTOUILLE
	Name:	Bradley Bertouille
	Title:	Chief Financial Officer
		(principal financial and accounting officer)

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