working capital fund and general fund...iii working capital fund and general fund fiscal year 2007...

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WORKING CAPITAL FUND and GENERAL FUNDFiscal Year 2007 Annual Financial Report

TABLE OF CONTENTS MessagefromtheDirector..................................... . . . . . . . . . . . . . . . v

I. Management’s Discussion and Analysis

a.DescriptionoftheDefenseLogisticsAgency........................ . . . . . . . . . . . . 3 b.AgencyStrategicGoalsandStrategies............................. ............ 3 c.Organization................................................ ............ 6 d. DefenseWorkingCapitalFund. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 e.GeneralFundandTransactionFund........................................... 9 f. FinancialCondition.......................................... ............ 10 g. Systems,Controls,andAuditability............................... ........... 11 h. OtherAccompanyingInformation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 II. Working Capital Fund a.ConsolidatedandCombinedFinancialStatements..................... . . . . . . . . . 19 b.NotestotheConsolidatedandCombinedFinancialStatements......... ............ 25 c.RequiredSupplementaryInformation......................................... 53 d.SupplyManagementActivityGroup 1.Overview................................................ . . . . . . . . . . . 57 2.ConsolidatedandCombinedFinancialStatements.............................65 e. DistributionActivityGroup 1.Overview................................................ . . . . . . . . . . . 71 2.ConsolidatedandCombinedFinancialStatements............................77 f. ReutilizationandMarketingActivityGroup 1.Overview................................................ . . . . . . . . . . . 83 2.ConsolidatedandCombinedFinancialStatements............................89 g.DocumentAutomation&ProductionService 1.Overview................................................ . . . . . . . . . . 95 2.ConsolidatedandCombinedFinancialStatements............................ 99

III. General Fund a.ConsolidatedandCombinedFinancialStatements................... . . . . . . . . . . . 105 b.NotestotheConsolidatedandCombinedFinancialStatements......... ........... 111

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Message from the DirectorOctober 2007

Ha�ing led the Defense Logistics Agency (DLA) for the past 13 months, I’m con�inced that deli�ering DLA’s commit-ment to the warfighter requires far more effort than success-fully managing the Department of Defense’s wholesale sup-plies and suppliers. To continue providing robust logistics support to our customers, we must leverage the capabilities generated through DLA’s many transformation initiatives and continue to do so as our missions change and expand. Moving forward with an eye keenly focused on warfighter support, stewardship, growth and development, and leader-ship we will provide our customers the best possible logistics support at the best possible value. Our competencies and capabilities are being moved closer to the warfighter to provide support at the “point of the spear.” Every business process is scrutinized to continually improve our business model to optimize national inventory and reduce costs to our customers. We are working with our customers and partners as we move from wholesale opera-tions to supply chain excellence and lead the military’s transformation by sharing our expansive logistics expertise throughout DoD. Using best practices from both government and industry, we will continue to establish and manage a seamless link between Military Service-identified materiel requirements, and the suppliers within the American industrial base who are ultimately filling those requirements. And, we will continue to develop our workforce’s technical proficiency and knowledge in response to the wide range of challenges that are associated with supporting America’s military forces around the world.

While DLA continues to excel as the Department’s Logistics Combat Support Agency, some of DLA’s financial data is derived from legacy processes, systems, and sources that cannot yet be audited. In response, we are executing a focused, coordinated, and deliberate process to improve the accuracy, completeness, and reliability of the financial data that will be presented in future financial reports.

The Soldiers, Marines Sailors, and Airmen operating across the globe today require and deserve the finest support, supplies, and materiel we can provide. There isn’t another agency out there that can do what DLA does. The commitment of our workforce ensures that our Nation consistently provides America’s warfighters with what they need. I am honored and proud to be a member of this team.

ROBERT T. DAILLieutenant General, USADirector

1DEFENSELOGISTICSAGENCY

CONSOLIDATED MANAGEMENT’SDISCUSSION & ANALYSIS

DEFENSE LOGISTICS AGENCY

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For the Fiscal Year Ended September 30, 2007

CONSOLIDATED MANAGEMENT’S DISCUSSION & ANALYSIS


TheDefenseLogisticsAgency(DLA)isthelogisticscombatsupportAgencyoftheDepartmentofDefense(DoD)andreceives its oversight and staff direction from theDeputyUnder Secretary of Defense for Logistics and MaterielReadiness. Our primary mission is to provide best valuelogistics solutions tomeet theneedsofAmerica’sArmedForces around-the-clock and around-the-world in timesof peace, national emergency, and war. Execution of theUnited States national defense strategy depends on DLAlogistics support to feed,clothe, fuel,medicateand treat,andsustainourtroopsandmanyofournation’sallies.WesupportDoDobjectivesandmissionswithinvolvementinthe full range of military operations – from participationwith multinational forces engaged in large-scale combatoperations,peacekeepingefforts,emergencysupport,andhumanitarian assistance to the global war on terrorism.

DLAmanagesmorethan5.2millionitemsanddisseminateslogisticscataloginginformationformostitemsmanagedbyDLA that support the DoD, other Federal Agencies, andU.S.internationalpartners.Amongthematerielwemanageare fuel and repair parts for weapon systems as well asfood,clothing,andmedicalsuppliesneededtodeployandsustainU.S.Forces.Wereceive,issue,anddistributetheseitemsthroughanetworkofsupplydepotsandcommercialsupplier relationships; and through our reutilization andmarketingservices,wemanageDoDprogramstoreutilize,transfer, donate, or sell surplus and excess materiel anddispose of hazardous materiel. We also administer theDoD document automation and production services.

Ourmissionshaveevolvedandgrownover thepast fourdecadestoanextentthatifourforcesfightwithit,wearit,

Description of theDefense Logistics Agency

Our Mission:To Provide Best Value Integrated Logistics Solutions to

America’s Armed Forces and Other Designated Customers…in Peace and in War…Around the Clock, Around the World

Our Vision: Extending the Enterprise Forward to Meet the Needs of the Warfi ghter

RIGHT ITEM, RIGHT SERVICE, RIGHT PLACE, RIGHT PRICE, RIGHT TIME…EVERY TIME

Agency Strategic Goals and StrategiesAs the Department’s sole Logistics Combat SupportAgency, we have a pivotal role in delivering the jointlogistics capability that optimizes warfighter support;andDLA’sabilitytodelivertherightlogisticssolutiontothe American warfighters in every transaction requiressupply chain excellence. Consequently, the U.S. mil-itary’s ability to generate and sustain global combatreadiness depends on a supply chain that seamlesslymovesDLA-managedmateriel from thenation’s indus-trialbasetoitsultimateuser.

To fulfill thismission,DLAwillbuildon itswholesalerexcellence.Wewillleveragetheoperationalefficienciesthat will be generated by the Agency’s transformation-al initiatives, such as, the 2005 Base Realignment andClosure (BRAC) decisions and the recently completedEnterpriseBusinessSystem(EBS)–anend-to-endEnterpriseResource Planning capability managing all of DLA’s 5.2millionhardwareandtroopsupportitems.[NOTE:Inpriorannualfinancialreports,EBSwasreferredtoastheBusinessSystemModernization(BSM)program.]

TheDefenseLogisticsAgencyFY07–FY13StrategicPlan,promulgatedinFebruary2007,containsfourstrategicgoalsandclearlydocumentsandcommitsDLA’s resourcesandenergytotherealizationofthreenewstrategicthrusts;eachdesignedtomoveDLAbeyonditstraditionalwholesalerre-sponsibilities.Thosestrategicthrustswill:1)extendEnterpriseresources togeographicallyalignwithsupportedactivitiesand capitalize on best value opportunities that improvewarfighter readiness; 2) connect warfighter demand with

eatit,orburnitasfuel,weprobablybuyit;warehouseanddistributeit;orarrangeforitsreuse,sale,ordisposalaftertheownernolongerneedsit.



4 DEFENSELOGISTICSAGENCY

supplybytransformingtheDepartment’sdemandplanningcapabilitiesandtheprocessingofdemandsignalsthrough-out the supply chain; and 3) deliver supply chain excel-

• MaximizewarfighterpotentialbyextendingtheEnterprisetoprovideworldwideresponse andintegrated,bestvaluesuppliesandservicesconsistentlytoourcustomers.• ContinuouslyimproveDLAperformancethroughthedevelopmentofbetterprocesses andbusinessarrangementsthatreducecost,increaselogisticscapabilities,andlink customerdemandswithoursupplychains.• Ensureadiverse,enabled,empowered,andmotivatedworkforcethatdeliversand sustainssupplychainexcellence.• ManageDLAresourcesforbestcustomervalue.

We will achieve these strategic goals through a series of integrated enterprise-wide strategies.

Goal 1. Maximize warfi ghter potential by extending the En-terprise to provide worldwide response and integrated, best value supplies and services consistently to our customers.

Strategy 1.1. Extendcompetenciesandcapabilitiesclosertothewarfighters.

Strategy 1.2. Activelyengagethewarfighterstobetterun-derstandtheirneedsandmeettheirrequirements.Goal 2. Continuously improve DLA performance through the de-velopment of better processes and business arrangements that reduce cost, increase logistics capabilities, and link customer demands with our supply chains.

Strategy 2.1. Align demand and supply chain capabili-tieswithinthesupplychainmanagementmodeltobettersupportthewarfightersandtheirweaponsystems.

Strategy 2.2. Leverage industry capabilities to provideworld-classsupporttothewarfighteratthelowestpossiblecost.

Strategy 2.3. Adopt, institutionalize, and continuouslyimprove best business practices to improve quality andspeedandtoreducecycletimeandcosts,whilemaintain-ingtheintegrityoftheprocurementprocess.

Strategy 2.4. Achieve world-class supply chain perfor-mance, completing DLA’s transition from wholesale to

Strategic Goals

lenceby forging end-to-end logistics solutions that strikethetargetedbalanceamongeffectiveness,agility,reliability,speed,visibility,andcost.DLA’sfourstrategicgoals:

end-to-endsupplychainmanagementexcellence.

Strategy 2.5. Design,implement,andsustainabestvalueenterpriseInformationTechnology(IT)environment.

Strategy 2.6. ImprovemanagementofDLA’s current andfuturerealproperty.

Strategy 2.7. Implement processes and procedures tosupportrequirementsforgreenprocurement.

Goal 3. Ensure a diverse, enabled, empowered, and motivated workforce that delivers and sustains supply chain excellence.

Strategy 3.1. Acquire, develop, and retain, world-classsupply chain expertise through a comprehensive talentmanagementprogram.

Strategy 3.2. Attain and sustain a corporate culturethat meets the needs of the warfighter through logisticsexcellence.

Strategy 3.3. Provide a quality work environment thatoptimizesemployeeperformance.

Goal 4. Manage DLA resources for best customer value.

Strategy 4.1. ResourceDLA’soperationalstrategies.

Strategy 4.2. Minimizetotalsupplychaincosts.

Strategy 4.3. Demonstrate stewardship and foster stake-holdertrust.




For any enterprise of DLA’s size and scope, transforma-tion and organizational evolution generally involves adifficultandcomplexprocess that -moreoften thannot-requiresanimmenseexpenditureofcapital,energy,andeffortbyallinvolved.Inordertomitigatethesechalleng-eswhilemaintaining its focuson itscoremissions,DLAorganizeditseffortsinto11distincttransformationalinitia-tives that support the three overarching strategic thrusts.Thestrategicthrustsprovidetheinitiativeswithacoherentfocusandobjective,ensuringthatindividualinitiativesdonotlosesightofthestrategicpictureevenastheyremainfixedupontheiruniquemissions.The11transformationalinitiativesareindividualprogramsforexecutingEnterprisechangeandare focusedon improvingDLA: thequalityofitsservices,thescopeofitsmission,andtheefficiencywithwhichitoperatestomeettheneedsofthewarfight-er while providing the best value for the taxpayer. TheFY 2008 Roadmap will be published and distributed inthe fall of 2007. DLA’s strategic thrusts and transforma-tion initiatives are identified and summarized below:

Customer Facing is a multi-phase effort to co-locate DLA personnel and Agency capabilities withthe Military Services and Combatant Commanders(COCOMs).ThisinitiativeisdeliveringonDLA’sstrategyto provide DLA’s customers with direct access to theAgency’scompetenciesandcapabilities.

Base Realignment and Closure (BRAC) 2005decisionswillexpandDLA’scurrentcapabilitiesandextendthosecapabilities forwardto theMilitaryServices’ industrialmaintenancedepots.

Joint Regional Inventory Materiel Management (JRIMM) isdesignedtoimprovewarfightersupportby:1)estab-lishing a single warehousing/distribution hub in eachregion; 2) minimizing all other storage sites within aregion; 3) eliminating duplicate inventories; 4) maxi-mizing utilization of the DLA Strategic DistributionPlatforms (SDP);4) reducingthenumberof times thatmaterielishandled;and5)consolidatingregionaltrans-portationmanagement.

National Inventory Management Strategy (NIMS) is an initiative that streamlines and improves con-sumable item management by affording the MilitaryServices the opportunity to eliminate their unneces-

sary inventory investment in DLA-managed parts. ThisallowsthemergerofDLAwholesaleandMilitaryServiceretail inventories into a single national inventory whosetotalcostislessthanthesumoftheindividualstockpiles.

Global Stock Positioning (GSP)isthestrategytopositionmaterielaroundtheglobeinadvanceofcustomerrequire-ments. It is designed to appropriately balance materialavailabilitywithinvestment,storage,anddistributioncosts.

Extend the Enterprise

Connect Warfighter Demand with Supply

Supplier Relationship Management (SRM)isaninitiativetobuildcollaborativeallianceswithkeysuppliersinordertoensurematerielavailability,qualityandvalueforthoseDLA-manageditemsvitaltowarfightersupport.SRMalsoprovidesthecapabilitytoevaluateandmanagesupplierperformance.Otherlong-termbenefitsofSRMinclude:1)reducedvendordeliverytimes;2)inventorysavings;3)col-laborativecommunicationbetweenDLA, itscustomers,andsuppliers;and4) leveragedbuyingpower forDoD.

Industrial Product-Support Vendor (IPV), formerlyknown as Integrated Prime Vendor, is an initiative tomigrate themanagementand requisitioningofconsum-able spare parts – industrial hardware, such as rivets,screws,ando-rings-usedatMilitaryServicemaintenancefacilities from individual service-managed programsto contractor-provided support. These parts are storedinbinsatornear thepointofuseonproduction lines.

Integrated Data Environment (IDE)/Global Transportation Network Convergence (IGC)isasystem-of-systemspart-nershipinitiativethatwillprovideasinglepointofaccesstodecisionsupport relateddataand informationwithinDLA and the United States Transportation Command(USTRANSCOM), and between DLA/USTRANSCOMand external systems. The convergence of these twoprograms will create a single face to DoD systems thatrequireaccesstocommonandauthoritativedata,businessstandards,andinformationfromDLAandUSTRANSCOM.

Deliver Supply Chain Excelence

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Common Food Management System (CFMS)isajointini-tiativebetweenDLAandtheMilitaryServicestoreplacetheMilitaryServices’individualfoodmanagementsystemswithasingle,cross-servicesystemthatalsoallowsservicememberstopurchasefoodatanyoftheMilitaryServices’

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Our organizational structure is depicted below:

Senior Enlisted Advisor

Vice Director

Defense Logistics Agency

CORPORATE STAFF

DESEnterprise

Support

J-1Human

Resources

DLAPacific

DefenseNationalStockpile

COMMANDERS& DIRECTORS

SERVICE ACTIVITIES

DefenseSupply CenterPhiladelphia

COMMANDER& D

DefenseDistribution

Center

DefenseSupply Center

Richmond

DefenseSupply Center

Columbus

J-3/4Logistics Ops& Readiness

DefenseEnergy Support

Center

DefenseReutilization &

Marketing Service

J-5Enterprise

Transformation

J-6Information

Ops

J-7Acquisition

Management

J-8Financial

Ops

J-9ReserveForces

Director

SpecialStaff

DLAEurope

DefenseLogistics

InformationService

DocumentAutomation &

ProductionService

Director

DLACentral

Organization

DLA maintains a global presence and accomplishes itsmissionwithapproximately21,000civilianpersonnel,454activedutypersonnel,and756reservepersonnel.Despiteoursignificantmissionexpansionoverthepast46years,ourworkforceisnowatthesmallestlevelsince1963.Agencyleaders are committed to the continuous assessmentand transformation of our organizational culture, size,

systemandprocess intoa single system thatcombinessoftware programs for many diverse activities, suchas materiel management, order fulfillment, procure-ment, financials, payroll, and human resources. EBSwillbethekeyenabler forDLA’snewbusinessmodel,allowingtheAgencytoreengineeritsbusinessprocessesquicklyandefficiently to improveoveralleffectiveness.

diningfacilitiesandwillresultinanend-to-endlogisticssolution for the worldwide DoD subsistence supplychain.Reutilization Modernization Program (RMP) is aDLAinitiative to update its disposal business processes andreplacethecurrentDefenseReutilizationandMarketingService(DRMS)inventorymanagementinformationtech-nology(IT)systems.RMPwillintegratetheDLAEnterpriseBusinessSystem(EBS),DistributionStandardSystem,andother Commercial-Off-the-Shelf (COTS) / GovernmentOff-the-Shelf (GOTS) programs into a single IT system,while re-engineering the DRMS business processes.

Enterprise Business Systems (EBS) is an initiative toestablish a DLA-wide Enterprise Resource Planning(ERP) environment that integrates nearly every Agency

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structure, and alignment through enterprise integrationandpartneringwiththeprivatesector.Theseeffortswillenableustoimplementanenterprisebusinessmodelanddevelop,deploy,andexecuteanimprovedsetofcorporatebusinessprocessesandstrategies.Byorganizingasasingle,integratedbusinessenterprise,wewillbeinpositiontofocusmore efficiently and effectively on supporting the DoD’ssupplychain,enhancingtheArmedForces’readiness,andproviding for the warfighter during contingency opera-tions.Weareproactiveinourapproachtoservingthosewhodependonus for theirmissionneeds;andwecon-stantlymeetface-to-facewithourcustomerstodeterminetheir requirements and how we can best fulfill them.

DLA’s core functions are directed or supported by:

Human Resources (J-1) provides a full range of civilianhumanresources services for theDLAcivilianandmili-tary workforce. J-1 conducts these services from itscustomersupportoffices located inColumbus,OHandNew Cumberland, PA; a centralized military personnelsupportorganizationlocatedatHQDLAinFortBelvoir,VA;andtheDLATrainingCenter,whichprovidestrainingsupport to its workforce - located in Columbus, OH.

Logistics Operations and Readiness (J-3/4) is re-sponsble for the end-to-end supply chain manage-mentofDLA’seightsupplychains,providinglogisticsand materiel process management policy, guidance,oversight,andmonitoringofsupplychainperformance.J-3/4istheprincipalstrategic,operational,andtacticalplannerforDLAbusinessoperations,championingbestbusinesspractices,andvalue-addedlogisticssolutionsforthewarfighter.ItservesastheAgency’sfocalpointforcustomersupport,engagingcustomersaround theworld,understandingtheirneeds,andtranslatingthoseneedsbacktotherestofDLAtomaximizetheAgency’slogistics capability. J-3/4 oversees the daily operationoftheDLALogisticsFieldActivities.Inaddition,J-3/4has primary responsibility for DLA Base RealinmentandClosure(BRAC)implementation.

Strategic Planning and Enterprise Transformation (J-5)is DLA’s Strategy Management Office, responsible forAgencystrategicplanningandoverallmanagementofen-terprisetransformationprograms.TheDirector,J-5commu-nicatesandexecutestheDLADirector’svisionandsenior

leadership’s strategiesandobjectives for attainmentofthatvisionthroughtheDLAStrategicPlan,theBalancedScorecard,andtheDLABusinessPlanwhilealigningwiththeDoDRiskScore-cardandthePresident’sManagementAgenda.J-5istheDirector’sagentforleadingdisciplinedexecutionofthestrategicchangemanagementstructure.J-5 ensures horizontal integration and execution ofstrategy by sponsoring cross-functional processes andcollaboration forums for enterprise decision-making.

Information Operations (J-6)isDLA’sknowledgebroker,and is responsible for providing comprehensive, bestpracticetechnologicalsupporttotheDoD/DLAlogisticscommunity,resultinginthehighestqualityofinforma-tionsystems,efficientandeconomicalcomputing,datamanagement,electroniccommerce,andtelecommuni-cationservices.TheDirector,J-6,isresponsibleforthedevelopment and compliance of information technol-ogy(IT)policy;thedevelopmentofITplansandstrate-gies;and theestablishmentof IT standards,processes,and measurements. The Director, J-6, also serves asthe Agency’s Chief Information Officer. InformationOperationsincludesoversightoftwofieldactivities:theDefenseLogisticsInformationServiceandtheDocumentAutomationandProductionService.

Acquisition Management (J-7)isresponsibleforthede-velopment,application,andoversightofDLAacquisi-tionpolicy,plans,programs,operations,andfunctionalsystems.

Financial Operations (J-8)isledbytheAgency’sChiefFinancial Officer and - as the financial managementprocessowner-isthesinglespokespersononfinancialmanagementmatterswithexternalorganizations.J-8isresponsiblefordesigning,implementing,andexecutingstandardfinancial processes across theAgency,whiledetermining financial services’ resource requirementsandperformancetargetsandestablishingfinancialcorecompetencyrequirements.

Joint Reserve Force (JRF) (J-9) supports DLA withtrained, ready, and available reservists, of all reservecomponents, for contingency operations, peacetimecontributorysupport,wartimesurgesupport,andplan-ning support. Further, J-9 advises the Director, DLA,

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Defense Working Capital Fund

The Defense-wide Working Capital Fund (DWCF) is theprimarysourceoffinancing forDLAoperations. DuringFY 2007, DLA executed a total budget program ofmore than $37.2 billion. The four DLA activity groupsfunded by the DWCF - and included in these state-ments - are supply management, distribution, reutiliza-tion and marketing, and document automation andproduction. Each year, DLA either obtains or returnsfunds to the DWCF and other DoD appropriations.

The following activity groups are financed by customerordersanddirectappropriationsthroughtheDWCF:

Supply Management:TheSupplyManagementactivitygroup provides customer support through its manage-ment of logistics processes. This includes centralizedmanagement of logistics catalog information, energy,repair parts, operating supply items, food, pharma-ceuticals, medical and surgical supplies, construc-tionmateriel andequipment, andclothingand textiles.Supply Management operates through three supplycenters located in Columbus, OH; Richmond, VA; andPhiladelphia,PA;andtheDefenseEnergySupportCenterlocated at Fort Belvoir, VA. The Supply Managementactivitygroupisthelargestofourbusinessareas.Itmakes

up about 96% of the assets, 85% of the liabilities, and93% of revenue and costs on the financial statements.

Distribution: The Distribution activity group providesa single, unified materiel distribution system for DoD.In addition to its primary mission of receiving, storing,and issuing materiel worldwide, distribution depotsperformotherfunctionsthatinclude-butarenotlimitedto - providing refrigerated storage, cylinder refurbish-ment, tent repair, medical unit assemblies, kitting, andset assembly or disassembly. The Distribution activitygroup is under the control of the Defense DistributionCenterinNewCumberland,PA,andincludes26subor-dinatedistributioncenterslocatedthroughouttheUnitedStates, Europe, Southwest Asia, and the Pacific region.

Reutilization and Marketing: The Reutilization andMarketing activity group supports and coordinates thedisposal of excess and surplus property within DoD.Property not reutilized within DoD is available fortransfer tootherFederalagenciesor fordonation toau-thorizednon-profitorganizations,stategovernments,andlocal governments. Propertynot reused, transferred,ordonatediseithersoldtothepubliconacompetitivebasisor disposed of in an environmentally safe manner. AcriticalpartoftheReutilizationandMarketingmissionistoarrangefortheworldwidedisposalofhazardouswasteincompliancewithlawandregulation.Theactivitygroupaccomplishes its mission from a Headquarters in BattleCreek,MI,and104DefenseReutilizationandMarketingOfficeslocatedonmilitaryinstallationsaroundtheworld.

Document Automation & Production: The DocumentAutomation & Production Service (DAPS) activitygroup provides printing, duplicating and document au-tomation services within DoD. This mission encom-passes the full range of automated services to include:document workflow conversion, electronic storage andoutput, and distribution of hard copy and digital in-formation. DAPS’ focus is on enabling customers totransition from hardcopy to digital/electronic-baseddocument management. DAPS manages its worldwidemission through its headquarters in Mechanicsburg,PA, and a network of 187 production facilities.

on the planning and application of JRF support in ac-cordancewithDoDandMilitaryServicereadinessandactivationpolicies.

DLA Enterprise Support (DES)providescorporatepoli-cy,program,andworld-wideoperationalsupportintheareasofenterprisecontracting,environment,safetyandoccupational health, installation management, publicsafety,moralewelfareandrecreation(MWR),andmul-timediaforDLA.Inaddition,DESprovidesoperationalsupporttotheHeadquarters(HQ)DLA(AndrewT.Mc-NamaraComplex)buildingforfacilities,security,MWRoperations, and Information Technology (IT) contractsupportforcorporateandbasecontractsupportforDLAactivitiesintheWashington,DCmetropolitanarea.

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5, 7

4, 8

2

3

DEFENSE LOGISTICS AGENCY ACTIVITY GROUP PRINCIPAL LOCATIONS

1.DefenseSupplyCenterColumbus(DSCC) 5. DefenseDistributionCenter(DDC)2.DefenseSupplyCenterRichmond(DSCR) 6. DefenseReutilizationandMarketingService(DRMS)3.DefenseSupplyCenterPhiladelphia(DSCP) 7.DocumentAutomation&ProductionService(DAPS)4.DefenseEnergySupportCenter(DESC) 8. DefenseLogisticAgencyHeadquarters(DLAHQ)

General Funds and Transaction Fund

DLAalsoreceivedabout$652.9millioninGeneralFundsdirectappropriations,whichaccounted forapproximately2%ofDLA’stotalbudgetprogramforFY2007.Theseap-propriationsincluded:OperationandMaintenance(O&M),Research,Development,TestandEvaluation(RDT&E),Mili-taryConstruction(MILCON),Procurement,FamilyHousingConstruction, Family Housing O&M and Family HousingImprovementFund.

TheDLAO&Mappropriation,$350.8million,fundedtwodistinctgroups:OtherLogisticsServices (OLS)andOtherLogistics Programs (OLP). The OLS group included ap-proximately 30 programs and incurred $285.2 millionin costs associated with the DLA logistics mission, suchas: Price Comparability, Warstoppers, Hard Copy Map

Function,Unemployment,MoraleWelfare&Recreation,and Disaster Relief Blankets. In addition, OLS includedprograms added by either the DoD or Congress, suchas Logistics Transformation. The OLP group consistedof approximately eight program offices for which DLAeither provided administrative support or had programoversight, such as the Defense Property AccountabilitySystem and the Continuity of Operations Program.

TheDLARDT&Eappropriation,$216.2million,primarilysupported two types of efforts: Advanced TechnologyDevelopment (Logistics Research and DevelopmentTechnologyDemonstrationandDefenseMicroelectronicsEquipment) and Operational System Development(Industrial Preparedness/Manufactured Technology andLogisticsSupportActivities).




The DLA MILCON appropriation, $71.8 million, fundedmajor construction projects to replace, renovate, orbuild new facilities. The Army Corps of Engineers andNaval Facilities Engineering Command are the primarydesign and construction agents for this program.

The DLA Procurement appropriation, $11.9 million,funded the purchase of mission essential equipment,includingautomateddataprocessing,telecommunicationsequipment, microelectronics equipment, and passengercarryingmotorvehicles.

The DLA Family Housing O&M appropriation, $1.3million, supported an inventory of 201 units locatedat the Defense Supply Center, Richmond, VA (31), theDistribution Depot Susquehanna, PA (140), and theDistribution Depot San Joaquin, CA (30). DLA’s FamilyHousingprogramconsistedof routineoperation require-ments including management and utility costs, carpetand linoleum replacement, painting, and replacement ofappliances.Inaddition,$0.9millionwasmadeavailablefor several Family Housing Construction projects, whichare large-scale renovations and unit replacements.

DLA also manages the National Defense StockpileTransaction Fund, a separate revolving fund that strivesto provide the safe, secure, and environmentally soundstewardshipforstrategicandcriticalmaterielintheUnitedStatesNationalDefenseStockpile.TheTransactionFundand related financial events are not accounted for inthesefinancialstatements,butareembeddedintheDoDAgency-widefinancialstatements.

Financial Condition

The financial statements have been prepared to reportthe financial position and results of operations for DLA,pursuant to the requirements of Title 31, United StatesCode,Section3515(b).

While the statements were prepared from the booksand records of DLA in accordance with the formatsprescribed by the Office of Management and Budget(OMB), the statements are in addition to the financialreportsused tomonitorandcontrolbudgetary resourceswhich are prepared from the same books and records.

To the extent possible, the financial statements werepreparedinaccordancewithfederalaccountingstandards.Attimes,theDepartmentisunabletoimplementallelementsofthestandardsduetofinancialmanagementsystemslimi-tations. TheDepartmentcontinues to implement systemimprovementstoaddresstheselimitations.Thereareotherinstances when the Department’s application of the ac-countingstandardsdiffersfromtheauditor’sapplicationofthestandards.Inthosesituations,theDoDhasreviewedtheintentofthestandardandapplieditinamannerthatman-agementbelievesfulfillsthatintent.ThestatementsshouldbereadwiththerealizationthattheyareforacomponentoftheUnitedStatesGovernment,asovereignentity.Oneimplication of this is that the liabilities cannot be liqui-datedwithoutlegislationthatprovidesresourcestodoso.

TheDefenseWorkingCapitalFund(DWCF)isarevolvingfundthatfostersademand-drivencost-basedrelationshipbetweencustomers(primarilythemilitaryoperatingforces)andsuppliers(theDoD’sbusiness-drivensupportorganiza-tions).Inthiscapacity,theoperationsofaDWCFactivityarefinancedwiththefundedordersplacedbyitscustomersandsatisfiedbythatactivity.Theexpectedoutcomeofthisrelationshipistheeffectiveandefficientdeliveryofgoodsandservices.SincethefinancialstructureoftheDLADWCFallowsfortheidentificationofthecosttoproducegoodsandservicesandsubsequentlysetprices,thecustomercanusebothpricinganddeliveryinformationinitsdecision-makingprocess.ThisvisibilityalsoenablesDLAmanagerstouseperformancemeasurestoensurethattheactivitiesoperateconsistentwithbudgetexecutiontargets,addressprogramrequirements, and foster productivity improvements.

TheDLADWCFfinishedFY2007withtotalassetsvaluedatapproximately$21.1billionandliabilitiesof$3.4billionfromtheConsolidatedBalanceSheetandanetoperatinggainofslightlylessthan$600milliononprogramcostsofapproximately$35.6billionandrevenuesofapproximately$36.1billionfromtheConsolidatedStatementofNetCost.

TheGeneralFundsareappropriatedbyCongresswhichalsograntsauthority totheOfficeof theSecretaryofDefense(OSD) and its components toobligate funds andpay forgoodsandservicesfromtheirannualbudgets.Afterfundsareappropriated,apportionedbyOMB,andallottedbytheOSD,thefundsmaybeusedtoacquiregoodsandservices.




TheDLAGeneralFundsarecomprisedofOperationandMaintenance (O&M); Research, Development, Test andEvaluation (RDT&E); Military Construction (MILCON);Procurement;FamilyHousingConstruction;FamilyHousingO&M;andFamilyHousingImprovementFund.Bothdetailandsummarylevelfinancialreportsareavailabletoprovidethe information necessary to make suitable managementdecisionspertaining to theallocationanduseofGeneralFunds.

TheDLAGeneralFundsfinishedFY2007withtotalassetsvalued at approximately $1.1 billion and liabilities ofalmost$300millionfromtheConsolidatedBalanceSheet.

Systems, Controls, and Auditability

TheDefense LogisticsAgency (DLA) seniormanagementevaluated thesystemof internalaccountingandadminis-trative controls in effect during the fiscal year and as ofthereportingperiodofJuly1,2006throughJune30,2007.This evaluation was done in accordance with guidanceprovided by OMB Circular A-123, “Management’sResponsibilityforInternalControl,”datedAugust5,2005,asimplementedbyDoDInstruction5010.40,“Managers’Internal Control Program Procedures,” dated January 4,2006,andDoDComptrollerguidance,“FY07GuidanceforthePreparationoftheStatementofAssurance(SOA),”datedNovember2006.TheOMBguidelineswereissuedinconjunctionwiththeComptrollerGeneraloftheUnitedStates, as required by the “Federal Managers’ FinancialIntegrity Act of 1982.” Included was an evaluation ofwhetherthesystemofinternalaccountingandadministra-tivecontrols forDLAcomplieswith standardsprescribedbytheComptrollerGeneral.

TherearethreeobjectivesofDLA’ssystemofinternalac-countingandadministrativecontrols.Thefirstistoprovidereasonable assurance that obligations and costs complywithapplicablelaws.Thesecondistoprovidereasonableassurance that funds,property,andotherassetsare safe-guardedagainstwaste,loss,unauthorizeduse,ormisappro-priation.Finally,thethirdistoprovidereasonableassurancethatrevenueandexpendituresapplicabletoAgencyopera-tionsareproperly recordedandaccounted for, topermit

thepreparationof reliable accounting, financial, and sta-tisticalreports,andtomaintainaccountabilityoverassets.

The results indicate that the DLA system of internal ac-counting and administrative controls, in effect duringthe FY 2007, taken as a whole, complies with the re-quirement to provide reasonable assurance thatthe objectives mentioned above were achieved.

Systems

For most of its history, DLA performed its complex,worldwide logistics mission with strong command andcontrol lines along multiple business segments andprograms. Over time, this led to “stovepipe” organiza-tions that developed their own automated management(legacy) information systems and accounting processes.

While these business practices worked well to servethe customer, they also produced a fragmented andvery complex set of accounting processes and financialsystems.Oftenthesebusinesspracticesappliedaccount-ingmethodsandsystemsdifferentlytoaccountforessen-tiallythesametypesoftransactions.Aspartofourlogisticstransformation initiatives, we will dramatically improvethe accuracy, timeliness, and relevance of the financialmanagement data maintained in our logistics systems.

The Defense Finance and Accounting Service (DFAS)prepared the FY 2007 DLA financial statements fromavailable automated finance, accounting, and feedersystems (such as acquisition, logistics, and personnelsystems) and manual processes. Since most of theseautomated systems were designed decades before thecurrentFederalaccountingstandardsweredeveloped,itisdifficulttocollectthedataneededtopreparefinancialstate-ments that comply with Federal standards. Additionally,thereisofteninsufficientdocumentationavailabletoshowhow financial transactions are processed through thosesystems. These factors make it impractical to audit thefinancial statements and for DLA to demonstrate a highlevel of internal control and compliance with pertinentfinancial laws and regulations. Lastly, some data comesfromDFASsystemsthatarenot linkedwithDLAsystemsand cannot easily pass data among other DFAS systems.




DLAhasamultitudeofshortandlong-termeffortsdesignedto fully assess its financial operations and to develop in-tegrated systems and processes that are compliant withFederalsystemandaccountingrequirements.Twoofourmajorstrategiesinclude:

Management Controls

The Managers’ Internal Control (MIC) Program is fullydeveloped at DLA, and the Headquarters (HQ DLA)BusinessOfficesandFieldActivities(FA)havecontinuedtomakeprogressintheexpandedreportingofweaknessesandcontrols.DLAcontinuouslyreviewscurrentprocessesandprocedurestoensureexistinginternalcontrolsareinplace,workingasintended,orarebeingenhanced.Eachdirector-ate,FA,andmajorofficehasaMICProgramMonitorassignedtooverseetheprogram.Thesemonitorsareresponsibleforensuringthattheirrespectiveorganizationsfollowthepre-scribedrequirementsandregulations,assetforthinOMB,

DoD, and DLA guidelines; provide assistance regardingthe performance of objective assessments; and reportweaknessesandconcernsarisingfromthoseassessments.

DLAMICProgramMonitorsannuallyreviewriskareastodeterminewhatshouldbeassessedforthecomingfiscalyear.TheobjectivesaredevelopedandincludedintheMICProgramforeachHQDLADirectorateandFA;andallassessmentsarereviewedandapprovedbyseniormanagementandtheMICProgramTeam,atboththeFAandtheHQDLAlevels.

MIC Program performance standards are part of DLA’ssupervisory/managerial performance plans and includeMICProgramresponsibilities.AspartoftheDLAInternalSupport Review program, updated status reports on MICprogram weaknesses and concerns are addressed on aquarterlybasistotheDLAseniorleadership.

TheDLASeniorAssessmentTeam(SAT)overseestheOMBCircularA-123,AppendixArequirementsfortheAgency.Appendix A requires - at a minimum – that DLA reporton the effectiveness of the key business process internalcontrolsthatsignificantlyaffectitsfinancialreporting.DoDdetermined that limiting assessments to key focus areas,whicharematerial toDoD’sfinancial statements,wouldbe the most economical approach and result in signifi-cantimprovementsforitsreportingentities.Accordingly,under the leadership and direction of the SAT and theMIC Program Team, DLA Focus Area Leads are respon-sible for assessing the effectiveness of internal controlsoverfinancial reportingandpreparingannual statementsofassurancethatfollowstrictrulesestablishedbyDoD.Ifmaterialweaknessesarediscovered,FocusAreaLeadsareresponsiblefordevelopingandexecutingCorrectiveActionPlans to resolve them. As such,CorrectiveActionPlansdocumentandfixmaterialweaknessesininternalcontrolsoverfinancialreporting.ProgressinexecutingCorrectiveActionPlansarereportedtotheSAT,DoD,andtheDLACorporateBoardthroughBalancedScorecardmetricsatleastquarterly.Inaddition,CorrectiveActionPlansarereportedto the DoD Financial Improvement and Audit Readiness(FIAR) Directorate, through its web-based FIAR tool.

Progress within the DLA Financial Operations (J-8)included:theverticalorganizationalparticipationiniden-tifyingandresolvinginternalcontroldeficiencies,updates

AnupgradeoftheDLAsupplychainmanagementsystem(supply/non-energy) was introduced via the BusinessSystemsModernization(BSM)initiative.BSMwasdesignedto improvebusinesspracticesandreplaceaging legacylogistics systems with commercial-off-the-shelf (COTS)enterprise resourceplanning software that is compliantwith Federal Financial Management Improvement Act(FFMIA) of 1996 requirements. This transformation isexpected to reduce costs, eliminate systemic deficien-cies, and provide the necessary auditability to dem-onstrate financial stewardship and pass the scrutiny offinancialaudits.FullyimplementedinDecember2006,thesystemintroducedbyBSMiscurrentlysupportingap-proximately5.2millionitemsofsupplyand8,000users.

ThelegacyenergysupplychainmanagementsystemwasreplacedbyBSM-Energy (formerly, theFuelAutomatedSystem(FAS)).FASwasanautomatedinformationsystemdesignedtosupporttheDefenseEnergySupportCenter(DESC)andtheMilitaryServicesinperformingtheirre-spective responsibilities in fuels supply chain manage-ment.InDecember2003,DLAwasdirectedtoconvergeFASwiththeDLAcorearchitecture(introducedviatheBSMprogram). ThisEnergyConvergenceProgramwillfullyassessallofDESC’ssupplychainoperationsandwilldevelop integrated systems and processes that complywith Federal system and accounting requirements.

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TransformationAgency,DefenseFinanceandAccountingServiceandotherComponents). Consequently,ensuringthat adequate controls are embedded in and aroundthese systems is a significant task; and because DLA-owned systems are undergoing revolutionary changes(legacysystemswerereplacedanditsenterpriseresourceplanning system, Enterprise Business System, is undergo-ing a significant software upgrade), control issues areevenmoredifficulttomanage.However,DLAisworkingto ensure that management can assert that no materialcontrolweaknesses exist in its systemsand that data ex-tractionsand systemdocumentationare readilyavailableforauditors.ThecomplexityoftheDLAFinancialSystemsArchitecture, the revolutionary nature of the on-goingchanges to theDLAenterprise resourceplanningsystem,and therecentautomatedcontrolcorrectiveactionplans-resultingfromOMB-123,AppendixAtesting-areafewofthekeychallengesthatDLAwillneedtobeovercomebefore asserting that the Agency is ready for audit.

Additionally, following months of discussions with theGovernment Accountability Office and OMB, in mid-FY2007 the Department revised its audit readiness strategyapproachfrommakingBalanceSheetlineitemsauditabletoasegmentationapproach.DLAisimplementingthisnewapproachbyidentifyingeachend-to-endbusinessprocessandassigningthosebusinessprocessestoDLAsenior-levelexecutives, the process owners. The business processesidentifiedinclude:ProcuretoPay;OrdertoCash;Inventory;Plan to Execution (Budget); Environment Management;FundsBalanceWithTreasury;HiretoRetire;Property,PlantandEquipmentManagement;andRecordtoReport.Thisapproach considers thebusiness processes as an auditorwouldduringafinancialstatementaudit.TheIRTstructureisbeingmodifiedtoprovidesupporttothevariousbusinessprocess owners. An IRT’s responsibilities will includecreating,reviewing,andrevisingDWPs-andtheembeddedKMsandFIPs-tocovertheend-to-endbusinessprocesses.

Asofthe3rdQuarter,FY2007,IRTleadsreportedthat66KMsand182FIPsareopen,tracked,andreportedthroughBalanced Scorecard metrics. Additionally, as a result oftestingrequiredbyOMBCircularA-123,AppendixA,anadditional 111 new FIPs were established to account for

to relevant DLA One Book chapters/procedures, refine-ments to agreements with customers and providers, andcontinued recognition of current process improvementsto ensure existing internal controls remain in place orare enhanced. J-8 reviewed current business practices,assessedmanagementcontrols,conductedbiweeklyauditupdates,andperformedriskanalysisaspartofitsevaluation.

Progressing Toward Auditability

Under the leadership and direction of the DLA AuditCommittee, the Auditability Working Group (AWG) andits subordinate Issue Resolution Teams (IRTs) are respon-sible for creating and implementing strategies that bothresolvereportedauditfindingsand,perhapsmoreimpor-tantly,documentingtheapproachestomaintainandsustainauditability. TheAWGand IRTsarecomprisedof seniormanagers and personnel representing both DLA and theDefense Finance and Accounting Service (DFAS). EachIRTisledbyamemberoftheDLAProcessOwner’s(FlagOfficer/SeniorExecutiveServicelevel)staffandisrespon-sible fordevelopingandexecutingaDetailedWorkPlan(DWP)toresolveauditimpedimentsinspecificareas.Assuch, DWPs document DLA’s approach to fix audit im-pediments; contain the actions required to documentthe processes and related internal controls; and identifythe steps required tovalidate theoutcomeof thecorrec-tiveactionsandprepare the requisitemanagementasser-tions. Progress in executing the Financial ImprovementPlans(FIPs)andKeyMilestones(KMs)thatarecontainedintheDWPisreportedmonthlytotheAWG,bi-monthlytotheAuditCommittee,andquarterlytotheDLACorporateBoard through DLA’s Balanced Scorecard metrics. Inaddition,KMsarereportedtotheFIARDirectoratethroughits web-based tool and included in the DoD FIAR Plan– the Department’s comprehensive approach to achieveDoD-wideauditability.DLAupdatestheFIARtool–ona monthly basis – with the status of its key milestones.

As DLA progresses towards audit readiness, the impor-tance of systems - within the business processes - andthe relianceon thecontrols inandaround those systemsbecome more and more apparent. DLA has a complexFinancialSystemsArchitecturecomprisedofsystemsownedbyseparateandautonomousorganizations(DLA,Business




the Corrective Action Plans needed to revise or enhancean already existing control, or implement a new control.

Financial Improvement and Audit Readiness(FIAR) Initative

In support of the strategic objective to demonstratereadiness for financial statement audit, DLA continues toexecuteacomprehensive–yetfluid–approachtoachieveauditability.DLAfollowsthesixphaseprocesscontainedin the DoD Comptroller’s Business Rules that culminateswith a financial statement audit. The six phases are: 1)DiscoveryandCorrection,2)SegmentAssertion,3)AuditReadiness Validation, 4) Audit Readiness Sustainment, 5)Financial StatementAssertion, and6) Financial StatementAudit. DLA is responsible for phases 1, 2, 4, and 5,while the DoD Inspector General is responsible for 3and 6. During FY 2007, DLA engaged the services of acommercial firm that assisted with implementation ofcorrective action and preparation of process documenta-tion required by both the DoD Comptroller’s BusinessRulesandtheOfficeofManagementandBudget’s(OMB)CircularA-123. DLA’splantoachieveauditablefinancialstatements is continually updated/revised as progress ismade toward these goals or as circumstances warrant.

primarily of two components: the Materiel ReturnsProgram, which equates to the ‘Return’ process of theSupplyChainOperationsReferenceModelofsupplychainmanagement,andthereutilizationservicesperformedbytheDefenseReutilizationandMarketingService(DRMS).Under the Materiel Returns Program, customers returnmaterielthattheynolongerneedtothewholesalesupplychaintosupportafuturecustomer’srequirements.Theseassets,inturn,precludetheneedtoinitiateprocurementactionstoacquireassetstomeetprojectedrequirements,thus improving both the efficiency and effectivenessof supply chain management. The DRMS reutilizationmission,whichisdescribedindetailseparately,primarilyinvolves receiving materiel that is no longer needed bya component of the DoD and making it available to allof the components of the DoD. These efforts optimizethe use of materiel that is available for use by theDoD and helps minimize the investment in inventory.

Retail Integration: RetailintegrationisatransformationalprogramtoextendtheDLAenterpriseclosertothewarf-ighter;andwhereDLAbecomesamanagerofcompletesupplychains–versusamanagerofwholesalesupplies.Instead of merely operating as a wholesaler, DLA willtakesupplyownershipandmanagementfromthefactorytotheultimatecustomer. UsingDepartment-wideinitia-tives(suchastheNationalInventoryManagementStrategy(NIMS), Joint Regional Inventory Materiel Management,Joint Environmental Materiel Management, and theBase Realignment and Closure supply, storage and dis-tribution concepts), DLA will replace distinct wholesaleand retail inventories with a national inventory that canbe managed in a more integrated manner. ThroughFY 2007, DLA has rolled-out NIMS to six locations:the Joint Environmental Materiel Management ServiceCenter, Okinawa (June 2002); Naval Station Ingleside,TX (July 2003); Naval Air Station Whidbey Island, WA(August 2005); Naval Air Weapons Station China Lake,CA (February 2006); Marine Corps Air Station Miramar,CA (February 2006); and Naval Auxiliary Landing FieldSanClemente,CA(February2006).NIMSprovidesbetterdemandvisibility,increasessupplyavailabilityandreducescustomerwait-time. As thestrategybecomesmore fullyintegratedintoourbusinesssystems,benefitswillinclude:furtherreductionstocustomerwait-times,higherlevelsofsupplyreadiness,moretailoredlogisticssupportsolutions,

Other Accompanying Information

Forward Logistics: ForwardLogisticsisthenetsumoftheDLAEnterpriseeffortstoperformend-to-endsupplychainmanagement on the eight DLA supply chains--Aviation,Maritime, Land, Construction & Equipment, Subsistence,Clothing&Textiles,Medical,andEnergy.Inmanagingthesesupplychains,DLA’seffortsinFY2007focusedonsupport-ingtwoofDLA’sStrategicGoals:extendingtheEnterpriseand continuing to improve performance. The EnterpriseaccomplishmentsincludethoseoutlinedinthediscussionofRetailIntegration,aswellasbuildingon/expandingtheCustomerDemandCollaborationinitiativebegunundertheBSM/EBSprogram.Lookingforward,weseetheseefforts(retail integration and customer demand collaboration)coalescing into a collaboratively extended supply chainwithcloseinvolvementofcustomerrequirementsgenera-torsandultimateconsumersofDLA’sgoodsandservices.

Reverse Logistics: Reverse Logistics in DLA consists




measurementintacticalDefenseFuelSupplyPoints;5)studied system interfaces and data element utilizationfor the purpose of simplifying/leveraging single-inputinformation; and 6) developed a Terminal OperationServicesbasicmoduletobeusedasthefoundationforfuelterminalcontractsestablishedbytheDefenseEnergySupportCenterandtheMilitaryServices.

For Class IV (Construction and Equipment): 1) jointlyidentifiedsupplychaingapsandseamstobeaddressedbytheEAWorkingGroupafterconductingaHumanitarianAssistance/Disaster Relief and Migrant Operation ROCdrillwithUSPACOMandUSSOUTHCOM;2)developeda requirements forecasting and management planningconcept;and3)deployedaTroopSupportPlannertotheUSCENTCOMAreaofResponsibility.

For Class VIII (Medical Materiel): 1) obtained theChairman of the Joint Chiefs of Staff’s approval fordeploying Theater Lead Agents for Medical Materiel(TLAMMs)intheNorthernCommand(USNORTHCOM)andUSSOUTHCOM.TLAMMsarenowinallGeographicCombatCommands; 2) conducted a secondROCdrillwithUSPACOM,USNORTHCOM,andUSSOUTHCOM;3) initiated Memorandums of Agreement for MedicalPlanners in Geographic Combatant Commands; 4)initiated the development of the Functional ExecutiveAgentMedicalSupportsystem;5)establishedPerformanceBased Agreements with Navy to improve collabora-tion/support aboard hospital ships; and 6) completeda study, theMedicalMaterielReadinessAssessment II.

improvedinventoryandcustomerdemandvisibility,greateroptimization of the supply chain, better use of availableresources (including lower overall DoD inventory andinventorymanagementcosts),andareductionintheMilitaryServices’inventoryinvestmentswithoutreducingsupport.

Executive Agent (EA): AnExecutiveAgent isdefinedas“TheHeadofaDoDComponenttowhomtheSecretaryofDefenseortheDeputySecretaryofDefensehasassignedspecificresponsibilities,functionsandauthoritiestoprovidedefined levelsofsupport foroperationalmissions,orad-ministrativeorotherdesignatedactivitiesthatinvolvetwoormoreoftheDoDComponents.”TheDeputySecretaryof Defense has designated the Director of DLA as theExecutiveAgent for Subsistence (Class I),BulkPetroleum(Class IIIB),ConstructionandBarrierMateriel (Class IV),and Medical Materiel (Class VIII). Accomplishments byDLAastheExecutiveAgentareasfollows:

Business Systems Modernization (BSM): The re-engi-neeringofDLA’sinternalmaterielmanagementprocessesto best business practices by replacing decades-oldsoftware with commercial-off-the-shelf solutions. BSMwastheengineorheartofthetransformation.Itdeliveredan integrated set of software applications running ona single hardware platform which Agency transforma-tional initiativeswill leverage,as theyaredevelopedanddeployed.TangiblebenefitsBSMbringstothewarfighterinclude: improvedmaterielavailability, reducedcustomerwait time, reduced cost, and improved data integrity.

Enterprise Business System (EBS): DLA’s EnterpriseBusiness System (EBS) capabilities will continue to be

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For Class I (Subsistence): 1) jointlyestablishedsupplychainreadinessstandardsandmetricsforcontinuousas-sessmentandreportingofend-to-endsupplychainper-formancebasedonMissionEssentialTasksoftheDefenseReadinessReportingSystem;2)engagedtheCombatantCommands to optimize sustainment supportabilityandplanning;3)jointlyidentified76supplychaingapsand seams to be addressed by the EA WorkingGroups-afterconductingaHumanitarianAssistance/DisasterReliefandMigrantOperationReviewofConcept(ROC)drillwiththePacificCommand(USPACOM)andtheSouthernCommand (USSOUTHCOM);4)obtainedJointSubsistencePolicyBoardapprovalonproposedres-olutionstofivesupplychaingaps;5)completedPre-PilotTestoftheCommonFoodManagementSystem.

For Class III (B) (Bulk Petroleum):1)initiatedalife-cyclemanagement program for receipt meters procured fortacticallocationsintheCentralCommand(USCENTCOM)AreaofResponsibility;2)achievedacommonpetroleumrequirementsgenerationmethodologyandtoolthroughthe Integrated Consumable Item Support system; 3)finalized performance-based joint specifications fortactical fuel bladders (multiple sizes) and assisted ininitiatingFirstArticleTest (FAT) for theprocurementof210,000gallonbladdersforusebytheMilitaryServices;4) funded FAT for the Tactical Automated Tank Gaugeas the community standard for improving inventory

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Base Realignment and Closure (BRAC) 2005: DLAis responsible for developing and executing policiesand procedures, and in addition manages the im-plementation of the BRAC 2005 recommendationsrelated to Depot-Level Reparable (DLR) ProcurementManagement Consolidation (including ConsumableItem Transfer (CIT)); Supply, Storage, and Distribution(SS&D) Management Reconfiguration; CommodityManagement Privatization; and discretionary locationmoves.TheDLRandCITrealignmentwillenableDoDto leverage its buying power, promote better materielprices,andreducelaboranddisposalcostsbyconsoli-datingthemanagementofDLRprocurementsandmostconsumable items. By consolidating SS&D functionswithinDLA,theDepartmentwillachieveeconomiesofscale and efficiencies that will make logistics supportto the operational forces more effective. CommodityManagement Privatization creates long-term contractswith private industry for the inventory managementand distribution of all tires, packaged petroleum,oils, lubricants, and compressed gasses used by theDoD. This approach will provide more responsive

leveraged as a major transformation initiative. It willexpand capabilities and benefits introduced under theBusinessSystemsModernization (BSM)Programbydeliv-ering additional standard systems andbusinessprocessesthrough the integration of a family of software applica-tions.TheAgencywillcontinuetoleveragebestpracticesand its commercially-based Commercial Off-the-Shelf(COTS) infrastructure to enable DLA to extend its EBScapabilities outward throughout the DoD supply chain.EBS will integrate DLA’s (previously) program-focused ITinitiatives into an enterprise capability-focused solution.Specifically,theAgencywillleverageitsexistingcoreen-terprise architecture components (SAP-based EnterpriseResourcePlanning(ERP)tool,DistributionStandardSystem(DSS), and Integrated Data Environment (IDE)) to enablea single, integrated, capability-based system that is ac-cessibleandofvaluetowarfightersacrosstheenterprise.

Energy Convergence: AsDLA’senterpriseisextendedacross the DoD supply chain, a technology insertioneffort is needed to enable the SAP Industry SolutionPublicSectorandtheSAPIndustrySolutionOil&Gassolutions to coexist in support of the Defense EnergySupport Center (DESC) mission requirements. At thehighest level DESC business processes and other DLAsupply chain operations appear similar, but at a moredetailed level there are significant differences. EnergyConvergencewillallowDLAtointegratefuelscommoditymanagementwithintheDLAEnterpriseArchitecture.

Enterprise Operational Accounting System (EOAS): EOAS is a planned post-production enhancement thatwill addalloperational accounting functions intoEBS.The result will be an enterprise-wide financial systemthat complies with federal government accountingstandards.

eProcurement: Aplannedpostproductionenhancementthat will integrate the SAP Government Procurementsoftware into EBS, replacing remaining legacy contractwritingsystems.ThisinitiativewillstandardizeDLApro-curementandcontractwritingcapabilitiesandprovidestate-of-the-artdecisionplanningtools. ItwillpositiontheAgencytoassumedepotlevelrepairable(DLR)pro-curement responsibility from the services as a resultof the latest Base Realignment and Closure (BRAC)recommendations.

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Distribution Planning and Management System (DPMS): GOTS/COTSsoftwaresolutionthatimprovesthecoordination,visibility,andpositioningofsuppliesandequipments. The result is bettermanagementofproductmovementfromvendorstoDLAcustomersandfromDLAdistributioncenterstoDLAcustomers.DPMSprovidesDLAwiththemeanstocontinuouslycollectandaccessreal-timeinformationonthelocation,movementand status of equipment and supplies. Access to thisinformation facilitates the seamless flow of materielfrom thepoint of origin to thepoint of consumption.

Reutilization Modernization Program (RMP): DLA’sstrategy to replace the current Defense ReutilizationandMarketingService(DRMS)informationtechnolo-gy(IT)systemswithasolutionbasedonbest-businesspractices,COTS,andbestofbreedsoftwareproducts.RMP will integrate and leverage the DLA EnterpriseBusiness System (EBS) and Distribution StandardSystem (DSS) to transform the DRMS business area.This integration will incorporate DRMS informa-tion needs into the DLA end-state architecture.

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supply support and eliminate the related excess infra-structureandpersonnelcosts. Lastly, thediscretionarylocation moves include the relocation/realignment ofcustomer service representatives, Document Automation& Production Service offices, Defense Reutilization andMarketingServiceactivities, and fuel sites in response tootherBRACchangesoccurringatMilitaryServicelocations.

Reservists: AmongthemanpoweravailabletoDLAwere756 reservists - authorized and funded by the MilitaryServices.ThereservistsareutilizedbyDLAinavarietyofcapacitiesinsupportofpeacetimeoperations,contingen-cies,andwartimesurges. SinceSeptember11,2001,thewartime surges were supported with the mobilization of408 reservistswhoserveda totalof568 toursofduty insupportofOperationsENDURINGFREEDOMandIRAQIFREEDOM in the Global War on Terrorism. During FY2007,50reservistsmobilizedandprovidedsupporttoDLA’sthreeContingencySupportTeams(DCSTs)inKuwait,Iraq,andAfghanistan,while15reservistsstaffedtheSustainmentDivisionoftheU.S.CentralCommand’sDeploymentandDistribution Operations Center. Collectively, activatedreservists logged more than 27,000 man-days of supportto DCSTs, field activities, and headquarters missions. Inaddition, to those deployed overseas, reservists providedmore than8,000man-daysofoperational support to thevariousstatesideDLAactivitiesduringtheirstatutoryannualtraining.


Consolidated and Combined Financial StatementsAs of and for the Years Ended September 30, 2007 and 2006


WORKING CAPITAL FUND



UNAUDITED

DEPARTMENT OF DEFENSE

DEFENSE LOGISTICS AGENCY WORKING CAPITAL FUND

Consolidated Balance SheetsAs of September 30, 2007 and 2006(In Thousands)

2007 2006

ASSETS (Note 2)

Intragovernmental:

Fund Balance with Treasury (Note 3)

Accounts Receivable (Note 4) $ 932,515 $ 857,284

Other Assets (Note 5) 124,925 124,925

Total Intragovernmental Assets 1,057,440 982,209

Cash and Other Monetary Assets (Note 6) 7,421 12,100

Accounts Receivable, Net (Note 4) 489,224 570,080

Inventory and Related Property, Net (Note 7) 17,516,903 17,913,093

General Property, Plant, and Equipment, Net (Note 8) 1,938,422 1,920,819


TOTAL ASSETS 21,053,039 21,458,642

LIABILITIES (Note 9)

Intragovernmental:

Accounts Payable (Note 10) 90,388 93,288

Other Liabilities (Notes 12 & 13) 64,757 86,885

Total Intragovernmental Liabilities 155,145 180,173

Accounts Payable (Note 10) 2,751,119 3,032,382

Military Retirement and Other Federal

Employment Benefits (Note 14) 235,596 253,172

Environmental and Disposable Liabilities (Note 11) 72,644 104,136


TOTAL LIABILITIES 3,363,953 3,816,861

NET POSITION

Cumulative Results of Operations – Other Funds 17,689,086 17,641,781

TOTAL NET POSITION 17,689,086 17,641,781

TOTAL LIABILITIES AND NET POSITION $ 21,053,039 $ 21,458,642

The accompanying notes are an integral part of these statements.



UNAUDITED



Consolidated Statements of Net CostFor the Years Ended September 30, 2007 and 2006(In Thousands) (See Note 15)

2007 2006

PROGRAM COSTS

Gross Costs $ 35,587,003 $ 35,161,318

(Less: Earned Revenue) (36,148,078) (35,759,143)

Net Program Costs (561,075) (597,825)

NET COST OF OPERATIONS $ (561,075) $ (597,825)




UNAUDITED



Consolidated Statements of Changes in Net PositionFor the Years Ended September 30, 2007 and 2006(In Thousands) (See Note 16)

2007 2006

CUMULATIVE RESULTS OF OPERATIONS

Beginning Balances $ 17,641,781 $ 16,184,286

Prior Period Adjustments:

Corrections of Errors (+/-) - 124,925

Beginning Balances, as adjusted 17,641,781 16,309,211

Budgetary Financing Sources:

Appropriations used 489,316 681,678

Transfers-in/out without reimbursement (+/-) (374,904) 16,165

Other Financing Sources:

Donations and forefeitures of property 2,710 -

Transfers-in/out without reimbursement (+/-) (782,613) (109,083)

Imputed financing from costs absorbed by others 151,721 145,986

Total Financing Sources (513,770) 734,746

Net Cost of Operations (+/-) (561,075) (597,824)

Net Change 47,305 1,332,570

Ending Balances 17,689,086 17,641,781

UNEXPENDED APPROPRIATIONS


Appropriations received 489,385 2,147,051

Appropriations transferred-in/out (+/-) - (1,465,200)

Other adjustments (rescissions, etc.) (+/-) (69) (173)

Appropriations used (489,316) (681,678)

Ending Balances - -

NET POSITION $ 17,689,086 $ 17,641,781




UNAUDITED

DEPARTMENT OF DEFENSEDEFENSE LOGISTICS AGENCY WORKING CAPITAL FUND

Combined Statements of Budgetary ResourcesFor the Years Ended September 30, 2007 and 2006(In Thousands) (See Note 17)

2007 2006

BUDGETARY FINANCING ACCOUNTS

Budgetary Resources:

Unobligated balance, brought forward, October 1 $ (30,820) $ (35,476)

Recoveries of prior year unpaid obligations 438,636 446,035

Budget authority:

Appropriation 489,385 2,147,051

Contract authority 36,589,729 33,797,628

Spending authority from offsetting collections:

Earned

Collected 34,015,324 34,627,477

Change in receivables from Federal sources 47,316 11,761

Change in unfilled customer orders

Advance received (95,521) (11,219)

Without advance from Federal sources 1,893,299 685,356

Subtotal 72,939,532 71,258,054

Nonexpenditure transfers, net, anticipated and actual (374,904) (1,449,329)

Permanently not available (36,059,827) (36,099,085)

Total Budgetary Resources $ 36,912,617 $ 34,120,199




UNAUDITED

DEPARTMENT OF DEFENSEDEFENSE LOGISTICS AGENCY WORKING CAPITAL FUND


2007 2006

Status Of Budgetary Resources:

Obligations incurred:

Reimbursable $ 36,936,465 $ 34,151,019

Subtotal 36,936,465 34,151,019

Unobligated balance:

Apportioned (23,848) (30,820)

Subtotal (23,848) (30,820)

Unobligated balance not available - -

Total Status of Budgetary Resources 36,912,617 34,120,199

Change in Obligated Balance:

Obligated balance, net

Unpaid obligations, brought forward, October 1 13,840,700 15,342,337

Less: Uncollected customer payments

from Federal sources, brought forward, October 1 (5,294,115) (4,596,998)

Total unpaid obligated balance 8,546,585 10,745,339

Obligations incurred net (+/-) 36,936,465 34,151,019

Less: Gross outlays (33,377,915) (35,206,622)

Less: Recoveries of prior year unpaid obligations, actual (438,636) (446,035)

Change in uncollected customer payments

from Federal sources (+/-) (1,940,616) (697,116)

Obligated balance, net – end of period

Unpaid obligations 16,960,614 13,840,700


from Federal sources (+/-) (7,234,730) (5,294,115)

Total unpaid obligated balance, net, end of period 9,725,884 8,546,585

Net Outlays:

Gross outlays 33,377,915 35,206,622

Less: Offsetting collections (33,919,803) (34,616,258)

Net Outlays $ (541,888) $ 590,364



Notes to the Consolidated and Combined Financial StatementsFor the Fiscal Year Ended September 30, 2007 and 2006





Note 1. Significant Accounting Policies

A. Basis of Presentation

Thesefinancialstatementshavebeenpreparedtoreportthefinancialpositionand resultsofoperationsof theDefenseLogistics Agency (DLA) Working Capital Fund (WCF),as required by the Chief Financial Officers Act of 1990,expandedbytheGovernmentManagementReformActof1994,andotherappropriatelegislation.Thefinancialstate-mentshavebeenprepared fromthebooksandrecordsofDLAinaccordancewiththeDepartmentofDefense(DoD)Financial Management Regulation (FMR), the Office ofManagement and Budget (OMB) Circular A-136, FinancialReporting Requirements, and to the extent possiblegenerallyacceptedaccountingprinciples(GAAP).Effective4thQuarter,FiscalYear(FY)2006,DoDnolongerpublishesconsolidating/combiningfinancialstatements.Theaccom-panyingfinancialstatementsaccountforallWCFresourcesfor which DLA is responsible unless otherwise noted.

TheDLAisunabletofullyimplementallelementsofGAAPandtheOMBCircularA-136duetolimitationsofitsfinancialand nonfinancial management processes and systems thatfeedintothefinancialstatements.TheDLAhasdeployedafullyintegratedEnterpriseResourcePlanning(ERP)systemtoamajorportionofitsbusiness.TheEnterpriseBusinessSystem(EBS)reachedfulloperationalcapabilityinJuly2007andiscapableoffullysupportingfinancialtransactionsandofdeliveringGAAPfinancialstatements.However,aportionof the information fed to the ERP still derives its reportedvaluesandinformationformajorassetandliabilitycatego-rieslargelyfromnonfinancialsystems,suchasinventoryandlogistic systems. These systemsweredesigned to supportreporting requirements formaintainingaccountabilityoverassets and reporting the status of federal appropriationsrather than preparing financial statements in accordancewith GAAP. The DLA continues to implement processand system improvements addressing these limitations.

The DoD currently has several auditor identified financialstatement material weaknesses. Of these, the DLA WCFhas the following: (1) Financial Management Systems, (2)IntragovernmentalEliminations,(3)UnsupportedAccountingEntries, (4) Fund Balance with Treasury, (5) Environmental

Liabilities, (6) General Property, Plant, and Equipment,(7) Governmental Property and Material in Possessionof Contractors, (8) Inventory and (9) Accounts Payable.

B. Mission of the DLA

TheDLA’sprimarymissionistoprovidebestvaluelogisticsintegratedsolutionstomeettheneedsofAmerica’sArmedForces and other designated customers in peace and inwararound theclock, around theworld. Supportbeginswithjointplanningforpartsusedinnewweaponssystems,extendsthroughproductionandcontractsupport,distribu-tionandwarehousing,andconcludeswiththedisposalofmateriel that is obsolete, worn out, or no longer needed.

The DLA provides supply support, technical/logisticsservicesandqualitysupporttoallbranchesoftheMilitaryandothernonDoDcustomers. Theservicesprovided fallinto the following activity groups: Supply Management,Defense Distribution Center (DDC), Defense ReutilizationandMarketingService(DRMS),andDocumentAutomationand Production Service (DAPS). Supply Managementis comprised of NonEnergy and Energy. NonEnergysupply is further divided into the following supplychains: Clothing and Textiles, Medical, Subsistence,ConstructionandEquipment,Aviation,Land,andMaritime.

C. Appropriations and Funds

The DLA WCF receives its appropriations and funds asworkingcapitalfunds.TheDLAusestheseappropriationsandfunds toexecute itsmissionsandsubsequentlyreportonresourceusage.

The DLA WCF received its initial working capital corpusthrough an appropriation or a transfer of resources fromexisting appropriations or funds; those capital resourcesare used to finance the operations and transactions thatflowthroughthefund.TheWCFresources thegoodsandservices sold to customers on a reimbursable basis andmaintains the corpus. Reimbursable receipts fund futureoperations andare generally available in their entirety forusewithoutfurthercongressionalaction.Atvarioustimes,Congress provides additional appropriations to supple-ment theWCFas an infusionof cashwhen revenues areinadequate to cover costs within the corpus and to fundcontingency operations and nonbusiness like activities.



The DLA WCF is provided two forms of budgetaryauthority: contract authority and anticipated reimburse-mentauthority.TheDLA’sSupplyManagement,DDC,andDRMSactivitygroupsareprovidedcontract authority forbothoperationsandcapitalprograms.TheDAPSactivityis provided anticipated reimbursement authority for itsoperationsandcontractauthorityforitscapitalprograms.Contract authority allows for the incurring of obliga-tionsprior toreceiptofcustomerorders. Incontrast,an-ticipated reimbursement authority requires the receipt ofcustomer orders prior to incurring obligations. Contractauthority must subsequently be liquidated through thereceipt of customer orders, appropriations or transfers.

D. Basis of Accounting

For FY 2007, DLA’s financial management systems areunable to meet all of the requirements for full accrualaccounting. Many of DLA’s financial and nonfinancialfeeder systems and processes were designed and imple-mentedpriortotheissuanceofGAAPforfederalagencies.These systems were not designed to collect and recordfinancial informationon the full accrual accountingbasisasrequiredbyGAAP.MostofDLA’slegacysystemsweredesigned to record information on a budgetary basis.

TheDoDhasundertakenefforts todeterminetheactionsrequired to bring its financial and nonfinancial feedersystems and processes into compliance with GAAP.One such action is the current revision of its account-ing systems to record transactions based on the U.S.StandardGeneralLedger(USSGL).Startingin2001,DLAundertookamajorinitiativetoimplementanERPsystem.This effort, known as EBS, became fully operational asof July 2007. The DLA plans to expand EBS, a USSGLcompliantsystem,toallWCFactivities.UntilallofDLA’sfinancial and nonfinancial feeder systems and processesareupdatedtocollectandreportfinancial informationasrequiredbyGAAP,theDLA’sfinancialdatawillbederivedfrom budgetary transactions (obligations, disbursements,and collections), transactions from nonfinancial feedersystems,andaccrualsmadeformajoritemssuchaspayrollexpenses,accountspayable,andenvironmentalliabilities.

In addition, DoD identifies program costs basedupon the major appropriation groups provided bythe Congress. Current processes and systems donot capture and report accumulated costs for major

programs based upon the performance measures asrequired by the Government Performance and ResultsAct. The DoD is working towards a cost reportingmethodology that meets the need for cost informationrequiredbytheStatementofFederalFinancialAccountingStandards (SFFAS) No. 4, Managerial Cost AccountingConcepts and Standards for the Federal Government.

E. Revenues and Other Financing Sources

DLA WCF activities recognize revenue from the sale ofinventoryitemsandservices.

TheDLAdoesnotincludenonmonetarysupportprovidedby U.S. allies for common defense and mutual securityin amounts reported in the Statement of Net Cost andthe Note 18, Reconciliation of Net Cost of Operationsto Budget. The U.S. has cost sharing agreements withother countries. Examples include countrieswhere thereis a mutual or reciprocal defense agreement, where U.S.troopsare stationed,orwhere theU.S.Fleet is inaport.

F. Recognition of Expenses

Forfinancialreportingpurposes,DLA’spolicyrequirestherecognitionof operating expenses in theperiod incurred.However,becauseDLAfinancial andnonfinancial feedersystemswerenotdesignedtocollectandrecordfinancialinformationon the full accrual accountingbasis, accrualsaremadeformajoritemssuchaspayrollexpenses,accountspayable, environmental liabilities, and unbilled revenue.

G. Accounting for Intragovernmental Activities

Preparation of reliable financial statements requires theeliminationoftransactionsoccurringamongentitieswithinDoDorbetweentwoormorefederalagencies.However,DLAcannotaccuratelyeliminate intragovernmental trans-actionsbycustomerbecauseallofDLA’s systemsdonottrack at the transaction level. Generally, seller entitieswithin DoD provide summary seller-side balances forrevenue, accounts receivable, and unearned revenue tothe buyer-side internal DoD accounting offices. In mostcases, the buyer-side records are adjusted to agree withDoD seller-side balances. IntraDoD intragovernmental



balancesaretheneliminated.Thevolumeofintragovern-mental transactions isso large thatafter-the-fact reconcili-ationscannotbeaccomplishedeffectivelywithexistingorforeseeable resources. The DoD is developing long-termsystemimprovementstoensureaccurateintragovernmentalinformation,toincludesufficientup-fronteditsandcontrolseliminating the need for after-the-fact reconciliations.

TheU.S.TreasuryFinancialManagementServiceisrespon-sible for eliminating transactionsbetweenDoDandotherfederal agencies. The Treasury Financial Manual Part 2– Chapter 4700, Agency Reporting Requirements for theFinancial Report of the United States Government, andtheU.S.Treasury’sFederal IntragovernmentalTransactionsAccounting Policy Guide provide guidance for reportingand reconciling intragovernmental balances. While DLAis unable to fully reconcile intragovernmental transactionswithallfederalpartners,DLAisabletoreconcilebalancespertainingtoFederalEmployees’CompensationAct trans-actionswiththeDepartmentofLaborandbenefitprogramtransactions with the Office of Personnel Management.

TheDoD’sproportionateshareofpublicdebtandrelatedexpensesoftheFederalGovernmentisnotincluded.TheFederalGovernmentdoesnotapportiondebtanditsrelatedcoststofederalagencies.TheDoD’sfinancialstatements,therefore,donot reportanyportionof thepublicdebtorinterest thereon, nor do the statements report the sourceof public financing whether from issuance of debt or taxrevenues.

FinancingfortheconstructionofDoDfacilitiesisobtainedthrough appropriations. To the extent this financing ul-timatelymayhavebeenobtained through the issuanceofpublicdebt, interestcostshavenotbeencapitalizedsincetheU.S.Treasurydoesnotallocatesuchinterestcoststothebenefitingagencies.

H. Transactions with Foreign Governments and International Organizations

Eachyear,DLAsellsdefensearticlesandservicestoforeigngovernmentsandinternationalorganizationsunderthepro-visionsoftheArmsExportControlActof1976.Undertheprovisions of the Act, DoD has authority to sell defensearticles and services to foreign countries and internation-

al organizations generally at no profit or loss to the U.S.Government.PaymentinU.S.dollarsisrequiredinadvance.

The DLA’s fuel transactions with foreign governments aremadeunder fuelexchangeagreements (FEAs). TheFEAs,alsoknownas replacement inkindagreements, are inter-national acquisition and cross-servicing agreements es-tablished between DLA and the military departments ofother nations. The DLA utilizes FEAs to account for fuelprovidedbyforeignmilitariestotheU.S.MilitaryaswellasfuelprovidedbyDLAtoothernations.Settlementcanbemadeeitherinfuelorcash.Forcashsettlements,theagree-mentstypicallycallforreciprocalpricing(i.e.pricescannotbe more than the participants charge their own military).TheDLAchargesDoDstandardpricestoforeignmilitaries.

I. Funds with the US Treasury

The DLA’s monetary financial resources are maintainedin U.S. Treasury accounts. The disbursing offices ofthe Defense Finance and Accounting Service (DFAS),the Military Services, the U.S. Army Corps of Engineers(USACE), and the Department of State’s financial servicecenters process the majority of DLA’s cash collections,disbursements, and adjustments worldwide. Each dis-bursing station prepares monthly reports that provideinformation to the U.S. Treasury on check issues, elec-tronic fund transfers, interagency transfers, and deposits.

In addition, DFAS sites and USACE Finance Centersubmit reports to the U.S. Treasury by appropriationon interagency transfers, collections received, and dis-bursements issued. The U.S. Treasury records this in-formation to the applicable fund balance with treasuryaccount.AppropriationsaresuballocatedtoDLAbyDoDand, as such, are not separately identifiable by the U.S.Treasury. Therefore, differences between U.S. Treasuryand the DoD balances are reconciled at the DoD level.

J. Accounts Receivable

As presented in the Balance Sheet, accounts receivableincludes three categories: accounts, claims, and refundsreceivable from other federal entities or from the public.Allowancesforuncollectibleaccountsduefromthepublicare based on the Analysis of Receivables by Age Group



method except for the Energy business area which usesthe General Reserve method based on bad debt experi-ence. The DoD does not recognize an allowance forestimated uncollectible amounts from other federalagencies.Claimsagainstotherfederalagenciesaretoberesolvedbetweentheagenciesinaccordancewithdisputeresolution procedures defined in the IntragovernmentalBusiness Rules published in the Treasury FinancialManual at http://www.fms.treas.gov/tfm/vol1/07-03.pdf.

ExchangetransactionssuchasFEAsmustbesettledthroughtheissuanceorreceiptofreplacementsuppliesorserviceswithin12monthsof theoriginal transactionaccordingtocurrentDoDpolicy.Asthesettlementoftheexchangetrans-actionsisauthorizedtotakeupto12months,theanalysisofthenonfederalaccountsreceivablebalancesgreaterthan180daysoldcouldbedistorted.Toassistintheanalysis,Note 4, Accounts Receivable, separates FEA transactionbalances from the remainder of the nonfederal accountsreceivable. Currently, upon reconciliation the purchasesof fuel from foreigngovernmentsarenettedagainst theiraccountsreceivablebalances.Thismethodologyisbeingreviewed during FY 2008 for conformance with GAAP.

K. Inventories and Related Property

TheDLAvaluesapproximately71%ofitsresaleinventoryusingthemovingaveragecostmethod.Anadditional29%(fuelinventory)isreportedusingthefirst-in-first-outmethod.

The DLA manages only military or government specificmateriel under normal conditions. Items commonlyused in and available from the commercial sector arenot managed in the DLA materiel management activi-ties. Operational cycles are irregular, and the militaryrisksassociatedwithstock-outpositionshavenocommer-cial parallel. The DLA holds materiel based on militaryneed and support for contingencies. The DoD doesnot attempt to account separately for “inventory heldfor sale” and “inventory held in reserve for future sale”basedonSFFASNo.3definitions,unlessotherwisenoted.

The DLA recognizes condemned materiel as “Excess,Obsolete, and Unserviceable.” The cost of disposal isgreaterthanthepotentialscrapvalue;therefore,thenetvalueof condemned materiel is zero. Potentially redistributed

materiel,presentedinpreviousyearsas“Excess,Obsolete,and Unserviceable,” is included in the “Held for Use” or“Held for Repair” categories according to its condition.

Inventoryavailableandpurchasedforresaleincludescon-sumablespareandrepairpartsandrepairableitemsownedandmanagedbyDLA.Thisinventoryisretainedtosupportmilitaryornationalcontingencies.Inventoryheldforrepairisdamagedinventorythatrequiresrepairtomakesuitableforsale.Often,itismoreeconomicaltorepairtheseinventoryitems rather than toprocure these items. TheDLAoftenreliesonweaponsystemsandmachinerynolongerinpro-duction.Asaresult,DLAsupportsaprocessthatencour-agestherepairandrebuildingofcertainitems.Thisrepaircycleisessentialtomaintainingaready,mobile,andarmedmilitary force. Work in process balances include costsrelated to the production or servicing of items, includingdirect material, direct labor, applied overhead, and otherdirect costs. Work in process also includes the value offinished products or completed services that are yet tobe placed in service and transferred to an asset account.

L. General Property, Plant, and Equipment

In FY 2006, DoD revised the real property capitaliza-tion threshold from $100 thousand to $20 thousand.The current $100 thousand capitalization thresholdremains unchanged for the remaining General PP&Ecategories. The DLA has not fully implemented thisrevised policy due to system and process limitations.

General PP&E assets are capitalized at historical acquisi-tion cost plus capitalized improvements when an assethasauseful lifeof twoormoreyearsand theacquisitioncostequalsorexceedstheDoDcapitalizationthresholdof$100 thousand. The DoD also requires capitalization ofimprovement costs over the DoD capitalization thresholdof$100thousandforGeneralPP&E.TheDoDdepreciatesallGeneralPP&E,otherthanland,onastraight-linebasis.

PriortoFY1996,GeneralPP&Ewascapitalizedifithadanacquisition cost of $15 thousand, $25 thousand, and $50thousand for FYs1993, 1994, and1995, respectively, andanestimatedusefullifeoftwoormoreyears.GeneralPP&Epreviouslycapitalizedatamountsbelow$100thousandwas



writtenoffoftheGeneralFundfinancialstatementsinFY1998.NoadjustmentwasmadeforWCFassetsthatremaincapitalized and reported on WCF financial statements.The heritage assets and stewardship land maintainedat DLA WCF installations and other related material dis-closures are provided in Note 8, General PP&E, Net.

When it is in the best interest of the government, DLAprovidesgovernmentproperty tocontractors tocompletecontract work. The DLA either owns or leases suchproperty,or it ispurchaseddirectlyby thecontractor forthegovernmentbasedoncontractterms.Whenthevalueof contractor-procured General PP&E exceeds the DoDcapitalization threshold, federal accounting standardsrequire that it be reported on DLA’s Balance Sheet.

The DoD is developing new policies and a contractorreporting process for Government Furnished Equipmentthat will provide appropriate General PP&E informa-tion for future financial statement reporting purposes.Accordingly, DLA reports only government property inthepossessionof contractors that ismaintained inDLA’spropertysystems.TheDoDhasissuednewpropertyac-countabilityandreporting requirements that requireDLAtomaintain, in theirproperty systems, informationonallproperty furnished to contractors. This action andotherDoDproposedactionsarestructuredtocaptureandreporttheinformationnecessaryforcompliancewithfederalac-countingstandards.TheDLAhasnotfullycompliedwiththis revisedpolicydue tosystemandprocess limitations.

M. Advances and Prepayments

The DoD’s policy is to record advances and prepay-ments in accordance with GAAP. As such, paymentsmade in advance of the receipt of goods and servicesarereportedasanassetontheBalanceSheet.TheDLAfollowsDoD’s policy to expense and/or properly classifyassetswhen the relatedgoodsandservicesare received.

N. Leases

TheDLAhascontractedwithathirdpartytoreviewDLA’sleases todetermine if theyarecapital leases. TheDLA’sefforttoidentifyallleaseagreementsatourfieldsiteswasprojected to be completed in the 4th Quarter, FY 2007.Aspartofourdiscoveryeffort,wefoundthatthisproject

wasmorecomplexthanoriginallyplanned.Asaresult,theprojectrequiredadditionaltimeandfunding.Afterresearch-ingallthefacts,DLAwasabletofullyassessanddeterminethe requirements for the lease efforts. The project thenbeganin4thQuarter,FY2007withcompletionscheduledfor4thQuarter,FY2008.TheDLAisdevelopingguidancewhich will be issued in a subsequent period to appro-priately record capital leases in the financial statements.

O. Other Assets

Other assets include those assets, such as military andcivil service employee pay advances, travel advances,and certain contract financing payments that arenot reported elsewhere on DLA’s Balance Sheet.

The DLA conducts business with commercial contrac-torsundertwoprimarytypesofcontracts:fixedpriceandcost reimbursable. To alleviate the potential financialburden on the contractor that long-term contracts cancause, DLA may provide financing payments. ContractfinancingpaymentsaredefinedintheFederalAcquisitionRegulations, Part 32, as authorized disbursements ofmoniestoacontractorprior toacceptanceofsuppliesorservicesbytheGovernment.Contractfinancingpaymentsclauses are incorporated in the contract terms and con-ditions and may include advance payments, perfor-mance-basedpayments,commercialadvanceandinterimpayments,progresspaymentsbasedoncost, and interimpayments under certain cost-reimbursement contracts.

Contract financing payments do not include invoicepayments,paymentsforpartialdeliveries,leaseandrentalpayments,orprogresspaymentsbasedonapercentageorstageofcompletion,whichtheDefenseFederalAcquisitionRegulationSupplementauthorizesonlyforconstructionofreal property, shipbuilding, and ship conversion, altera-tion, or repair. Progress payments for real property arereportedasconstructioninprogress. It isDoDpolicytorecordcertaincontractfinancingpaymentsasOtherAssets.

P. Contingencies and Other Liabilities

TheSFFASNo.5,AccountingforLiabilitiesoftheFederalGovernment, as amendedby SFFASNo.12,RecognitionofContingent LiabilitiesArising fromLitigation, defines a



contingency as an existing condition, situation, or set ofcircumstances that involves an uncertainty as to possiblegainor loss. Theuncertaintywill be resolvedwhenoneor more future events occur or fail to occur. The DLArecognizes contingent liabilities when past events orexchange transactions occur, a future loss is probable,and the loss amount can be reasonably estimated.

Financialstatementreportingislimitedtodisclosurewhenconditionsforliabilityrecognitiondonotexistbutthereisat least a reasonablepossibility of incurring a loss or ad-ditional losses. Examples of loss contingencies includethecollectibilityofreceivables,pending,orthreatenedliti-gation, and possible claims and assessments. The DLA’srisk of loss and resultant contingent liabilities arise frompending or threatened litigation or claims and assess-ments due to events such as vehicle accidents; propertyor environmental damages; and contract disputes.

Other liabilities arise as a result of anticipated disposalcosts for DLA’s assets. This type of liability has twocomponents: nonenvironmental and environmental.Consistent with SFFAS No. 6, Accounting for Property,Plant, and Equipment, recognition of an anticipated en-vironmental disposal liability begins when the asset isplaced into service. Nonenvironmental disposal liabili-ties are recognized for assets when management decidestodisposeofanassetbaseduponDoD’spolicy,whichisconsistent with SFFAS No. 5, Accounting for Liabilities ofFederalGovernment. TheDLAhasnot fully implement-ed these policies due to system and process limitations.

Q. Accrued Leave

TheDLAreportsasliabilitiescivilianearnedleave,exceptsick leave, that hasbeenaccruedandnot used asof theBalanceSheetdate.AsaWCFactivity,DLAisrequiredtofund civilian accrued annual leave earned but not taken.Sickleaveisexpensedastaken.Theliabilityreportedattheendoftheaccountingperiodreflectsthecurrentpayrates.

R. Net Position

Net Position consists of cumulative results of opera-tions. Cumulative results of operations represent thenet difference, since inception of an activity, between

expenses and losses and financing sources (including ap-propriations, revenue, and gains). Beginning with FY1998, the cumulative results also include donations andtransfer in and out of assets without reimbursement.

S. Unexpended Obligations

The DLA obligates funds to provide goods and servicesfor outstanding orders not yet delivered. The financialstatements do not reflect this liability for payment forgoods and services not yet delivered, unless title passes.

T. Undistributed Disbursements and Collections

Undistributeddisbursementsandcollectionsrepresent thedifferencebetweendisbursementsandcollectionsmatchedat the transaction level to a specific obligation, payable,or receivable in DLA’s activity field records as opposedto those reported by the U.S. Treasury. These amountsshouldagreewith theundistributedamounts reportedonthe monthly accounting reports. Intransit payments arethosepayments thathavebeenmade,buthavenotbeenrecorded in the fund holder’s accounting records. Thesepaymentsareappliedtotheentities’outstandingaccountspayable balance. Intransit collections are those collec-tions from other agencies or entities that have not beenrecordedintheaccountingrecords.Thesecollectionsarealso applied to the entities’ accounts receivable balance.

The DoD policy is to allocate supported undistributeddisbursements and collections between federal and non-federal categories based on the percentage of distributedfederal and nonfederal accounts payable and accountsreceivable. Unsupported undistributed disbursementsare recorded in accounts payable. Unsupported un-distributed collections are recorded in other liabilities.

U. Significant Events

Beginning 4th Quarter, FY 2007, DoD began presentingtheStatementofFinancing(SOF)asanote inaccordancewith the OMB Circular A-136. The SOF will no longerbe considered a basic statement and is now referred toas “Reconciliation of Net Cost of Operations to Budget.”



The Cash and Other Monetary Assets consists of cashcollected by the Defense Reutilization and MarketingService(DRMS)thatwillbepaidtootherentities. WhenDRMSenters intoa long-termcontractwithabuyerpur-chasing excess/surplus government property or scrap,DRMS requires a prepayment. After contract closeout,anyremainingbalanceisrefundedtothesalescontractor.Also includedarecreditcardcollections thatarepayableto DRMS’ commercial sales partner and the portion ofsalesproceeds fromcertain typesofproperty thatDRMSis required to return to the Military Services or DefenseAgenciesthatoriginallyownedtheproperty.

The Nonfederal Accounts Receivable consists of interest,penalties, and administrative fees that are related to the

nonfederalaccountsreceivablethathavebeenreferredtoDefenseFinanceandAccountingServicedebtmanagementforcollection.Thisamountisnonentitybecauseuponcol-lectiontheamountwillbetransferredtoU.S.Treasury.

Note 3. Fund Balance with Treasury

TheU.S.TreasurymaintainsandreportstheDefenseWorkingCapitalFund(DWCF)fundbalancesattheTreasuryIndex(TI)appropriationsub-numberedlevel.DefenseAgencies,toincludeDLA,areincludedattheTI97DWCFappropria-tionsub-numberedlevel,anaggregatelevelthatdoesnotprovideidentificationoftheseparateDefenseAgenciesbyU.S.Treasury.Additionally,whileDLAmaintainscollectionsanddisbursement clearing accounts, those cashbalancesare transferred to the DWCF cash account on an annualbasis.Asaresult,DLAdoesnotreportFundBalancewithTreasury(FBWT)separately.TheDLAbalanceintheDWCFcashaccountasofthe4thQuarter,FY2007is$1.6billion.

Note 2. Nonentity AssetsAs of September 30 2007 2006

(Amounts in thousands)

Nonfederal Assets

Cash and Other Monetary Assets $ 7,421 $ 7,970

Accounts Receivable 3,077 2,481

Total Nonfederal Assets $ 10,498 $ 10,451

Total Nonentity Assets $ 10,498 $ 10,451

As of September 30 2007 2006


Unobligated Balance Available $ (23,848) $ (30,820)

Obligated Balance not yet Disbursed $ 16,960,614 $ 13,840,699

NonFBWT Budgetary Accounts $ (15,377,069) $ (12,906,483)

Total $ 1,559,697 $ 903,396

Status of Fund Balance with Treasury

Nonentity accounts are assets for which DLA maintainsstewardship and accountability to report, but are notavailableforDLA’soperations.

UnobligatedBalance,Availableshowsanabnormalbalanceof $23.8 million. This abnormal balance exists becausepriorto4thQuarter,FY2003,DocumentAutomationandProduction Service processed its budgetary reports as ifcontract authority was used for operating authority. The

useofcontractauthorityaccountingwasdeterminedtobeincorrectandanadjustmentwasmadeatyearendinFY2003, resulting inanabnormalbalance inUnobligatedBalance. Theabnormalbalanceisbeingresolvedovertime.



The Status of Fund Balance with Treasury reflects thebudgetaryresourcestosupporttheFBWT.

UnobligatedBalancerepresentsthecumulativeamountofbudgetaryauthoritythathasnotbeensetasidetocoverout-standingobligations. UnobligatedBalance isclassifiedasavailableorunavailableand isassociatedwithappropria-tionsexpiringatfiscalyearendthatremainavailableonlyforobligationadjustmentsuntiltheaccountisclosed.

ObligatedBalancenotyetDisbursedrepresentsfundsthathavebeenobligatedforgoodsthathavenotbeenreceived,services that have not been performed, and goods andservices that have been delivered/received but not yetpaid.

NonbudgetaryFBWTincludesentityandnonentityFBWTaccounts which represent adjustments that do not havebudgetary authority, such as unavailable receipt accounts

orclearingaccounts.

NonFBWT Budgetary Accounts represent adjustmentsto budgetary accounts that do not affect FBWT. DLA’sNonFBWTBudgetaryAccountsconsistofcontractauthority,accounts receivable and the accounts for unfilled orderswithout advance from customers. This category reducestheStatusofFBWT.

Unobligatedbalancesaresegregatedtoshowavailableandunavailableamounts in thenote schedule. TherearenorestrictionsonDLA’sunobligatedbalances.

TheDLA’sFBWTiszeroas thenetofDLA’scurrentyeardisbursements, collections, cash transfers, and appropria-tionsreceivedaretransferredtotheDWCFcashaccount.The Total Status of Funds represents what DLA’s FBWTwouldhavebeen if the transfers to thecashaccounthadnottakenplace.

Disclosures Related to Problem Disbursements


(Decrease)/Increase from FY

2006 to 2007


Total Problem Disbursements,Absolute Value

Unmatched Disbursements(UMDs) $ 70,884 $ 66,862 $ 43,760 $ (23,102)

Negative UnliquidatedObligations (NULO) 564 1,603 2,053 450

In-Transit Disbursements 704,572 328,723 369,941 41,218

Total $ 776,020 $ 397,188 $ 415,754 $ 18,566

ProblemDisbursementsarereportedasanabsolutevalueamount.Absolutevalueisthesumofthepositivevaluesofdebitandcredit transactionswithoutregardtotheplusorminussigns.

An Unmatched Disbursement occurs when a payment isnotmatchedtoacorrespondingobligationintheaccount-ingsystem.

ANegativeUnliquidatedObligationoccurswhenapaymentismadeagainstavalidobligation,butthepaymentisgreaterthan theamountof theobligation recorded in theofficialaccountingsystem.Thesepaymentshavebeenmadeusing

available funds and are based on valid receiving reportsfor goods and services delivered under valid contracts.

The Intransits represent the absolute value of disburse-mentsandcollectionsmadebyaDepartmentofDefensedisbursing activity on behalf of an accountable activityand have not been posted to the accounting system.

Beginning with 2nd Quarter, FY 2007, intransit dis-bursements are reported as an absolute value asopposed to net amounts disclosed in prior years. Thisreporting change applies to amounts in the noteschedule for both the current and comparative years.



Note 4. Accounts Receivable

2007 2006As of September 30

Intragovernmental Nonfederal Intragovernmental Nonfederal


CATEGORY

Nondelinquent

Current $ 1,079,146 $ 172,862 $ 738,330 $ 185,897

Noncurrent 204,285 132,869 189,408 111,447

Delinquent

1 to 30 days $ 56,165 $ 65,901 $ 34,135 $ 93,064

31 to 60 days 25,071 14,014 21,348 23,998

61 to 90 days 36,680 11,864 1,541 52,032

91 to 180 days 26,342 32,215 17,800 42,525

181 days to 1 year 20,120 37,654 23,570 50,526

Greater than 1 year andless than or equalto 2 years 21,649 21,695 19,560 35,725

Greater than 2 yearsand less than orequal to 6 years 12,324 12,794 10,023 13,480

Greater than 6 yearsand less than orequal to 10 years (43) 11 (12) 1,245

Greater than 10 years 0 0 0 1,443

Subtotal $ 1,481,739 $ 501,879 $ 1,055,703 $ 611,382

Less SupportedUndistributedCollections (8,931) 12,223 (56,447) (7,871)

Less Eliminations (217,124) 0 (141,973) 0

Less Other (323,169) 0 0 0

Total $ 932,515 $ 514,102 $ 857,283 $ 603,511


Gross Amount DueAllowance For

EstimatedUncollectibles

AccountsReceivable, Net



IntragovernmentalReceivables $ 932,515 N/A $ 932,515 $ 857,284

Nonfederal Receivables(From the Public) $ 514,102 $ (24,878) $ 489,224 $ 570,080

Total AccountsReceivable $ 1,446,617 $ (24,878) $ 1,421,739 $ 1,427,364

Aged Accounts Receivable





Intragovernmental Other Assets

Other Assets $ 124,925 $ 124,925

Total Intragovernmental Other Assets $ 124,925 $ 124,925

Nonfederal Other Assets

Outstanding Contract Financing Payments 41,597 59,591

Other Assets (With the Public) 2,032 750

Total Nonfederal Other Assets $ 43,629 $ 60,341

Total Other Assets $ 168,554 $ 185,266

Abnormal Balance

Intragovernmentaldelinquentbalancegreater than6yearsandlessthanorequalto10yearsis$42.5thousand.Thecreditisforarefundreceivableduetoacustomerthatwasnot posted in the accounting system prior to the conver-sion of accounting records from our legacy system to theEnterpriseBusinessSystem.

Nondelinquent Noncurrent Accounts Receivable

Intragovernmental nondelinquent noncurrent accountsreceivable of $204.3 million consists of the HeavyEquipment Procurement Program ($127.2 million), MilitaryInterdepartmental Purchase Requests ($15.5 million), andtheDepartmentofDefenseElectronicMallcreditcardcol-lections ($61.6 million). The matching of collections tothebillings for theseprograms is amanual, time intensiveprocess. Historically DLA has found these bills havealreadybeencollected,butnotyetmatchedtoopenreceiv-ables.Therefore,fordelinquencyreportingpurposes,theseprograms are categorized as nondelinquent noncurrent.TheDLAandtheDefenseFinanceandAccountingServiceColumbus(DFAS--CO)areworkingtoautomatethismatchingprocess to reduce the noncurrent accounts receivables.

Nonfederalnondelinquentnoncurrent accounts receivableof$132.9millionprimarilyconsistsofforeignmilitarysales

for the Defense Energy Support Center’s Fuel ExchangeAgreementProgram.Thenormalprocessforclearingthesereceivables can take up to 12 months. Refer to Note 1.J,AccountsReceivable,foradditionaldetailsofthisprogram.

Collection Action for Delinquent Receivables

The DLA and DFAS-CO are working together to ensuretimelycollection/resolutionofdelinquentreceivables.TheDLA’s financial systems generate collection letters whichDFAS-COsends todelinquentcustomers. TheDFAS-CO,onbehalfofDLA,refersnonfederalreceivablesthatarede-linquentover60days involvingamountsof$600ormoretotheDebtManagementOffice(DMO).TheDMOrefersthosedebtsexceeding180daysoldtotheU.S.Treasuryorto the Department of Justice (DOJ) for collection action,asappropriate. Debt returneduncollectible fromtheU.S.Treasuryof$500thousandormoreisreferredtotheDOJ.Debtreturnedlessthan$100thousand,maybewrittenoffby DMO upon notification to fund holder. Write-offs ofnonfederalaccountsreceivableafter2yearsaremandatoryinmostcasesunlessspecialcircumstancesexist.TheDLAmanagement researches and continues collection effortsondelinquentintergovernmentalcustomersasappropriate.

Description of “Other” Line

TheOtherlineconsistsprimarilyofanadjustmenttoaccountsreceivablebalancesforcustomerreturnsthatareintransit.

Note 5. Other Assets



Description of “Other” Lines

Intragovernmental Other Assets consist of crude oil heldby the Department of Energy (DoE) on behalf of theDepartmentofDefense(DoD).TheDLAhastherighttoap-proximately6.4millionbarrelsofcrudeoilheldbyDoEonbehalfofDoD.PublicLaw102-396,Section9149enactedin November 1992 established the requirement for DoEtoacquireandmaintainastrategicpetroleumreserve fornationaldefensepurposes.Section9149providedappro-priationsfortheacquisition,storage,anddrawdownofsuchreserve.ProceedsfromsalesofthisreservewillbedepositedtoDoD’s accounts and remain availableuntil expended.TheDoEreportsthiscrudeoilininventoryintheirfinancialstatements, with an offsetting custodial liability to DoD.Bylaw,thereservecannotbedrawndownorreleasedtoDoD without a Presidential order along with the advicefromtheSecretaryofDefense.Todatenoneofthereservehasbeendrawnupon,thusthefull inventoryremainsonhandwithDoE.SeetheEnergyPolicyandConservationAct(42USC6241(d)),Section161(d)offorfurtherdetails.



Cash $ 7,421 $ 12,100

Total Cash, Foreign Currency, & OtherMonetary Assets $ 7,421 $ 12,100

Note 6. Cash and Other Monetary Assets

TheentireCashbalanceisrestrictedbecauseitconsistsofprepayments, credit card collections, and sales proceedsthat will be paid to other entities. When the DefenseReutilizationandMarketingService (DRMS)enters intoalong-termcontractwithabuyerpurchasingexcess/surplusgovernmentpropertyorscrap,DRMSrequiresaprepayment.



Inventory, Net $ 17,516,903 $ 17,904,388

Operating Materials & Supplies, Net 0 8,705

Total $ 17,516,903 $ 17,913,093

Note 7. Inventory and Related Property

Nonfederal Other Assets (With the Public) consist ofprepaidpostageandsalaryadvancesforcivilianemployees.

Contract Financing Payments

ContracttermsandconditionsforcertaintypesofcontractfinancingpaymentsconveycertainrightstoDLAthatprotectthecontractwork fromstateor local taxation, liensorat-tachmentbythecontractor’screditors,transferofproperty,ordisposition inbankruptcy; however, these rights shouldnot be misconstrued to mean that ownership of the con-tractor’s work has transferred to the Government. TheGovernment does not have the right to take the work,except as provided in contract clauses related to termina-tion or acceptance, and DLA is not obligated to makepayment to the contractor until delivery and acceptance.

TheContractFinancingPaymentbalanceof$41.6millioniscomprisedof$35.6millionincontractfinancingpaymentsandanadditional$6.0millioninestimatedfuturepaymentsthat will be paid to the contractor upon future deliveryand Government acceptance of a satisfactory product.(See additional discussion in Note 12, Other Liabilities).

Aftercontractcloseout,anyremainingbalanceisrefundedtothesalescontractor.Alsoincludedarecreditcardcollec-tionsthatarepayabletoDRMS’commercialsalespartnerandtheportionofsalesproceedsfromcertaintypesofpropertythat DRMS is required to return to the Military Servicesor Defense Agencies that originally owned the property.




Inventory, GrossValue

RevaluationAllowance

Inventory, Net Inventory, NetValuationMethod

(Amounts inthousands)

InventoryCategories

Available andPurchased forResale $ 17,511,043 $ (11) $ 17,511,032 $ 17,890,803 LAC,MAC

Held for Repair 9,785 (3,914) 5,871 13,585 LAC,MAC

Excess, Obsolete,and Unserviceable 4,926,768 (4,926,768) 0 0 NRV

Total $ 22,447,596 $ (4,930,693) $ 17,516,903 $ 17,904,388

Legend for Valuation Methods:Legend for Valuation Methods:Adjusted LAC = Latest Acquisition Cost, adjusted for holding gains and losses; NRV = Net Realizable Value; MAC = Moving

Average Cost

Inventory, Net

Restrictions

The DLA has restrictions related to inventory in litiga-tion.Inventoryinlitigation(conditioncodeL)ismaterielheld pending litigation or negotiation with contractorsor common carriers, and remains in condition code Luntilnegotiatedorsettled.ThebalanceasofSeptember30, 2007 for inventory in litigation was $1.5 million.

General Composition of Inventory

TheDLAinventoryiscomprisedofNonEnergySupplyandEnergy Supply. TheNonEnergy inventory supply chainsrepresentcommoditybased inventoryand is reported inEnterpriseBusinessSystem(EBS).EnergySupplyisreportedin Business System Modernization - Energy (BSM-E).

NonEnergySupplyconsistsofTroopandWeaponSystemsSupport supply chains. Troop Support supply chainsincludes Clothing and Textiles, Medical, Subsistence,Construction and Equipment. Weapon Systems supplychainsincluderepairpartsofAviation,Land,andMaritime.

EnergySupplyconsistsof:jetfuels,aviationgasoline,au-tomotive gasoline, heating oils, power generation, navalpropulsion fuels, lubricants, and missile propellants.

SystemsInventoryValuation GrossValue Method

EBS $12,326.30 MovingAverageCost (MAC)

BSM-E $5,179.60 TransactionalFirst-In, First-Out(FIFO)

Legacy $5.10 AdjustedLatest AcquisitionCost(LAC)

Total $17,511.00

Legacy $5.10 AdjustedLatest AcquisitionCost(LAC)

EBS $12,326.30 MovingAverageCost (MAC)

Table 1 displays the total gross value of Available andPurchasedforResalematerielbysystem.

Table 1 ($ millions)

Changes from Prior Year’s Accounting Methods

Prior to 2nd Quarter, FY 2007 inventory for theDocument Automation & Production Services (DAPS)was reported as Operating Material & Supplies (OM&S).During 2nd Quarter, FY 2007 a review of the compo-sition and use of the OM&S balance determined thatDAPS’ OM&S should be classified as inventory. Asof 2nd Quarter, FY 2007 it is classified as inventory.



InventoryCategory ConditionCodeServiceable A,B,C,DUnserviceable E,F,G,H,J,K,L,M,N,RExcess,Obsolete,Unserviceable H,P,S

InventoryCategory ConditionCode

Unserviceable E,F,G,H,J,K,L,M,N,RExcess,Obsolete,Unserviceable E,F,G,H,J,K,L,M,N,R

have a congressionally mandated level of 5.0 millioncases.Inaddition,MREhaveadisasterreservelevelof250 thousand cases for use by the Federal EmergencyManagement Agency, Department of HomelandSecurity.

Petroleum inventories are comprised mostly of productswith military specification and are stocked primarily tomeet wartime operation plans and to ensure that DLAhas sufficient stocks in place to minimize any risk to thewarfighter.Wartimepetroleumrequirementsarecalculat-ed by Military Services and coordinated with CombatantCommanders.TheDLA’sDefenseEnergySupportCenter(DESC) then works with the Combatant Commanders toposition thosestockswherespacepermitsandwithin thefundedvolumes. Thecurrentwartimestockageobjectiveis34.5millionbarrels(mbbls). Peacetimebulkpetroleuminventory requirements are calculated by DESC in accor-dancewithguidelinesprovidedbyOUSD(C)andarepo-sitionedbyDESCpriortoplacingwarreserveinventories.The peacetime objective is 25.7 mbbls. These invento-ries are not physically segregated in tankage, meaningthat wartime (appropriated funded) stocks can be usedto meet peacetime (working capital funded) requirement.


OM&S GrossValue

RevaluationAllowance

OM&S, Net OM&S, NetValuationMethod


OM&S Categories

Held for Use $ 0 $ 0 $ 0 $ 8,705SP, LAC,MAC

Total $ 0 $ 0 $ 0 $ 8,705

Legend for Valuation Methods:Adjusted LAC = Latest Acquisition Cost, adjusted for holding gains and losses; MAC = Moving Average Cost; SP = Standard

Price

Operating Materiels and Supplies, Net

Minimum Inventory Levels

TheDLAhascongressionallymandatedminimumlevelsof specific inventory items. These items are not nec-essarily restricted on use, rather these are mandatedminimumlevelsforDLA,whichdrivefluctuationsintheDLA inventory levels. The Meals Ready to Eat (MRE)

Decision Criteria for Identifying the Category to which Inventory is assigned:

TheOfficeoftheUnderSecretaryofDefense(Comptroller)(OUSD(C))establishedaconditioncodecrosswalkasstatedinthememorandum,“AccountingforExcess,Unserviceable,and Obsolete Inventory and Operating Materials andSupplies”,inordertostandardizeDoDreportingofthecat-egories: serviceable; unserviceable; and excess, obsoleteandunserviceable.

Prior to 2nd Quarter, FY 2007 inventory for the DAPSwas reported as OM&S. During 2nd Quarter, FY 2007a review of the composition and use of the OM&S

balance determined that DAPS’ OM&S should be classi-fied as inventory. Asof 2ndQuarter, FY2007 it is clas-sified as inventory. The DLA has no OM&S inventory.



Therearenorestrictionsontheuseorconvertibilityofgeneral property, plant and equipment (PP&E) exceptheritageassets.

Heritage Assets and Stewardship Land

StatementofFederalFinancialAccountingStandardsNo.29,HeritageAssetsandStewardshipLand,requiresnotedisclosuresforPP&Ethatareuniquebecauseofhistoricalornatural significance;cultural,educational,orartistic(e.g. aesthetic) importance; or significant architecturalcharacteristics. The DLA’s policy is to preserve andaccountforitsheritageassets.TheDLA’sheritageassetsconsistofabuilding,amonument,andcemeteries.TheDLAhasnostewardshipland.TheDLA’sheritageassetsareresourcesthataremanagedtoprovidemultipleuseactivities for the public benefit to include compliancewithrequiredfederallaws,executiveorders,DepartmentofDefensepolicies,finalgoverningstandardsandotherbindingagreements.


Depreciation /Amortization

Method

ServiceLife

AcquisitionValue

(AccumulatedDepreciation /Amortization)

Net BookValue

Prior FY NetBook Value


Major AssetClasses

Buildings,Structures, andFacilities 20 or 40 $ 1,901,969 $ (1,204,611) $ 697,358 $ 681,921

Software S/L 2-5 or 10 1,335,625 (473,503) 862,122 707,201

General Equipment S/L 5 or 10 648,646 (402,611) 246,035 238,386

Construction-in-Progress N/A N/A 132,907 N/A 132,907 293,300

Other 0 0 0 11

Total GeneralPP&E $ 4,019,147 $ (2,080,725) $ 1,938,422 $ 1,920,819

Note 8. General PP&E, Net

Buildings & Structures: The Defense Supply CenterRichmond(DSCR)operatesanearlynineteenthcenturyplantation house which also serves as the DSCROfficer’sClub. Thebuilding is listed in theNationalRegister.

Monuments & Memorials: The DSCR and a localNative American organization jointly establisheda monument honoring Native American culture.

Cemeteries: DLA has administrative and curatorialresponsibilities for two cemeteries located at DSCR.

Assets Under Capital Lease

The DLA is engaged in a long-term comprehen-sive effort to identify and assess agreements forassets acquired through lease-type arrangementsto determine if the leases should be classified ascapital or operating. Refer to Note 8, GeneralProperty, Plant And Equipment, for further details.





Intragovernmental Liabilities

Other $ 10,120 $ 34,968

Total Intragovernmental Liabilities $ 10,120 $ 34,968

Nonfederal Liabilities

Military Retirement andOther Federal Employment Benefits 235,596 253,171

Environmental Liabilities 22,249 87,152

Other Liabilities 17,690 17,752

Total Nonfederal Liabilities $ 275,535 $ 358,075

Total Liabilities Not Covered by BudgetaryResources $ 285,655 $ 393,043

Total Liabilities Covered by Budgetary Resources $ 3,078,298 $ 3,423,818

Total Liabilities $ 3,363,953 $ 3,816,861

Note 9. Liabilities Not Covered by Budgetary Resources

LiabilitiesnotcoveredbybudgetaryresourcesareliabilitiesforwhichCongressionalactionisneededbeforebudgetaryresourcescanbeprovided.TheDLAWorkingCapitalFundcurrentyearliabilitiesnotcoveredbybudgetaryresourcesare primarily comprised of actuarial Federal EmployeesCompensationAct (FECA)benefits. TheFECA liability isforactuarialcostprojections,andthereforeisunfunded.


Intragovernmental Liabilities Other primarily consists ofaccrualsforunfundedFECAliabilityandinterestonoverduenonfederalaccountsreceivablethatmustberemittedtotheU.S.Treasuryuponreceipt.

NonfederalLiabilitiesOtherincludesaccrualsforunfundedleave and contingent liabilities for contract financingpayments.TheDLAbeganrecordinganaccrualforcivilian

employee compensatory time and credit hours earnedbutnotusedduring3rdQuarter,FY2006andlaterbeganrecording a contingency for contract financing paymentsduring4thQuarter,FY2006.TheDLAimplementedthesemodifications inaccordancewithDepartmentofDefenseissuedguidance.

Military Retirement and Other Federal Employment Benefits

MilitaryRetirementandOtherFederalEmploymentBenefitsnot covered by budgetary resources are comprised ofvariousemployeeactuarial liabilitiesnotdueandpayableduringthecurrentfiscalyear.Theseliabilitiesareprimarilycomprisedof$235.6million forFECA. Refer toNote14,MilitaryRetirementandOtherFederalEmploymentBenefits,foradditionaldetailsanddisclosures.



Note 10. Accounts Payable

2007 2006

As of September 30Accounts Payable

Interest, Penalties,and Administrative

FeesTotal Total


IntragovernmentalPayables $ 90,388 $ N/A $ 90,388 $ 93,288

Nonfederal Payables(to the Public) 2,749,441 1,678 2,751,119 3,032,382

Total $ 2,839,829 $ 1,678 $ 2,841,507 $ 3,125,670

TheDLA’ssystemsdonottrackallintragovernmentaltrans-actions by customer at the transaction level. Therefore,internal Department of Defense buyer-side balances areadjusted to agree with internal seller-side balances for

Note 11. Environmental Liabilities and Disposal Liabilities


Current LiabilityNoncurrent

LiabilityTotal Total


Environmental Corrective Action $ 10,382 $ 62,262 $ 72,644 $ 104,136

Total Environmental Liabilities $ 10,382 $ 62,262 $ 72,644 $ 104,136

Environmental Disclosures

TheDLA’senvironmentalliabilities(EL)arefromcurrentandout-yearRemedialActionCostEngineering&Requirements(RACER)estimatesfor247sites,214associatedwithclosurecosts,andtheremaining33arecorrectedactioncosts.InAugustFY2006,DLAexecutedtheRACERmodelanditgeneratedtheFY2007Cost toComplete(CTC)estimateswhichareanestimationofanticipatedcostsnecessary tocomplete environmental restoration requirements. TheCTCestimatesforthefirstyearplustheunliquidatedobliga-tionsasofyearendequalthecurrentliability.AllremainingCTCestimatesarecategorizedasnoncurrentliabilities.

TheDLAhasdevelopedaplanforcollectingandreportingEL for Non Defense Environmental Restoration Program(NonDERP) contamination at DLA managed installa-

tions including government-owned contractor-operated(GOCO) fuel points and for Service-owned and operatedfuelterminalswhereDLAstoresfuel.ToobtaintheService-ownedfuelterminalsdata,DLAdevelopedanenvironmentaltemplatethatwillbeprovidedtotheMilitaryServicesaftertheOfficeoftheUnderSecretaryofDefense(Comptroller)resolves real property record inconsistencies between theMilitaryServicesandDLA. This templatewillbeused topopulate the Environmental Disclosures table and for thereportingofoverseasbaseEL in the1stQuarter,FY2008financialstatement.

Applicable Laws and Regulations for Cleanup Requirements

The DLA is required to clean up contamination resultingfrom past waste disposal practices, leaks, spills and other

revenue, accounts receivable, and unearned revenue.Accountspayablewereadjustedbyreclassifyingamountsbetween federal and nonfederal accounts payable.



prior activities, which may have created a public healthorenvironmental risk. TheDLAis required to follow theComprehensive Environmental Response, Compensation,and Liability Act; Resource Conservation and RecoveryAct;andtheSuperfundAmendmentsandReauthorizationActtocleanupcontaminationoninstallationsmanagedbyDLAincoordinationwithregulatoryagencies.Thiscleanupmay at times extend beyond installation boundaries ontoprivatelyownedpropertyandtositeswhereDLAisnamedas apotentially responsiblepartyby a regulatory agency.

Types of Environmental Liabilities and Disposal Liabilities

TheDLAhascleanuprequirementsforNonDERPinstalla-tions.Allcleanupisdoneincoordinationwithregulatoryagencies, other responsible parties, and current propertyowners.

Methods for Assigning Estimated Total Cleanup Costs to Current Operating Periods

The DLA uses the RACER model, an independentlyvalidated model, to estimate environmental costs. TheDLAvalidates themodel inaccordancewithDepartmentof Defense (DoD) Instruction 5000.61 and primarily usesthemodeltoestimatetheliabilitiesbasedondatareceivedduringapreliminaryassessmentandinitialsiteinvestigation.

Incompliancewithaccountingstandards,DLAisdevelop-ingaprocesstocaptureandexpensethecostsforcleanupassociated with General Property, Plant and Equipment(PP&E). Initial Data on the environmental cost linked toGeneral PP&E was gathered during FY 2006 and is thebasisforthedevelopment,implementation,andreporting.

Nature of Estimates and the Disclo-sure of Information Regarding Possible Changes Due to Inflation, Deflation, Technology, or Applicable Laws and Regulations.

TheDLAhadchangesinestimatesresultingfromchangesin site conditions, changes in recent groundwater

modeling data, better site characterization and improvedanalysis by program managers. The EL are expectedto fluctuate due to changes in agreements with regula-tory agencies, deflation, inflation, and technology. TheFY 2007 CTC has incorporated the DoD inflation factorsinto the NonDERP closure estimates. The latest versionof RACER (2007) was used to rebaseline estimates.

Uncertainty Regarding the Accounting Estimates used to Calculate the Reported Environmental Liabilities.

TheELforDLAarebasedonaccountingestimatesandas-sumptions thatarebelieved tobe reasonablebaseduponinformationavailableatthetimeoftheRACERcalculation.Theactualresultsmaymateriallyvaryfromtheaccountingestimatesifagreementswiththeregulatoryagenciesrequiredifferentremediationthananticipatedatthetimeofthecal-culation. Theliabilitiescanbefurther impactedif furtherinvestigationof theenvironmentalsitesdisclosescontami-nation different than known at the time of the estimate.

AlthoughDLAhas institutedextensive internalcontrols toensurethattheseestimatesareaccurateandreproducible,they are generally considered accurate at +/- 40%. Thestated noncurrent liability is an estimate of future liabili-ties,asthemajorityofDLAsiteswillrequirecleanupforupto 30 years. Estimates for work that are more than 1 to2yearsinthefuturemaybesubjecttosignificantchange.

Liability for Overseas Bases

In addition to the liabilities reported above, DLA has thepotential to incur costs for restoration initiatives in con-junctionwith returningoverseasDefense facilities tohostnations.TheDLAisunabletoprovideareasonableestimateatthistimebecausetheextentofrestorationrequiredisnotknown.



Note 12. Other Liabilities


Current LiabilityNoncurrent

LiabilityTotal Total


Intragovernmental

Advances from Others $ 21,932 $ 0 $ 21,932 $ 18,489

FECA Reimbursement to theDepartment of Labor 23,802 7,021 30,823 57,043

Other Liabilities 12,002 0 12,002 11,353Total Intragovernmental Other

Liabilities $ 57,736 $ 7,021 $ 64,757 $ 86,885

Nonfederal

Accrued Funded Payroll andBenefits 161,665 0 161,665 154,476

Advances from Others 17,578 0 17,578 116,805

Deposit Funds andSuspense Accounts (55,809) 0 (55,809) (54,630)

Accrued Unfunded AnnualLeave 7,064 0 7,064 6,950

Other Liabilities 11,245 7,706 18,951 23,397Total Nonfederal Other

Liabilities $ 141,743 $ 7,706 $ 149,449 $ 246,998

Total Other Liabilities $ 199,479 $ 14,727 $ 214,206 $ 333,883

Abnormal Balance

The Nonfederal Deposit Funds and Suspense Accountsbalance reflects an abnormal amount of $55.8 millionrelated to unsupported undistributed collections. Thisprimarily resulted when the Document Automationand Production Service (DAPS) transferred from Navyto DLA in FY 1997. At that time, approximately $45million incash related toDAPSbusinessdidnot transferto DLA. This issue is pending a decision by the Officeof the Under Secretary of Defense (Comptroller).


Intragovernmental Other Liabilities include the employerportion of payroll taxes and benefit contributions, suchas retirement, including DLA’s contribution to the Thrift

Savings Plan (a Federal Government sponsored retire-ment savings and investment plan). Also included arehealth and life insurance for covered employees, andcustodialrevenueyettobetransferredtotheU.S.Treasuryfor interest on overdue nonfederal accounts receivables.

NonfederalOtherLiabilitiesconsistofcontingentliabilitiesand contract holdbacks for amounts withheld from con-tractorspendingcompletionofrelatedpaymentsforopencontracts.

Contingent Liabilities

Contingent Liabilities include $6.0 million in estimatedfuture contract financing payments that will be paid tothe contractors upon delivery and Government accep-tance. In accordancewith contract terms, specific rights



to thecontractor’sworkvestswith theGovernmentwhena specific type of contract financing payment is made.Thisactionprotectstaxpayerfundsintheeventofcontractnonperformance. These rights should not be miscon-strued as the rights of ownership. The DLA is under noobligation to pay the contractor for amounts greater thantheamountsauthorized in thecontractuntildeliveryandGovernment acceptance. Because it is probable that thecontractor will complete its efforts and deliver a satisfac-tory product to DLA and the amount of potential futurepayments is estimable; DLA has recognized a contingentliability for estimated future payments, which are con-ditional pending delivery and Government acceptance.

Note 13. Commitments and Contingencies

The DLA is a party in various administrative proceedingsand legal actions, with claims including environmentaldamageclaims,equalopportunitymatters,andcontractualbidprotests.

TheDLAhasaccruedcontingentliabilitiesforlegalactionswhereDLA’sOfficeofGeneralCounsel(OGC)considersanadversedecisionprobableandtheamountoflossismea-surable. In theeventof anadverse judgmentagainst theGovernment,someoftheliabilitiesmaybepayablefromtheJudgmentFund.TheDLArecordsJudgmentFundliabilitiesinNote10,AccountsPayable,andNote12,OtherLiabilities.

The DLA has reasonably possible loss contingencies of$65.0 thousand. This iscomprisedofonecase for$50.0thousandcurrentlyintheArmedServicesBoardofContractAppeals;andoneU.S.Courtcasefor$15.0thousand.TheDefense Distribution Center is the party in both of theseactions.OfthecasesreportedinDLA’sCaseManagementSystem,whichisusedbyOGCtoprojecttheoutcomeandvalueofopencases,theminimumliabilityisapproximately$65 thousand and the maximum is approximately $608thousand.

TheDLAWorkingCapitalFund(WCF)doesnothaveobli-gations related tocancelledappropriations forcontractualcommitments.

Environmental Contingencies

TheDLAhasdevelopedaprocess to identifyand recordcontingentenvironmentalliabilities.WhereDLAisawareof any pending environmental claims, the appropriateprogramcategorywillbereportedinNote11,EnvironmentalLiabilities.IftheJudgmentFundisresponsibleforaportionofclaimsforsettlement,animputedfinancingamount(i.e.paidontheagency’sbehalf)willbereflectedonlyfortheamounttobepaidbytheJudgmentFundonbehalfofDLA.

Potential Loss Related to Economic Price Clause Contracts

The DLA is involved in litigation in the U.S. Court ofFederalClaimsregardingtheuseofeconomicpriceadjust-mentclausesinfuelscontractsawardedfrom1982through1999.TheDLAcontinuestobelievethattheuseofsuchclauseswasproperandinaccordancewithlaw.Inpreviousfinancial statements, DLA reported 27 cases challengingeconomic price adjustment clauses. The value of thesecases was approximately $3 billion, and DLA disclosedthepotentialliabilityinthefootnotestothefinancialstate-ments. Since that time, DLA’s OGC has determined anoutflow of cash associated with these cases is remote.

InApril2005,theU.S.CourtofAppealsruledintheTesoroHawaiiandHermescasesthattheDefenseEnergySupportCenter’s economic price adjustment clauses are autho-rized by the Federal Acquisition Regulation. The court’sdecisionisprecedentandappliestotheremaining25casespending in the U.S. Court of Federal Claims. However,plaintiffsinmanyofthesecaseshavebeenpursuingalter-nativetheories,meaningthatthecasesarenotyetfinished.InSeptember2007,theU.S.CourtofAppealsupheldtheAugust -September2006dismissalofanumberof thesealternativetheoriesbythreeU.S.CourtofFederalClaim’sjudges. TheU.S.CourtofAppealsdecision isprecedentfor other cases and DLA’s OGC is waiting to determinewhether plaintiffs will continue to pursue the cases.

Refer to Note 12, Other Liabilities, for additional detailsrelatedtocontingenciesthatareconsideredbothmeasur-ableandprobable.



Note 14. Military Retirement and Other Federal Employment Benefits

2007 2006

As of September 30Present Value

of Benefits

AssumedInterest

Rate (%)

(Less:Assets

Available toPay

Benefits)

UnfundedLiability

Present Value ofBenefits


FECA $ 235,596 $ 0 $ 235,596 $ 253,172

Total Other ActuarialBenefits $ 235,596 $ 0 $ 235,596 $ 253,172

Total Military Retirementand Other FederalEmploymentBenefits: $ 235,596 $ 0 $ 235,596 $ 253,172

Actuarial Calculations

The DLA actuarial liability for workers’ compensationbenefitsisdevelopedbytheDepartmentofLabor’s(DOL)Employment Standards Administration and provided toDLAat theendofeachfiscalyear. Theliability includesthe expected liability for death, disability, medical, andmiscellaneous costs for approved compensation cases.The liability is determined using a method that utilizeshistoricalbenefitpaymentpatterns topredict theultimatepayments. The projected annual benefit payments arethen discounted to the present value using the Office ofManagementandBudget’s (OMB)economicassumptionsfor10-yearU.S.Treasurynotesandbonds.Costoflivingadjustments(COLAs)andmedicalinflationfactorsarealsoapplied to the calculation of projected future benefits.

Actuarial Cost Method and Assumptions

The liability for future workers’ compensation benefitsincludestheexpectedliabilityfordeath,disability,medical,and miscellaneous costs for approved compensationcases, plus a component for incurred but not reportedclaims. The liability is determined using a method thatutilizes historical benefit payment patterns related to aspecific incurredperiod topredict theultimatepaymentsrelated to that period. Consistent with past practice,

these projected annual benefit payments have been dis-countedtopresentvalueusingOMB’seconomicassump-tions for10-yearU.S.Treasurynotesandbonds. Interestrate assumptions utilized for discounting are as follows:

• 4.930%inYear1• 5.078%inYear2andthereafter

To provide more specifically for the effects of inflationon the liability for futureworkers’compensationbenefits,wage inflation factors (COLAs) and medical inflationfactors (Consumer Price Index Medical (CPIMs)) wereapplied to the calculation of projected future benefits.These factors were also used to adjust the methodolo-gy’s historical payments to current year constant dollars.

ThecompensationCOLAsandCPIMsusedintheprojec-tionsforvariouschargebackyears(CBY)wereasfollows:

CBY COLA CPIM

2007 2.63% 3.74%

2008 2.90% 4.04%

2009 2.47% 4.00%

2010 2.37% 3.94%

2011+ 2.30% 3.94%



Themodel’sresultingprojectionswereanalyzedtoinsurethat the estimateswere reliable. The analysiswasbasedon two tests: (1)acomparisonof thepercentagechangeintheliabilityamountbyagencytothepercentagechangein theactualpayments,and(2)acomparisonof theratioof the estimated liability to the actual payment of thebeginningyearcalculatedforthecurrentprojectiontotheliability payment ratio calculated for the prior projection.

Programs Upon Which Actuarial Calcu-lation are Based (Retirement Systems)

TheDLAinteractswith,andisdependentuponthefinancialactivities of the Federal Government as a whole. The



Intragovernmental Costs $ 1,285,443 $ 2,427,583

Public Costs 34,301,560 32,733,736

Total Costs $ 35,587,003 $ 35,161,319

Intragovernmental Earned Revenue $ (30,251,340) $ (31,276,914)

Public Earned Revenue (5,896,738) (4,482,229)

Total Earned Revenue $ (36,148,078) $ (35,759,143)

Net Cost of Operations $ (561,075) $ (597,824)

Note 15. General Disclosures Related to the Statement of Net Cost

Intragovernmental costs and earned revenues arerelated to transactions made between two reportingentities within the Federal Government. Public costsand earned revenues are exchange transactions madebetween the reporting entity and a nonfederal entity.

The DLA’s systems do not track all intragovernmen-tal transactions by customer at the transaction level.Therefore, internal Department of Defense buyer-sidebalances are adjusted to agree with internal seller-sidebalances for revenue. Expenseswere adjustedby reclas-sifyingamountsbetweenfederalandnonfederalexpenses.

TheStatementofNetCostisuniquebecauseitsprinciplesaredrivenonunderstandingthenetcostofprogramsand/or organizations that the Federal Government supportsthrough appropriations or other means. This statement

providesgrossandnetcostinformationthatcanberelatedtotheamountofoutputoroutcomeforagivenprogramand/ororganizationadministeredbyaresponsiblereportingentity.

The amounts presented in this statement donotmeet ac-counting standards and are based on budgetary ob-ligations, disbursement and collection transactions,as well as nonfinancial feeder systems, adjusted torecord known accruals for major items such as payrollexpenses, accounts payable, and environmental liabilities.

The DLA accounting systems do not capture informa-tion relative to heritage assets separately and distinctlyfrom normal operations. Where the DLA was able toseparately identify the cost of acquiring, constructing,improving, reconstructing, or renovating heritage assets,the DLA has identified $135 thousand for the fiscal year.

DLA’s civilian employees participate in the Civil ServiceRetirement System (CSRS) and the Federal EmployeesRetirement System (FERS) while the Military RetirementSystem (MRS) covers military personnel. Additionally,personnel covered by FERS and MRS also have varyingcoverage under Social Security. The DLA finances onlya portion of the civilian pensions. While reporting andfunding civilian pensions under CSRS and FERS is theresponsibility of Office of Personnel Management,DLA recognizes an imputed expense for the portion ofcivilian employee pension’s benefit on the Statementof Net Cost. The DLA also recognizes correspondingimputed revenue from the civilian employee pension’sbenefit on the Statement of Changes in Net Position.



2007 2006

As of September 30Cumulative Results

of OperationsUnexpended

Appropriations

CumulativeResults ofOperations

UnexpendedAppropriations


Errors and Omissions in PriorYear Accounting Reports $ 0 $ 0 $ 124,925 $ 0

Total Prior Period Adjustments $ 0 $ 0 $ 124,925 $ 0

Imputed FinancingCivilian CSRS/FERS

Retirement $ 55,690 $ 0 $ 58,260 $ 0

Civilian Health 93,010 0 87,175 0

Civilian Life Insurance 247 0 237 0

Judgment Fund 2,774 0 314 0

Total Imputed Financing $ 151,721 $ 0 $ 145,986 $ 0

Note 16. Disclosures Related to the Statement of Changes in Net Position

Imputed Financing

The amounts DLA remits to the Office of PersonnelManagement (OPM) by and for employees covered bytheCivilianServiceRetirementSystem,FederalEmployeeRetirementSystem,FederalEmployeeHealthBenefitsandFederalEmployeeGroupLifeInsurance,donotfullycoverthe Federal Government’s cost to provide these benefits.Thefinancialstatementsincludeanimputedcostmadetorecognize the difference between the government’s andDLA’s costs of providing thesebenefits to the employeesand contributions made by and for them. The OPMprovidesthecostfactorstoDefenseFinance&AccountingService (DFAS) for computation of imputed financingcost. The DFAS provides the costs to the Office of theUnder Secretary of Defense (Personnel and Readiness)(OUSD (P&R)) and DLA for validation. After validation,OUSD (P&R)provides the imputedcosts to the reportingcomponents for inclusion in their financial statements.

The Judgment Fund imputed financing recognizes DLA’sexpensewhenunfavorable litigationoutcomesoccurandsettlement payments have been made on DLA’s behalfby the U.S. Treasury’s Judgment Fund. These imputedpayments are nonreimbursable to the Judgment Fund.

Other Disclosures

The$69.0thousandinBudgetaryFinancingSources:Otheradjustments (rescissions, etc) is a permanent reductionto unexpended appropriations in Supply Management.

In FY 2007, DLA received $2.7 million of free com-modities from foreign governments in support of theGlobal War on Terror as donated revenue - nonfinan-cial resources. During FY 2007, $126.0 million in com-modities were distributed free of charge to the MilitaryServices, some of which was donated in FY 2006.





Net Amount of Budgetary Resources Obligated forUndelivered Orders at the End of the Period $ 13,743,356 $ 10,511,696

Available Borrowing and Contract Authority at theEnd of the Period 0 7,612,368

Total $ 13,743,356 $ 18,124,064

Note 17. Disclosures Related to the Statement of Budgetary Resources

Abnormal Balance

Unobligated balance brought forward, October 1, 2006,showsanabnormalbalanceof$30.8million.Thisabnormalbalance exists because prior to 4th Quarter, FY 2003,DocumentAutomationandProductionServiceprocesseditsbudgetaryreportsasifcontractauthoritywasusedforoperatingauthority.Theuseofcontractauthorityaccount-ingwasdeterminedtobeincorrectandanadjustmentwasmade at year end in FY 2003, resulting in an abnormalbalanceinUnobligatedBalance.Theremainingabnormalbalance of $23.8 million is reflected as UnobligatedBalance: Apportioned and is being resolved over time.

Apportionment Categories for Obligations

TheDLAhadapportionmentcategoryBreimbursableob-ligationstotaling$36.9billion.

Other Disclosures

TheStatementofBudgetaryResources (SBR) includes in-traentitytransactionsbecausethestatementsarepresentedascombined.

TheavailableContractAuthorityat theendof theperiodis$0.

The DLA received direct appropriations during FY 2007totaling $489.3 million. Public Law 110-28 provided$471.7 million in supplemental funding. The funding

was comprised of $156.3 million received in the DLANonEnergy Supply to replenish previous cash invest-mentsincombatinventory,$296.1millionreceivedintheDLAEnergySupplyforincreasedfueltransportationcostsand combat losses, $3.8 million received in the DefenseReutilization and Marketing Service to defray the costof demilitarization service contracts, and $15.5 millionreceived in the Defense Distribution Center for TheatreRedistribution efforts. An additional $17.6 million indirect appropriations was provided for the Reutilization,Transfer, and Disposal mission and Defense Financeand Accounting Service (DFAS) Financial Systems costs.

During FY 2007, residual FY 2006 supplemental fuelfunding, provided to cover fuel customers impacted byincreased DoD fuel rates, was reapportioned. The AirForceWorkingCapital Fund received$262.4million andthe Navy Working Capital Fund received $112.5 million.

ThereisadifferencebetweentheSBRandSF133,ReportonBudgetExecution,intheamountof$2.0million.ThisisaresultofreversalsofprioryearContractDisputesActJudgment Fund data call and DFAS accrual amounts. In4thQuarter,FY2006, theamountswerenot included inthe SF 133 but reflected in the SBR. To avoid an over-statement in FY 2007, the amount is reversed on theSBR, thus creating a difference between the two reports.

This note has been modified to accurately report theremaining available balance of contract authority.Previously, DLA reported the amount of the contractauthority that had initially been used and not subse-quently replaced by reimbursement or appropriation.





Resources Used to Finance Activities:

Budgetary Resources Obligated:

Obligations incurred $ 36,936,465 $ 34,151,019

Less: Spending authority from offsettingcollections and recoveries (-) (36,299,054) (35,759,410)

Obligations net of offsetting collections andrecoveries 637,411 (1,608,391)

Net Obligations $ 637,411 $ (1,608,391)

Other Resources:

Donations and forfeitures of property 2,710 0

Transfers in/out without reimbursement (+/-) (782,613) (109,083)


Net Other Resources Used to Finance Activities $ (628,182) $ 36,903

Total Resources Used to Finance Activities $ 9,229 $ (1,571,488)

Resources Used to Finance Items not Part of the Net

Cost of Operations:

Undelivered Orders (-) (3,231,660) 2,105,936

Unfilled Customer Orders 1,797,778 674,137

Resources that fund expenses recognizedin prior Periods (-) (76,984) (160,202)

Resources that finance the acquisition ofassets (-) (26,984,654) (29,148,247)

Other (+/-) 779,903 109,083

Total Resources Used to Finance Items not Part of the

Net Cost of Operations $ (27,715,617) $ (26,419,293)

Total Resources used to Finance the Net Cost of

Operations $ (27,706,388) $ (27,990,781)

Note 18. Reconciliation of Net Cost of Operations to Budget





Components of Net Cost of Operations that will not

Require or Generate Resources in the Current

Period:

Components Requiring or Generating Resources in Future Periods:

Increase in annual leave liability $ 314 $ 6,950

Increase in environmental and disposalLiability 0 63,724

Other (+/-) 0 128,086

Total Components Requiring or GeneratingResources in Future Periods $ 314 $ 198,760

Components not Requiring or Generating Resources:

Depreciation and amortization $ 175,395 $ 188,873

Revaluation of assets or liabilities (+/-) (1,246,091) (309,084)

Cost of Goods Sold 28,237,383 27,315,970

Other (21,688) (1,562)

Total Components not Requiring or GeneratingResources $ 27,144,999 $ 27,194,197

Total Components of Net Cost of Operations that will

not Require or Generate Resources in the Current

Period $ 27,145,313 $ 27,392,957

Net Cost of Operations $ (561,075) $ (597,824)

Reconciliation of Net Cost of Operations to Budget (Continued):

The Reconciliation of Net Cost of Operations to Budgetprovides information on the total resources used byDLA - both those received through the budget and thosereceivedbyothermeans. It reconciles thebudgetaryob-ligations incurred to the net cost of operation for a givenreporting period. It articulates and details the relation-ship between net obligations from budgetary accountingand net cost of operations from proprietary accounting.

Due to DLA’s financial system limitations, budgetarydata is not in agreement with proprietary expenses andassets capitalized. The difference between budgetaryand proprietary data is a previously identified deficiency.

Thereconciliationrequiresthatadjustmentsbeprocessedbecause of imbalances between the budgetary andproprietary amounts recorded in DLA’s accountingsystems. The balancing entries for DLA include ad-

justments with an absolute value of $6.7 million toResources That Finance the Acquisition of Assets,$0.6 million to Other Components Not Requiring orGeneratingResourcesand$14.3milliontoRevaluationof Assets or Liabilities lines. These adjustments wererequired in order to bring the reconciliation intoagreement with the Statement of Net Cost (SoNC).

The following note schedule lines are presented ascombined insteadofconsolidateddue to intraagencybudgetarytransactionsnotbeingeliminated:

• ObligationsIncurred

• Less:SpendingAuthorityfromOffsettingCollections andRecoveries

•ObligationsNetofOffsettingCollectionsand Recoveries

• Less:OffsettingReceipts



•NetObligations

• UndeliveredOrders

•UnfilledCustomerOrders

The $107.4 million change between 4th Quarter, FY2007 and 4th Quarter, FY 2006 in Liabilities NotCovered by Budgetary Resources on the Balance Sheet(Note 9) differs from the $0.3 million amount reportedas of 4th Quarter, FY 2007 in Components Requiringor Generating Resources in Future Period on this noteschedule. The $107.1 million difference is comprisedof a $77.0 million decreases in the future funded li-abilities and $30.1 million decrease from reclassifyingenvironmental liabilities from uncovered to covered.

In FY 2007, DLA received $2.7 million of free com-modities from foreign governments in support of theGlobal War on Terror as donated revenue nonfinan-cial resources. During FY 2007, $126.3 million in com-modities were distributed free of charge to the MilitaryServices, some of which was donated in FY 2006.

Other Disclosures

Resources used to Finance Items not part of Net Costof Operations: Other. This amount mainly consists ofend of quarter fund balance with treasury (FBWT) that istransferred to Defense Working Capital Fund (DWCF)component level, where the DWCF FBWT is managed.

Components Requiring or Generating Resources inFuture Period: Other. This amount consists of con-tingent legal liabilities that are considered probable.

Components Not Requiring or Generating Resources:Other. This amount is comprised of changes in theallowance for bad debt, miscellaneous expenses thatdid not require budgetary resources and to recordthe note schedule to SoNC budgetary adjustment.


Required Supplementary Information for the Years Ended September 30, 2007 and 2006





HERITAGE ASSETS

For the Years Ended September 30, 2007 and 2006

Stewardship Land and Heritage Assets

The DLA reports insignificant restrictions on the use orconvertibility of general PP&E for heritage assets associ-atedwiththeDepartmentofHistoricalPreservationunderthe state and other minor restrictions as such by the in-stallation host(s) where DLA is a tenant activity throughreal-estate agreements and Interdepartmental ServiceSupportAgreements. TheDLAhasno stewardship land.

Buildings & Structures

ExecutiveOrder11593fromtheUnitedStatesDepartmentof the Interior, Heritage Conservation and RecreationService entered Bellwood, Chesterfield County, Virginiain the National Register. Operated by the DefenseSupply Center - Richmond (DSCR), the Bellwood homeis an early nineteenth century plantation house high-lighted by slender columns extending up two stories;it also serves as the DSCR Officer’s Club. (Cultural)

Cemeteries

The DSCR has established a cemetery to re-inter AfricanAmerican remainsunearthedduring theconstructionofachilddevelopmentcenter.(Cultural)

The DSCR has established a cemetery for the GregoryFamily.Thefamilyownedthepropertypriortotheacquisi-tionofthepropertybytheGovernment.(Cultural)

CategoriesMeasureQuantity

As of10/01/06

Additions DeletionsAs of

9/30/07

Buildings and Structures Each 1 - - 1

Cemeteries Site 2 - - 2

Museums Each - - - -

Monuments and Memorials Each 1 - - 1

Monuments & Memorials

TheDSCRjointlyestablishedamonumenthonoringNativeAmericanculturewitha localNativeAmericanorganiza-tion.(Cultural)

Duringthe4thQuarterFY2007,DLAexpensedapproxi-mately$135,000intheStatementofNetCostforthecostsof acquiring, constructing, improving, reconstructing, orrenovatingheritageassets.

Note: Financial information pertaining to Multi-UseHeritageAssetsisincludedontheBalanceSheet.



Annual Deferred Sustainment TrendProperty Type

FY 2003 FY 2004 FY 2005 FY 2006 FY 2007

Buildings andStructures

$293,443 $239,953 $219,430 $245,000 $341,000

Property Type FY 2007

Annual SustainmentRestorationPrior Required Actual Difference

RestorationEnding

Buildings andStructures

$245,000 $495,000 $399,000 $96,000 $341,000

REAL PROPERTY DEFERRED MAINTENANCE

As of September 30, 2007(In Thousands)

FY2007 sustainment requirements for DLAoriginate from theDODFacilities Sustainment Model (FSM). The require-ments and funding encompass facilities funded from the Operations & Maintenance appropriation, Defense-wideFamilyHousingappropriations, theDefense-wideWorkingCapitalFund,and fromNon-AppropriatedFunds.Accuracyof data above is dependent upon information collected and recorded in the FSM. The FSM captures and presentsdata specific to trends, reductions and requirements imposed by Base Realignment and Closure (BRAC) activity.

ThemajorityofthefacilitiesforwhichtheAgencyisresponsibleforsustainingorrestoringandmodernizingarenotunderDLA’sdirectoperationalcontrol,e.g.fuelstorageandhandlingfacilities.

Actualcumulativesustainmentspendingthroughtheendofthe4thQuarter,FY2007was$399million.TheincreaseinfacilitiesmaintenancespendingreflectsrequirementsassociatedwithincreasedtroopsupportandadditionalcostsincurredduetoongoingBRACefforts.


Supply Management Activity Group Overview



SupplyManagementActivityGroupOverview



Supply Management Activity Group

TheSupplyManagementActivityGroupconsistsof threesupply centers, one support center, two service centers,andseveralsupportorganizations.Thesupplycentersarelocated at the Defense Supply Center Columbus (DSCC)inColumbus,OH; theDefenseSupplyCenterRichmond(DSCR)inRichmond,VA;andtheDefenseSupplyCenterPhiladelphia (DSCP) in Philadelphia, PA. DLA supportsits Military Service customers by managing supply chainbusinessprocessesthatensureworldwidelogisticssupportisprovidedat the right time, to the rightplace,andcon-sistently at the best value in peacetime, emergency, andwartime scenarios. Each supply center acts as a supplychain lead for one or more commodity groups. Eachcommodity group contains common suppliers, similaritems, and to some extent, similar customers. They areformedtoimprovealignmentwithindustryandcustomers.The seven supply chains at these three centers include:aviation, land, and maritime (associated with weaponsystemsparepartsandrelatedconsumablemateriel),con-structionandequipment, food,clothingand textiles,andmedical. The Defense Energy Support Center (DESC),whichislocatedatFortBelvoir,VA,purchases,manages,positions,andsellsfueltotheMilitaryServicesandprovidescentralizedenergysupplychainsupporttomeettheenergyneeds of the military installations. The service centersare: the Defense Logistics Information Service, locatedin Battle Creek, MI, which manages the Federal SupplyCatalogSystemandprovideslogisticsinformationproductsandservicesforallmilitaryandcivilianactivities;andtheDefense Automatic Addressing System Center, located inDayton, OH, which provides support to DLA’s logisticsmission by editing and routing electronic logistics trans-actions(includingmaintainingtheaddressesofcustomersandsuppliers);maintainingnetworkinteroperabilityforthelogisticscommunity;andconductingspecialservicesandreports.DuringFY2007,DLAsupportedmorethan1,300differentweaponsystems;managedfuelthatgeneratednetsalesof132.8millionbarrels;andreceivedadailyaverageof104,566requisitionsthatledtoadailyaverageof3,890contractsawarded.Byyear’send,therewerethan9,469civilian,308activedutymilitary,and229militaryreservepersonnel that supported thisbusinessarea. TheSupplyManagement Activity Group generated revenue whichtotaled about $33.7 billion during FY 2007. This is anincreaseofmorethan$1.1billionfromthepreviousyear.

Mission

The Supply Management Activity Group’s mission isto provide materiel and logistics services that supportpeacetimeandcombatoperations,combatpreparedness,emergencysupport,andhumanitarianaid.Theseservicesincludetheintegratedmaterielmanagementofmorethan5.2millionnationalstocknumbereditemsthatsupporttheeight separate supply chains. The support requirementsaredynamic,andDLAcontinuestoadjustitsapproachinresponsetoevolvingchangesinnationalpriorities,require-mentsof theMilitaryServices, technology,and thecom-mercialmarketplace.

The primary logistics functions include:

Supply-chain integration and inventory management;

Transportation management (shared with the Distribution Activity Group);

Technical management, which guaran-tees product quality and proper pricing of materiel;

Procurement management, ensuring DoD gets the best value;

Logistics data and information collection, management, and distribution and providing for the integration and availability of this in-formation; and

Logistics management process and process-ing of logistics and standard Military Logistics Systems transactions

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Strategic Goals

The long-term goals of the Supply Management ActivityGroup are consistent with those in the DLA StrategicPlan. By achieving these goals, DLA will ensure thatthe supplies and services required by its customers areprocuredanddeliveredinthemosteffectiveandefficient

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manner and that these services reflect the customers’concerns for timeliness, quality, and cost. These goalswill be achieved through a series of supporting strat-egies and executed primarily by the supply centers.

Program Initiatives and Accomplishments

Supplier Relationship Management (SRM): SRM is amajor transformationeffortwhichencompassesallof theAgency’s supplier facing initiatives. The focusof SRM istotransitionfrommanagingsuppliestomanagingsuppliersas a means to better serve the warfighter. When estab-lished,theseenhancedrelationshipsbetweenDLAanditssupplierswillallowtheAgencytoachievetheunderlyinggoalofhavingthe“rightitem,rightservice,rightplace,righttime...everytime.”Consequently,SRMwillaffirmDLAasanintegralpartnerintheend-to-endsupplychainthatlinksoursupplierstoourcustomers.DetailedbelowaresomeofthekeyinitiativeswithinSRMincludingStrategicMaterielSourcing(SMS),StrategicSupplierAlliances(SSAs),SupplyChain Alliances (SCAs), and Performance-Based Logistics(PBL):

Strategic Materiel Sourcing (SMS):SMSfocusesonstrat-ifyingandsatisfyingcustomerdrivenhighdemandandreadinesshardwareitems–304,010ofthemorethan3millionhardwareitemsmanagedbyDLA-throughlong-termagreements.WhilethetargetedSMSitemsmakeuponlyabout10%oftheDLAmanagedhardwareitems,theyaccountforover80%ofitshardwareprocurementactionsandsales.TheprimaryperformancemeasurementoftheSMSprogramis inventorysavings. Sincethe inceptionof thisprogram,DLAhas realizedover$216million inone-timeinventorysavings.DLAcurrentlyhasatotalof131,444itemsunderSMSlong-termagreements.TheseagreementsincludePrimeVendorAgreements,CorporateContracts, and standard Long-Term Contracts (LTCs).

Strategic Supplier Alliances (SSAs): SSAs are long-term partnerships - formed with DLA’s key suppliers- that allow the Agency and the supplier to worktogether by sharing information and jointly workingproblem areas. The result is added value for bothpartiesandimprovedsupporttothewarfighters.Thereare currently 28 SSAs and each one is assigned to aSupplier Relationship Manager, whose primary re-

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sponsibility is the maintenance and success of thepartnership.Significantsavingshavebeenrealizedbyreducinglead-timesandloweringprices.Forexample,inonepartnership,AdministrativeLeadTime(ALT)wasreduced,onaverage,byalmost71%comparedtopre-SSA performance with on-time delivery that exceeds98%. Similar results occurred with the other SSAs.

Supply Chain Alliances (SCAs):SCAsareallianceswithkeysupplierswhoprovideitemsthathavelowercustomerdemandandreadinessimpact.Generally,thesealliancesdonotrequirethehighlevelofinteractionandmanage-mentattentionthatarereceivedforSSAs.Additionally,SCAs can be formed with competitive suppliers,something not possible with SSAs. However, whileSCAsrequirelessinvolvedrelationships,theystillfurtherthe goals of the SRM initiative and add value to bothDLAandthesupplier.Todate,DLAhasformedSCAswith20suppliers,sixofwhichweresignedinFY2007.

Performance-Based Logistics (PBL): PBLs are: 1)the preferred contract method to support weaponsystems; 2) mandatory for all new major systemsand for fielded Acquisition Category (ACAT) I andII systems; and 3) expected to increase support towarfighters through increased materiel availability,improved reliability,andenhancedobsolescenceman-agement. DLA sold$149millionworthofmateriel inFY2007 through its PBLpartnerships. Themajorityofthese sales were obtained from commercial vendors(whowereawardedServicePBLcontractsandutilizedDLA as a source of supply for consumable items).

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Chemical Management Services (CMS): Championedby the Assistant Deputy Under Secretary of Defensefor SupplyChain Integration -CMS is aDoDenterprise-wideandcradle-to-graveinitiativedesignedspecificallytomanage hazardous materiel (hazmat), reduce associatedhazmatmanagementanddisposalcosts,andenableDLAtoget closer to its customers. It is a strategic, long-termrelationshipwhereeither the serviceprovideror suppliermanages a customer’s chemical-related services. Whileinitially developed to meet the needs of Military Serviceindustrial complexes, CMS is fully capable of managinghazmat down to the tactical retail levels, and will incor-poratethebestbusinesspracticesofDLA’sTailoredPrime




services. The survey focuses on the opinions of upper-echelonclients– thosewith theofficer rankofO-6andabove–by evaluating enterprisepartnerships, reputationandbrand.Thefirstclient-levelsurvey-conductedinApril2006-yieldedinsightscenteringonsuccessesandoppor-tunitiesforimprovement.Specifically,thesurveyrevealedthattheoverallclient-levelsatisfactionwasat67%,whichis consistent with results for similar respondents in thelargeroverallcustomersatisfactionsurvey–conductedinMay 2005. Additionally, 86% of respondents indicatedtheywouldrecommendDLAtoanotherunitorcolleague.WarfighterscitedthattheAgencystrengthswere:deliver-ingwellonitscommitments;maintainingarelativelygoodreputation; and providing valuable support. Howeverthis initial client-level survey also revealed a number ofcustomerconcerns.TheseconcernswerereviewedbytheDLACustomerAssessmentIntegratedProcessTeamwhichgroupedthemintosix“themesforaction.”Thesethemesserve as the focus points for developing and institutingfixes:

BoththeDLAfieldcommandsandHeadquartershavetakenactiontorespondtotheseconcerns.

Program Performance Indicators

In December 2006, DLA finalized the transition of datafrom its legacy system (Standard Automated MaterielManagementSystem-SAMMS)totheEnterpriseBusinessSystem (EBS). This transition enables DLA managementgreater access to more timely, complete, accurate, andreliableperformanceandfinancialdata.Consequently,thefollowingmetricsareorwillsoonbeavailableformanage-mentdecision-making:

Partneringandunderstandingcustomers’missions;

Dealingwithcustomersproactively;

Respondingtoandroutingcallsandothercontacts;

BetterpromotingDLA’scapabilities;

Improvingtimelinessofsupport;and

BetterpromotingthevalueDLAbrings

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Vendor initiatives. ThesebestbusinesspracticeswillalsoincludemanyofthosedevelopedandusedtoexecutetheNationalInventoryManagementStrategy,JointEnvironmentalMateriel Management System, and the Base RealignmentandClosuresupply,storage,anddistributionconcepts.Thepilotsitesforthisinitiativearethe76thMaintenanceWing(76th MXW) and Navy Strategic Communication Wing -one (SCW-1) locatedatTinkerAir ForceBase,OklahomaCity -Air LogisticsCenter,with start-upestimated for thethirdquarterFY2008.Afterthe“ProofofConcept”isdem-onstrated, the intent is to extend the program throughouttheTinkerbaseandthentoallDoDcustomerswithintheregion.DLAwillprovidethecontractandcontractmanage-mentoversightforthisinitiative,andasthestrategybecomesmorefullyintegratedintoourbusinessmodels,benefitswillincludereducedwaittimesforcustomers,higherlevelsofDLAsupplyreadiness,moreeffectiveandefficienttailoredlogistics support solutions, better inventory visibility, amoreoptimizedsupplychain,andreducedwaste/disposalcost.Consequently,thesebenefitswillproducesignificantcost savings and better utilization of hazmat resources.

Customer Support Modules (CSM)/Customer Outreach: DLA uses SAP Customer Support Modules tools andprocesses in itsCustomerOutreachManagementeffort tomore deliberately understand warfighter needs and meetcustomer expectations. DLA began using these standardEnterprise-wide tools and processes for account manage-ment,opportunitymanagement,andcustomeroutreachinMarch2006.Inthefollowingmonth,analyticsandservicemoduleswereconfiguredanddeployed.Systemenhance-mentswereperiodicallydeployedduringtheremainderof2006and2007. These improvements included improvedprogram reporting, customer outreach, account manage-ment,opportunitymanagement,andservicecapabilities.Intotal-1,800DLAemployeesusethesystemandprocessesto perform customer outreach, manage accounts andcustomersupportopportunities,providecustomerservice,aswellastakeadvantageoftheintegratedanalyticscapabil-itythatprovidesreportsforeachprocess.CSMreachedfulloperationalcapabilityinJuly2007.

Client-level Survey: The2007client-level surveywillbefieldedinfall2007toevaluatethewarfighters’assessmentofDLAgoods and services andprovide feedback for thecontinuedimprovementinthedeliveryofthosegoodsand

Perfect Order Fulfillment (POF)– as a draft interimmetric -wasdevelopedanddeployed,and isbeingtested incoordinationwith theMarineCorps. POFmeasures the percentage of orders shipped on

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time and delivered in full withnoproductqualityorpricing issues. This will be the overarching metric tomeasurehowwellDLAsupporteditscustomer–thewarfighter. We expect a final POF metric to befully developed and deployed during FY 2009.

Demand Planning Accuracy (DPA)measuresthedegreeofaccuracyofademandforecastcomparedtotheactualdemand.Itisfirstcalculatedatthelowestlevelofdetail,the Demand Forecasting Unit (DFU), comprised of acustomerandanitemofsupply.TheDFUcanberolleduptocomputetheDPAforthevariousandsignificantlylargercustomergroups(suchasanEnterprise,aDemandChain, a Customer, etc.). Currently, DPA is measuredin “lags” or forecasted ahead for set periods of time(both at onemonth and at sixmonths). Plans includemeasures for two, three, and twelve month lags aswell. Increased demand planning accuracy shouldresult in better customer support and lower inventoryinvestments and holding costs. To this end, DLA ispursuing both top down and bottom up approach-es. The most recent DPA for Lag 1 for August 2007was 28.41%; the management objective was 40%.

Sales Ordersarethenumberofcustomerorders(requi-sitions)receivedandareanindicatorofworkload.Thenumber of sales orders for FY 2006 was slightly morethan33.6millionandforFY2007thenumberwasalmost40.9million-representinga21.6%increase.

Attainment to Plan (ATP) identifies the percentage ofPurchase Requests and Stock Transport Orders (DLA-ownedstockredistributionorders)generatedthroughthesupplyplanningprocesswhichmeetcriteriaforquantity,quality,andtimeliness.Afailureofoneormoreofthesecriteriaindicatesthataproblemexistswithinthesupplychain.AnincreaseinATPdemonstratesthatsupplyplansaremore reliableand lowersafetystock levels (smallerinventory investments) may be possible. ImplementedinJuly2007theATPduringthefourthquarterwas74%.The management objective is 91% ATP for FY 2008andthelong-termmanagementobjectiveis99%.Ouranalysesofthecontributingfactorsleadingtoextendedlead times, and of ATP by vendor will be completedbytheendofOctober2007.Inaddition,managementoversight will ensure that Supply Planners are activelyworkingtheirinventoryexceptionsandreviewstoensurethat PRs are prioritized by the Required Award Date.

Purchase Requests (PRs)On Hand are thenumberofPRsinprocess,butnotyetawarded.Thismetricgrewsignificantly-tonearly240,000-intheearlypartofthefiscalyearasDLArolledbusinessfromitslegacysystem,theStandardAutomatedMaterielManagementSystem,totheEnterpriseBusinessSystemconcurrentwithasurgein customer demands. In response to this rise, DLAdeveloped and promulgated productivity goals for theHardware, Construction & Equipment, and Clothing &TextileSupplyChainstomobilizetheiravailableassetstoarresttheriseandgraduallyreducethenumberofPRsOnHandtoamanageablelevel.Afterpeakingnear260,000,theoverallPRsonHandhaveremainedrelativelystable(near that number) through the end of the fiscal year.Aggressiveefforts toreducethesenumberstargetedonlowvaluePRsarethefirstorderofactionforFY2008.

Percentage of PRs Exceeding Required Award Date (RAD) is determined by the number of PRs that havenot been awarded within the required contract awarddaterelativetothetotalnumberofPRsOnHand.TheDLA management objective is to have no more than20%ofitsPRsexceedingtheRAD.Significantincreasesthroughout the fiscal year in receipt of customerdemands exceeded the capacity of the Supply Chainsto award contracts. Consequently, by the end of thefiscalyear,roughly60%ofthePRsexceededtheRAD.As the Supply Chains make progress in reducing theirPRsonHand,thepercentageshowsdownwardtrends.

Administrative Lead Time (ALT)isthetotaltimebetweenDLAreceiptofacustomerorder/plannedrequirementtotheContractAwardDate.ALTisweightedtocompen-sate forquantitiesof single-itemorders. TheobservedALTfortheenterprisehassteadilyimprovedthroughouttheyeartofromahighof43.26daysinOctober2006to33.19daysbytheendofthefiscalyear.AstheSupplyChains make progress in reducing their PRs on Hand,the ALT should continue to trend downward in 2008.

Production Lead Time (PLT) is the total timebetweenthereceiptofawardbythevendortoeitherDLA’sorthecustomer’sreceiptofaqualityproduct.PLTisweightedto compensate for quantities of single-item orders.The observed PLT for the enterprise improved steadilythroughout theyear - fromahighof61.44 inOctober2006to54.01bytheendofthefiscalyear.

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Financial Performance Measures

DLA establishes its prices predicated on three primaryfactors:1)itscurrentfinancialposition,asdeterminedbytheAccumulatedOperatingResult(AOR);2)itsprojectedcashpositionrelativetothestatedobjective;and3)theestimatedexpenses that will be incurred to generate the estimatedrevenue. It isAgencypolicy tosetprices thatachieveanAORofzerooverthelong-termandmaintaincashbalancesthatprecludeanAnti-DeficiencyActviolation.Inaddition,notallcostsattributedtothebusinessarerecoveredbythebusiness-imputedcosts,depreciationexpensesappliedtoinvestments funded fromGeneralFundaccounts,and therecordingofrevenuethatisfornon-expenseitems(peacetimeinventoryaugmentation,mobilization inventories,andad-justmentstothecashposition).TheResultssectionbelowmore fully describes DLA achievement during FY 2007.

DLA measures the effectiveness of program budgetingandexecutionwithunitcostperformancemeasures. Thefollowing table depicts the Supply Management unit costresultsforthefuelsupplychain:

UnitCostResults FY07Goal FY07Actual

ProductCostPerBarrelofFuel $79.33 $84.35

Non-ProductCostperBarrelofFuel $8.60 $8.05

TotalCostperBarrelofFuel $87.93 $92.40

Non-Energy $.95 1.04

UnitCostResults FY07ActualFY07Goal

The Non-Energy unit cost was $1.04, which exceededthe plan by $.09. The actual unit cost was higher thanthe plan primarily due to a process change that requiresobligation of funds when customers place orders withour prime vendors, leaning forward efforts, and an addi-tional end of year purchase to buy components and traypacks for a new item, Unitized Group Rations-Express.

DLAalsomeasuredandmonitoredfinancialperformanceofitsNon-EnergybusinesssegmentbycomparingtheCostRecoveryRate(CRR)approvedinthebudgettothatwhichwasexecuted.TheCRRisacompositeratethatiscalculatedbydividingitsrelatedoperatingcostsbythecostofgoodssold;andisusedasanaggregatemeasurementofthecoststhatDLAincurredtogeneratea levelofsales. Thelong-termfinancialgoalistoachieveabreak-evenbudget-relatedaccumulatedoperating result. DLA’s composite FY2007CRRgoalwas14.4%.TheactualCRRwas14.1%,whichwas0.3%lowerthantheFY2007President’sBudgetandisattributedtogreaterthanexpectedNetSalesattheendofthefiscalyearandfocusedeffortstoreduceoperatingcosts.

Net Operating Resultcomparesbusiness results to thebusinessplanforrevenues,expensesandgainsorlosses.

Gross Sales at Standard Priceistherevenuegeneratedbythesaleofmateriel.

Obligations and Cash Performance measure fundsexecutionandcashpositionrelativetothebudgetsandplans.

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Thetotalcostperbarreloffueliscomprisedofthecompositeproductcost(theacquisitioncostofabarrelofpetroleum

product sold) and thenon-product cost (operations costsfor fuel services, transportation, storage, and overhead).This totalunit cost ended theyearoverplanby$4.47 (a5.1%increase)duetosalesthatwere76thousandbarrelshigherthantheplannedsalesof132.7millionbarrelsandacompositerefinedproductcostof$84.35($5.02perbarrelhigherthantheplannedcost).Thiscompositeproductcostincludedapurchaseof6.74millionbarrelsofKuwaitfuelpricedat$39.00perbarrel.Withoutthisspecially-pricedfuel,theproductcostwouldhavebeen$86.72perbarrel.Higherproductcostsaremarketdriven.Thenon-productcost decrease was due primarily to lower actual labor,facilitymaintenance,andterminaloperationsexpendituresthanplanned.

The following table depicts the SupplyManagement unitcostresultforthenon-energysupplychains:





FINANCIAL RESULTS

The Supply Management Net Cost of Operations, whichincludescosts(militaryconstructiondepreciation,imputedexpenses, and accounting adjustments) not recovered bythe Defense-wide Working Capital Fund, reflects a gainofapproximately$832million.Theincreaseisprimarilyattributable to the Energy business segment whereboth sales price and sales quantity to federal customersincreased.Additionally,revenuegrewintheNon-energyarea due to greater demand by the Military Services.




Supply ManagementConsolidated and Combined Financial StatementsAs of and for the Years Ended September 30, 2007 and 2006



UNAUDITED


SUPPLY MANAGEMENT


2007 2006

ASSETS (Note 2)

Intragovernmental:



Total Intragovernmental Assets 1,001,339 822,867

Accounts Receivable (Note 4) 482,581 567,335

Inventory and Related Property (Note 7) 17,511,771 17,904,388

General Property, Plant and Equipment (Note 8) 1,265,784 1,262,816


TOTAL ASSETS 20,303,313 20,617,455


Intragovernmental:


Other Liabilities (Note 12 and Note 13) 13,148 16,799


Accounts Payable (Note 10) 2,595,024 2,832,801

Military Retirement Benefits and Other Employment-Related

Actuarial Liabilities (Note 14) 36,608 37,380

Environmental Liabilities (Note 11) 72,645 104,135

Other Liabilities (Note 12 and Note 13) 134,070 234,993

TOTAL LIABILITIES 2,861,582 3,268,275

NET POSITION

Cumulative Results of Operations 17,441,731 17,349,180

TOTAL NET POSITION 17,441,731 17,349,180



WORKING CAPITAL FUNDWORKING CAPITAL FUND


UNAUDITED


SUPPLY MANAGEMENT


2007 2006

PROGRAM COSTS

Gross Costs $ 32,842,943 $ 31,945,957


Net Program Costs (831,669) (590,294)

NET COST OF OPERATIONS $ (831,669) $ (590,294)




UNAUDITED


SUPPLY MANAGEMENT


2007 2006

Beginning Balances $ 17,349,180 $ 16,274,118



Transfers-in/out without reimbursement (374,904) 15,246


Donations and forfeitures of property 2,710 -

Transfers-in/out without reimbursement (923,586) (270,383)

Imputed Financing Sources 86,612 85,004


Net Cost of Operations (831,669) (590,294)

Net Change 92,551 1,075,062

Ending Balances 17,441,731 17,349,180

UNEXPENDED APROPRIATIONS



Appropriations transferred-in/out (+/-) - (1,465,200)

Other adjustments (rescissions, etc.) (69) -


Ending Balances - -

NET POSITION $ 17,441,731.00 $ 17,349,180.00


WORKING CAPITAL FUNDWORKING CAPITAL FUND


UNAUDITED

DEFENSE LOGISTICS AGENCY WORKING CAPITAL FUNDSUPPLY MANAGEMENT


2007 2006


Budgetary Resources: Recoveries of prior year unpaid obligations $ 438,475 $ 446,034

Budget Authority:


Contract Authority 34,623,573 31,051,479


Earned

Collected 31,967,505 31,471,504

Change in receivables from Federal sources 147,012 (52,541)


Advance received (98,363) (13,757)

Without advance from Federal sources 1,917,961 742,063

Subtotal 69,027,807 65,318,849

Nonexpenditure transfer, net, anticipated and actual (374,904) (1,450,247)


Total Budgetary Resources 34,623,573 31,051,480



Reimbursable 34,623,573 31,051,480




Unpaid obligations, brought forward, October 1 13,127,305 14,384,387


from Federal sources, brought forward, October 1 (4,944,936) (4,255,413)

Total unpaid obligated balance 8,182,369 10,128,974





from Federal sources (+/-) (2,064,973) 689,521


Unpaid obligations 16,141,354 13,127,304


from Federal sources (+/-) (7,009,909) (4,944,935)

Total unpaid obligated balance, net, end of period 9,131,445 8,182,369

Net Outlays:

Gross outlays 31,171,049 31,862,528


Net Outlays $ (698,093) $ 404,781



Distribution Activity Group Overview




DistributionActivityGroup-Overview


Distribution Activity Group

The Distribution Activity Group operates through theDefenseDistributionCenter(DDC)headquarteredinNewCumberland,PA,and26subordinatedistributioncenterslocated throughout the United States, Europe, Pacificand Southwest Asia. The group’s mission is to managethe receipt, storage, and issuance of DoD materiel. Itmay deliver that materiel to customers collocated on abaseor to far-off ships, posts, and repair facilities. Theactivity group uses contracts with commercial sourcesto transport items fromDLA-ownedwarehousesdirectlyto customers worldwide. Some distribution centers arehighlyautomatedfacilitiesthatwerespecificallydesignedtoprovideglobalsupportforgeneralcommodities;whileothers fill customer requirements on a regional basis ormay provide global support for materiel that requiresspecial equipment, facilities, or training. Forexample,onedistributioncenter -withninesubor-dinatesatelliteoperations-providesglobalsupportforallmapdistributionrequirements.Thedistributioncentersmaintain the accountable inventory records and are re-sponsibleforpreservingabout$96billion(atsellingprice)inDoDmateriel,representingover3.5millionitems.Inaddition, they processed 23 million receipt and issuetransactions during FY 2007 and their business servicesgenerated almost $1.4 billion in revenue. By year’s hisactivity group employed approximately 7,129 civilian,137 active duty, and 179 reserve military personnel.

Mission

The mission of the Distribution Activity Group is toprovidethefullrangeofdistributionservicesandinfor-mation enabling a seamless, tailored worldwide DoDdistribution network that delivers effective, efficientand innovative support to the Combatant Commands,the Military Services, and other Agencies duringpeace and war. The distribution network ensures thatAmerica’sWarfighters receivecompetitivelypricedandbest value distribution services by providing “aroundthe clock - around the world” world-class service.The Distribution Activity Group is also responsible forthe DLA transportation management functions whichsupportsallshipments,bothfirstandseconddestination.

Program Initiatives and Accomplishments

Infrastructure Cost Reduction through A-76 Cost Comparisons: In FY 1998, DDC began the process ofcompeting DLA depots with private industry. The goalof these competitions is to reduce operating costs eitherby reengineering existing depot business processes or byinsertingthemarketforcesofcompetitionintothedistribu-tionfunctions.AsoftheendofFY2007,twelvesiteshavebeencompeted,withthegovernmentretainingdepotop-erationsatfivesites,whiletheothersevenwerecontractedwith private industry. The estimated long-term (FY 1998- FY 2013) net savings from these twelve competitions isin excessof$560million. In addition to thesecompeti-tions,selectedinstallationservicessupportfunctionsattheDefense Distribution Depot San Joaquin CA (DDJC) andthe Defense Distribution Depot Susquehanna PA (DDSP)underwentpublic/privatecompetitions,also followingtheguidelines of OMB Circular A-76. While a commercialfirmwontheDDJCcompetitionandbeganworkinMarch2007,thefederalworkersat theDDSPwereawardedtheperformance decision as a Most Efficient Organization(MEO) andwill begin full performance inOctober2007.

Domestic Disaster Support: As part of the DLADomesticDisasterPlantosupporttheFederalEmergencyManagement Agency (FEMA) the DDC developed dis-tribution initiatives to maintain 100% In-Transit Visibility

Strategic Goals

ThestrategicgoalsestablishedbytheDistributionActivityGroup are consistent with those contained in the DLAStrategicPlan.Thesegoalsareachievedthroughaseriesofsupportingstrategiesthatwill:

Increaseour reliabilityandvaluecoupledwitha fasterresponsetimetoourcustomersbycontinuouslyimprovingandreengineeringbusinesspractices;

Providebest-valuesolutionstoourcustomersbycontinu-ouslyevaluatingouractivitiesandimplementingchanges,asnecessary,toensureefficientandeffectivedistributionoperations;and

Reduce under-utilized infrastructure by eliminating un-necessarystoragecapacity.

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of DLA shipped supplies using satellite tracking capabil-ity. DDC established a Defense Transportation TrackingSystemaccounttotrackDDCbookedDLAshipmentsfromthe commercial vendor and/or distribution center to theFEMA, drop-off destination. The DDC also establisheda Deployable Distribution Depot, with positions battle-rosteredandavailabletorespondtodomesticdisastersitu-ationsinCONUS.Thisresponsewillbeinconcertwiththecoordinated requirements and capabilities of both FEMAand the U.S. Northern Command (USNORTHCOM).

Foreign Disaster Support:PlansforexpandingDeployableDistribution Depot capabilities for world-wide use arebeing considered. Conceptually, this would requirea combination of functions and capabilities of both aTheater Distribution Center and those of a DLA fixedbase forward stocking site to meet contingency needsandpriorities. Thoseneedsandprioritieswould includewholesale support services, as well as materiel visibility.

Theater Consolidation and Shipping Points (TCSP)–Kuwait, Europe, and Korea: InFY2006,DLAacceptedthetransferoftheArmyTheaterDistributionCenter(TDC)in Kuwait at Camp Arifjan and established the TheaterConsolidation and Shipping Point (TCSP-Kuwait). TCSP-Kuwait is the primary conduit for sustaining theater op-erationsbyrapidlyconsolidatingorsegregatingshipmentsfrommultiplesourcesandthenpreparingandforwardingthoseshipmentsdirectlytothecustomer.KeyfeaturesofTCSP-Kuwait include the capability to maintain visibilityof the transportation control number and asset control.Collectively,thesefeatureswillallowforthemovementofpelletizedmaterieldirectlyfromthereceivingdocktotheshippingdock.Theabilityto“cross-dock”eliminatestheneedforanystorageorstagingandfacilitatesanefficienttransition from inbound to outbound operations. At therequestoftheArmy,DLAestablishedTCSP-Europe(locatedatDefenseDistributionDepotEurope)inSeptember2006.TCSP-Europe’s mission is to rapidly segregate, sort, andconsolidatemultipleconsigneeshipmentsfromarangeofsources and then deliver those supplies to the customer.Theseeffortsprovidebotheffectiveandefficient supportto the warfighters throughout Europe, Africa, and theMiddle East. Thus far, this mission has reduced cost by

20%witha40% reduction in redundanthuband spokedistributionsystems.BasedonthesuccessesachievedbyboththeKuwaitandEuropeanoperations,DLAisnegotiat-ingwiththePacificCommandtoestablishaTCSP-Korea.

Deployment Distribution Operations Center (DDOC) Pilot Project: DLA partnered with the United StatesTransportationCommand,theJointMunitionsCommand,and the United States Central Command to establish theDDOC pilot project. The DDOC is a cross-command,cross-Service team that focuses on integrating movementofDLAandMilitaryServicesustainmentcargo,deployingforces and equipment, and managing in-theater stocks.The goal is to optimize the use of personnel andequipment(aircraft,MaterielHandlingEquipment,etc.)byimprovingassetvisibilityandsustainingpipelinevelocity,using Department of Defense transportation assets.

Defense Logistics Management System (DLMS): The twoStrategic Distribution Platforms (DDSP and DDJC) imple-mentedDLMSon1 July2007. Consequently,DDC’sper-formance metrics will change how Hi-Priority and Routinereceiptsandshipmentsareprocessed. Thesechanges– toincludeimportingthemetricsthatarefocusedoncustomeroutputs -will enable theDDC to further optimize thedis-tribution network and provide flexibility in processingorders thatare tailoredto thecustomer’sneeds. Toensurethat its customer needs are understood and fully met, theDDC is actively engaged with DLA’s National AccountManagers,CustomerFacingPersonnel,andAccount teams.

Distribution Planning and Management System (DPMS): DPMS is a DLA transformational initiative to improve themanagementofproductmovements fromvendorsanddis-tributioncenterstocustomers.TheDPMSprogramreachedfull operational capability at the end of FY 2006 and hasresulted in better coordination, visibility, and precise stockpositioning. SinceFebruary2007, allOCONUS shipmentsare being processed by DPMS; and as of June 2007, 11%of all DLA product movement contracts were awarded toDPMSvendors.ByAugust2008, theuseofDPMSwillbemandatory for all new DLA product movement contracts.

Enterprise-wide Transportation System: DLAwill achieveeconomies and efficiencies by consolidating and centraliz-ingthemanagementandservicesforsevenofitseightsupply




systems, and provides the capability to track passengersand cargo moving through the Defense TransportationSystem (DTS). IDE is a net-centric, service-orienteddata capability that provides access to supply chain andtransportation data across the DLA and USTRANSCOMlandscape. IGC allows the legacy components ofGTN to be retired and the newer ones to be expanded.

chains(Energyhastransportationrequirementsuniquetoitssupplychain). Whencompletednear theendofFY2007,thissystemwillestablishasinglepointofcontactforvendors,supplychain representativesandeventually thecarriers. Itwill improve the reliability and predictability of transpor-tation delivery time and other services by standardizingbusinesspracticesanddrivingdowntransportationleadtime.

Defense Transportation Coordination Initiative (DTCI):DTCI isaContinentalUnitedStates (CONUS) freight initia-tivethatfocusesonreducingcycletimeandimprovingpre-dictabilitythroughoptimizationandincreasedcoordination.DTCIwillprovideDoD,DLAandtheDDCwithgreaterinsightonshipmentconsolidationandtransportationcostreductionopportunitiesthroughouttheDoDtransportationenterprise.This initiative contributes to the DoD goal to integrate theDepartment’s logistics tomake itmore responsive towarf-ighterreadinesswhileachievinggreaterefficiency.InAugust2007acontractwasawardedfortheselectionofanationwidetransportationcoordinator.DTCIisanticipatedtoberolledouttoDDCDistributionCentersduringFYs2008and2009.

Augmentation of Passive Radio Frequency Identifi cation (RFID) Portals:TheDDCinstalledpassiveradiofrequencyidentification portals across its global logistics network.The current initiative to expand DDC’s existing passiveRFID infrastructure will bring DDC into compliance withthe Department of Defense policy to make DoD distri-bution centers capable of receiving passive RFID tagsas suppliers begin tagging their products in compliancewith acquisition regulations. All 19 of DDC’s distributioncenters in the continental United States were equippedwithRFIDportalsbySeptember2006.PortalinstallationatDDC’s sevenoverseas siteswascompleteduringFY2007.

Integrated Data Environment (IDE) / Global Transportation Network (GTN) Convergence (IGC): IGCisaDLAandUnitedStatesTransportationCommand(USTRANSCOM)system-of-systemspartnershipinitiativethatwillprovideasinglepointofaccesstodecisionsupportrelateddataandinformationwithinDLAandUSTRANSCOMandbetweenDLA/USTRANSCOMandexternalsystems. Theconver-genceof these twoprogramswillcreatea single face tosystems requiring access to common and authoritativedata,businessstandards,andinformationfromDLAandUSTRANSCOM.GTNisthecurrenttransportationinfor-mation system that warehouses and integrates informa-tionfrommultipletransportation,distributionandsupply


Inventory Record Accuracy: This performance metricmeasures the accuracy of inventory records using statis-tical sampling techniques, which are performed semi-annually. Starting in FY 1999, DLA incorporated estab-lished DoD stratification and tolerance levels into theinventory sampling methodology. The DoD plan takesinto consideration item characteristics such as dollarvalue and provides a means to focus resources com-mensurate with the significance of the errors found.

The FY 2007 goals for inventory accuracy were: 99%for items in thehighdollar strata (CategoryA) and95%for the remaining three strata. Our record accuracy forthehighdollarCategory (A)was98%;Category (B)was96%;Category(C)was97%;andCategory(D)was97%.

CAT DCAT A CAT B CAT C

Inventory Accuracy%AccuracyofInventoryRecords

99%95% 95% 95%

98% 96% 97% 97%

FY07GOAL FY07ACTUAL

Category A: UnitPrice>$1,000

Category B: UnitofIssueNotEqualtoEachOROn- HandBalance>50ANDExtendedDollar Value<$50,000ORActivity>50peryear

Category C: On-HandBalance<50ANDDateofLast Inventory>24Months

Category D: AllOthers




.

Maintaining Process Performance: All performancemetrics were within the DLA goals and the continuedoperational streamlining and reengineering of theworkplaces had a positive impact on performance: FY 07 FY 07 Goal Actual

HighPriorityRequisitions(Shippedin) 1Day 0.7Day

RoutineRequisitions(Shippedin) 1Day 1Day

NewProcurementReceipts(Storedin) 1Day 0.7Day

CustomerReturns(Storedin) 3Days 2.1Days

DenialRate(OrderedMaterielUnavailable) 0.5% 0.45%

LocationAccuracy(Materiellocationsverified) 99.5% 99.8%

Financial Performace Measures Wemeasure the effectivenessof programbudgeting andexecution with unit cost performance measures. Thefollowingtabledepictsthedistributionunitcostresultsforprocessingandstoragecostrates.

Unit Cost Results FY 07 Goal FY 07 Actual

UnitCost-TotalCompositeProcessingRate $21.82 $23.93

UnitCost-CoveredStorage $3.12 $3.83

The Unit Cost-Total Composite Processing Rate measuresprocessing costs (direct, indirect, and applied overhead)relative to the number of line items (receipts and issues)processed.

TheUnitCost-CoveredStoragemeasuresthecosts(direct,indirect,andappliedoverhead)toprovidecoveredstoragetothecubicfootageused.

Actualprocessingunitcostwasabovegoalby$2.11.Actualprocessingworkloadwas22.7millionlinesor0.6millionlineslessthanouroriginalFY2007estimate.Actualpro-cessing cost (without Second Destination Transportation)was $543 million, or $72.7 million above plan.

Actual covered storage unit cost was higher than thegoalduetoareducedlevelofcoveredstorageworkload.Actual covered storage workload was 73 million cubicfeetor14millioncubicfeetlessthanthe87millioncubicfeet thatwas forecasted. Actual storagecostswere$318millionor$9millionless thanthe$309millionbudgeteddue to decreased facility maintenance obligations.

Financial Results

The Net Cost of Operations, which includes costs notrecovered by the Defense-wide Working Capital Fund(military construction depreciation, imputed expenses,and accounting adjustments), reflects an excess ofexpenses over revenue of approximately $203 million.This losswasprimarily related to theprocessingbusinesswhere workload declined significantly below forecastedlevels. Because of the fixed and overhead components,thebusiness area couldnot fully reduce costs enough tooffset the decline in revenue caused by lower workload.

By exceeding the standards for processing both HighPriority and Routine requisitions, the DDC continued toprovidetimely,qualitysupporttoitscustomers.Theop-erationalsupportprovidedtoboththeCentralCommandandtheMilitaryServiceMaintenanceDepotswas instru-mentalinmaintainingthehighstateofcombatequipmentreadiness experienced during FY 2007. In addition totimelydeliveryofmateriel,theDDCcontinuestoexceedthe goals for processing receipts and inventory integrity.ThisensuresthatAmerica’swarfighterscontinuetogettheright itemat the rightpriceat the right time...every time.

The FY 2007 performance sample inventory shows thatgoalsweremetinthreeofthefourinventoryaccuracycate-gories.However,theCategory“A”(highdollarvalueitems)goalwasnot reachedbecause an insufficient numberofsampleinventorieswereperformed.InFY2008DDCwillinstituteanaggressiveschedulefortheconductofsampleinventoriesforCategory“A”itemsateachofitsDistributionCenters.TheDDCisalsoprovidingcontinuoustrainingintherelateddistributionresponsibilitiesandprocesses,aswell.

NewProcurementReceipts(Storedin) 1Day 0.7Day

DenialRate(OrderedMaterielUnavailable) 0.5% 0.45%




DistributionConsolidated and Combined Financial StatementsAs of and for the Years Ended September 30, 2007 and 2006



UNAUDITED


Distribution


2007 2006

ASSETS (Note 2)

Intragovernmental:


Total Intragovernmental Assets 50,813 156,040

Accounts Receivable, Net (Note 4) 1,409 871

General Property, Plant, and Equipment, Net (Note 8) 600,165 580,574

Other Assets (Note 5) 131 176

TOTAL ASSETS 652,518 737,661


Intragovernmental:




Accounts Payable (Note 10) 53,475 89,253 Military Retirement and Other Federal



TOTAL LIABILITIES 363,005 399,281

NET POSITION

Cumulative Results of Operations – Other Funds 289,513 338,380

TOTAL NET POSITION 289,513 338,380

TOTAL LIABILITIES AND NET POSITION $ 652,518 $ 737,661




UNAUDITED


Distribution


2007 2006

PROGRAM COSTS

Gross Costs $ 1,599,309 $ 2,564,380


Net Program Costs 203,436 14,008

NET COST OF OPERATIONS $ 203,436 $ 14,008




UNAUDITED


Distribution


2007 2006


Beginning Balances $ 338,380 $ 83,128



Transfers-in/out without reimbursement 341,500 -


Transfers-in/out without reimbursement (+/-) (251,961) 196,871


Total Financing Sources 154,568 269,260

Net Cost of Operations (+/-) 203,436 14,008

Net Change (48,868) 255,252

Ending Balances 289,512 338,380



Appropriations received 15,500 25,000


Ending Balances - -

NET POSITION $ 289,513 $ 338,380




UNAUDITED

DEFENSE LOGISTICS AGENCY WORKING CAPITAL FUNDDistribution


2007 2006



Budget authority:

Appropriation $ 15,500 $ 25,000

Contract authority 1,622,228 2,452,624


Earned

Collected 1,447,433 2,482,910

Change in receivables from Federal sources (104,934) 69,683


Without advance from Federal sources (28,977) (53,160)

Subtotal 2,951,250 4,977,057

Nonexpenditure transfers, net, anticipated and actual 341,500 -


Total Budgetary Resources $ 1,622,228 $ 2,452,624




UNAUDITED

DEFENSE LOGISTICS AGENCY WORKING CAPITAL FUNDDistribution


2007 2006



Reimbursable $ 1,622,228 $ 2,452,624




Unpaid obligations, brought forward, October 1 473,195 721,862


from Federal sources, brought forward, October 1 (264,147) (247,623)

Total unpaid obligated balance 209,048 474,239




from Federal sources (+/-) 133,910 (16,523)


Unpaid obligations 546,987 473,195


from Federal sources (+/-) (130,236) (264,147)

Total unpaid obligated balance, net, end of period 416,751 209,048

Net Outlays:

Gross outlays 1,548,436 2,701,292


Net Outlays $ 101,003 $ 218,382



Defense Reutilization and Marketing Activity Group Overview





ReutilizationandMarketingActivityGroup-Overview


Defense Reutilization and Marketing Activity Group

The Defense Reutilization and Marketing Activity GroupoperatesthroughtheDefenseReutilizationandMarketingService (DRMS), headquartered in Battle Creek, MI, and104DefenseReutilizationandMarketingOffices(DRMOs)locatedonmilitaryinstallationsthroughouttheworld.Thegroup’s mission is to coordinate the reuse of excess andsurplusDoDproperty.DRMOsreceive,classify,segregate,demilitarize,accountfor,anddisposeofexcessmaterielinaccordancewithallapplicablelawsandregulations.ThereutilizationofexcessmaterielbyDoDcustomersreducestheirneedtopurchasenewmateriel.InFY2007,materielwithanacquisitionvalueof$25billionwas turned in toDRMS,and$2.2billionwasreutilizedwithinDoD.DRMSalso oversees the demilitarization and disposal of theremainingpropertythroughtransfers,donations,andsales,or its ultimate disposal - as in the case with hazardouswaste. The business services provided by this activitygroupgeneratedrevenuesofapproximately$253millioninFY2007.Byyear’send,thisactivitygroupemployed1,276civilian,9activeduty,and228reservemilitarypersonnel.

Mission

The mission of the Defense Reutilization and MarketingActivity Group is to manage the reutilization, transfer,donation,andsaleofmilitarypersonalpropertyaswellasthedisposalofhazardouswaste itemsno longerneededfornationaldefense.TheDRMSmissionmustbeaccom-plishedinamannerthatsafeguardsnationalsecurityinacostefficientandoperationallyeffectivemanner,conservesvaluable resources, and protects the environment.

Strategic Goals

The strategic goals established by the Reutilization andMarketing Activity Group are consistent with the goalscontained in the DLA Strategic Plan. These goals areachieved through a series of supporting objectives andinitiatives designed to improve and reengineer businesspracticestoensureefficient,effective,andbest-valueop-erationalsupport.

The DoD disposal business model calls for a balancebetweenmaximizingtheuseofpropertywithanabsoluterequirement toprevent it fromgetting into thehandsof

unauthorizedrecipients.Accordingly,DRMS’goalsaretocontinuetoprovidequalitysupporttothewarfighter,mitigaterisks to national security by strengthening the disposalprocessandinventoryaccountability,andensuretaxpayerdollars are spent appropriately. DRMS is committed toeliminating the release of potentially harmful property tothepublic.DRMScontinuestobalancethemaximumre-utilizationofpropertywithcontrolsoverpotentialvulnera-bilities,evenifitresultsinreducedrevenuesandincreasedcosts.

In short,DRMS“PR0VES” it is theproviderofchoice fordisposalsolutionsby:

P reventingunauthorizedreleases;

R eutilizingasmuchaspossibleDRMS addsvaluetotheAmericantaxpayer.Byensuring0 defects;

V erifyingeverything;

E xecutingitsoperationsflawlessly;and

S ellingonlywhatshouldbesold,itprotectsNational Security.

Program Intiatives and Accomplishments

Reduced Concurrent Procurement: Numerous actionsweretakentoreducethefrequencyofDoDorganizationsprocuringthesameitemstheyaredisposingasexcessbutstill in serviceable condition. Specific actions included:

Conductedon-goingeducation,training,andworkinggroupsessionswithseniorMilitaryServicerepresen-tatives to increase reutilization and determine howexistingsystemscaninterfacewithDLA’ssystems;

UpdatedsystemstoallowDLAactivitiestoautomati-callymatchDRMSexcesspropertyassetsagainstDLAinventoryretentionlevels;

Providedelectronicnotificationstopastcustomersofavailableproperty;

Featuredscrollingphotographsofhighdollarand/orunique good condition items on the DRMS R/T/Dwebsite;and

Implementedanadditional2-dayscreeningopportu-nity forLocalStockNumberandBatch lotpropertythat has been reviewed and cleared for sale at theControlledPropertyCenters(CPCs).

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•

•

•




These actions resulted in an annual increase of 12%in the acquisition value of excess property reutilized/recouped as compared to FY 2006. Overall the re-utilization rate for the best quality property increasedfrom an average of 12,900 lines per month in FY 2006to an average of 13,800 lines per month in FY 2007.

Controlled Property Centers (CPCs): The four CPCsreceive, thoroughly review, and research property witheitherspecifiedLocalStockNumbersorpropertyconsoli-dated into batch lots from designated feeder sites. Aftercompleting this identification process, the property goesthrough the appropriate disposition channel to mitigatethe release of unauthorized property to the public.DuringFY2007,theCPCsreceived12,000batchlots.Ofthese, 7,300 batch lots were processed, 278,000 lines ofproperty were inspected, and 124,000 lines of propertyweredeterminedinappropriateforrelease.Consequently,throughCPCprocessing,948,000piecesofpropertywereremoved from sale to the public and properly disposed.

Controlled Property Verifi cation Offi ce (CPVO): In acontinuousefforttoensuresecurityofthenationaldefenseandsafeguardthepublic,theCPVOwasestablished.Thisoffice monitors the Commercial Venture (CV) website todeterminewhethercontrolledpropertyisbeingofferedforsale.DRMSverificationefforts(websitereviewsbyCPVOandcontractor,automatedintegrationofdisparatedatabasesidentifyingcontrolledandsensitiveitems,andestablishingCPCs)successfullyremoved4.3millionpiecesofpropertyfromsalesworld-wide;approximately477,000pieceswereremovedasaresultofitsCVwebsitereviews.Additionally,the CPVO submitted approximately 19,000 demilitariza-tioncodechallenges to theDefenseLogistics InformationService Demilitarization Coding Management Office toprevent theunauthorized releaseofpotentially significantmilitary equipment/items. Of these challenges, 13,000were reviewed and 10,800 were upheld, thus preventingthe inappropriate saleofproperty to thepublic. Greateremphasishasbeenplacedonreviewingpropertyandiden-tifyingcontrolleditemsprior totheitembeingtransferredto the sales partner. TheCPVOalso researches changesto regulations that may affect an assigned demilitariza-tion code and submits a code challenge, as appropriate.

Commercial Venture (CV) Contract Changes: DRMSmodifieditssalescontracttoincludefinancialdisincentivesifunauthorizedpropertyissoldtothegeneralpublic,andincentivesforreturningallcontrolledpropertydeterminedto be unauthorized for sale. Any additional items in theCVpossessiondeemed“unsafe”tosellarealsoreturnedtotheGovernment.DRMSmeasurestheCVcontractor’sper-formancethroughconstantreviewsandauditsofpropertyoffered for sale and data reports received from the CVcontractorsandtheCPVO.ResultsarereportedtoDRMSmanagement on a monthly basis. Because the CV con-tractormet thecontract incentives,nofinancialdisincen-tiveswereleviedduringFY2007;whilethefinancialincen-tives totaledmore than$1.8million for the sameperiod.

Safeguarding Excess/Surplus Property:DRMSwillspendalmost $2.2 million from FY 2007 – 2011 on a prioritybasis toupgrade thephysical securityatDRMOs. Basedon the greatest need, seven facility projects totalingalmost$0.7millionwereexecutedinFY2007.Significantchanges also were implemented activity group-wide totighten the walk-in procedures for property removal.Consequently, DRMS ensures that authorization lettersandpotential screeners are independently verifiedbeforeproperty is released and conducts weekly site inspec-tions of contractor facilities where security risks exist.

Most Effi cient Organization (MEO): Transition to fullMEO status for stock, store and issue functions in thecontinental United States was completed in July 2006.The stand-up of the MEO has resulted in a reduced or-ganizational and physical infrastructure. The MEOoperates 21 fully staffed DRMO warehousing opera-tions compared to 68 prior to MEO implementation.

Vulnerabilities Integrated Process Team (IPT). In July2006, DRMS initiated a Vulnerability Team AssessmentProgram to review and identify vulnerabilities and risksthroughoutallofitsdisposaloperations.TheVulnerabilityIPT, comprised of nine sub-teams, conducted integratedprocess reviews and off-site conferences that examinedDRMS’ receiving, warehousing, knowledge management,demilitarization, sales, scrap, environmental, recyclingcontrolpointoperations,andreutilization/transfer/donation(R/T/D).Correctivemeasuresincludetheestablishmentof





thefourControlledPropertyCenters,astrongercomplianceassessment program, and a fully operational “job ready”trainingprogramwithjobreadytrainingstandardsinplace.

Collaborative Efforts Between DRMS and Defense Distribution Center (DDC) to Extend the Enterprise:Because DRMS and DDC have similarities in the stock,store,andissuefunctions,theirjointmanagementteamisexploringopportunitiestoleveragethosesimilaritiesintoa“onestop”shoppingexperienceforacquiringanddisposingofsurplusandexcessproperty.UtilizingtheconceptsofLeanSixSigma,themanagementteamdevelopedaflowchartthatmappedtheDRMSandDDCvaluestreamtorealigntheDRMOprocesseswiththecurrentoperationswithinDDC.

Developing Waste Disposal Standards for Iraq:DRMS-workingwithDoD,U.S., and international regulationsandguidance (including tools such as technical guidancedocumentsavailablefromtheUnitedNationsEnvironmentalProgram’sBaselConventionRegionalCenters) - isdevel-opingwastedisposal and treatment standards specific toitsoperations in Iraq. Thegoal is to reduce thevolumeof materiel that DoD must export for disposal andincreaseopportunitiesforin-countrytreatment, includingland disposal. These standards should be available foruse by 30 October 2007, and will be forwarded to theMulti-National Forces - Iraq for their consideration.

Supporting DRMO Operations in Iraq, Afghanistan, and Kuwait:TheRequestforProposalandStatementofObjectivesforreceiptanddistributionfunctionsattheDRMOsinIraq,Afghanistan,andKuwaitwereissuedtoindustryduringthesecondquarterFY2007.AfterthecontractsareawardedinFY2008,DRMSwilloverseetheworkperformanceusingAcceptablePerformanceLevelsandmetricstoensurethatthecontractormeetscontractrequirements.Thecontrac-tor’sperformancedatawillbemonitoredandreportedinthe Contract Performance Assessment Reporting System.Formal reportcardswillbe issuedyearlybasedon inputfromthecustomersandDRMSrepresentatives.Thiseffortwill improveoperationsbybringingcommercialcapabil-ity to the DRMO yard, demilitarization capability to theforwardoperatingbases,andscrapremovalbycontractor.

Enhanced DRMS Intern Program: Faced with an agingworkforce, DRMS utilizes an Intern Training Program to

ensurethat theknowledgebaseis transferredtoatrainedemployeepriortoanindividual’sretirement.Theprogramincludescompletionofmandatoryformaltrainingcourses,on-the-job training, cross training, and rotational trainingwithina2-yearperiod. Each intern isassigned tooneofthree disciplines (disposal, environmental, or contract-ing)withspecificprogramdevelopmentrequirements:thevarioustrainingcourses,prerequisites,andlearningobjec-tives. Each intern is also assigned to a targeted positionwithestablishedprogressioncriteriathatmustbemetpriorto assigning the intern to a permanent position. DRMShired16internsinFY2006andseveninternsinFY2007.

Program Performance Indicator

Reutilization/Transfer/Donation (R/T/D) rate: Thisindicator represents the aggregate number of line itemsof the property reutilized, transferred, and donatedexpressedasapercentageofthetotallineitemsdisposed.The indicatorapplies to theavailableassets thatareeco-nomically reused. It addresses disposal via reutilizationby another defense customer, transfer to another FederalAgency, or donation to an eligible state or local govern-mentor toanon-profitorganization. R/T/Ddispositions,as a percentage of total dispositions, indicate supportprovided to DoD, Federal government, and state andlocal agencies. Customer utilization of these programsincreases troop readiness,avoidsnewprocurementcosts,andprovidesneededitemstoagenciesatnocost. InFY2007,DRMSsuccessfullyreutilized,transferred,ordonatedover192,500lineitemsofexcesspropertyforanR/T/Drateof about 17%,which exceeded the goal of at least 15%.

Operations Enduring Freedom and Iraqi FreedomReutilization: Total reutilization supporting thesetwo contingencies surpassed 74,000 line itemswith a value of $528.2 million. Examples of thetypes of items issued in support of these opera-tions include vehicles, tanks, trucks, and body armor.

Computers for Learning: DRMS is responsible foroverseeing the transfer of computers to schoolsin support of the DoD’s Computers for LearningProgram. In FY 2007, over 4,300 schools partici-pated in the program, and computers worth over$23 million in acquisition value were transferred.

•

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R/T/Dwill continue to increase as apercentageof totaldispositionsby:

• Receiving

• Reutilization/Transfer/Donation(R/T/D)

Thesemeasuresrecognizethatallpropertyreceivedincursprocessing costs; that certain types of excess propertyrequire costly special handling, such as demilitarization,withoutgeneratinganyeconomicreturntoDoD;andthatpartnershipswiththeprivatesectorincurcosttothegovern-ment. TheDRMSunitcoststructure isflexible toremainviableduringperiodsof significantprocesschanges. Thetablebelowdepictstheunitcostresultsforeachcategory.

Marketing high dollar, good condition items throughscrollingphotographsontheR/T/Dwebsite.InFY2007,DRMS received 308 requisitions for property with anoriginalacquisitionvalueof$22.9million.

Pushing (to past customers) inventory alerts of theavailability of same/similar items that they previouslypurchased.InFY2007,DRMSreceivedover7,000req-uisitionsforpropertywithanoriginalacquisitionvalueof$86million.

Implementing changes that will improve the informa-tiononavailableproperty.Thisincludesprovidingmorephotographsonthewebandwritingbetterdescriptionsoftheproperty.

WorkingcloselywithDLAandDoDsupplycenters tofillbackordersandnewpurchaserequests.

Establishing and implementing automated tools thatwill provide priority screening for item managers.

Testing initiatives to provide automatic notification toitemmanagersofhighdollarvalue,bestconditionitemsreceived.

Testing longer screening timeframes for higher qualityproperty.

Promoting the additional 2-day screening opportu-nity forLocalStockNumber itemsandbatch lots thatwere previously screened and cleared for sale. In FY2007, DRMS received 434 requisitions for propertywith an original acquisition value of $129,000.

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FinacialPerformanceMeasures FY07 FY07 Goal Actual Costincurredperline itemofuseableproperty received–Receiving $25.394 $34.165

Costincurredperlineitem– Reutilization/Transfer/ Donation(R/T/D) $253.851 $195.618

Costincurredperlineitem– UseableSales $30.502 $28.678

Costincurredperpound– HazardousWasteDisposal $0.186 $.195

Costincurredperpound– Recycling/Disposal $.044 $.052

TheReceivingunitcostgoalisbasedonthetotalcostas-sociatedwiththestock,store,andissue(logistics)ofusableproperty divided by the number of line items of usablepropertyreceived.

The FY 2007 Useable Property Received unit cost washigherthantheplanby34%.Therewere3.3millionlineitemsactuallyreceivedversus4millionlineitemsplanned(an18%decrease).

BasedontheBRACrecommendations,DRMSanticipatedlineitemsofdormantstocktobetransferredfromDDCinFY2007,butthisisrescheduledtoFY2008.Inaddition,thecostofprocessingworkloadwashigherthanplanned.

TheReutilization/Transfer/Donationunitcostgoaliscal-culated from the total cost associated with reutilizing,

FINANCIAL PERFORMANCE MEASURES

We measure the effectiveness of programbudgeting and execution with unit cost perfor-mance measures. Cost is defined as obligationsincurred in support of or attributed to the serviceperformed.DRMSismeasuredonfiveunitcostgoals:

• UseableSales

• HazardousWaste(HW)Disposal

• Recycling/Disposal.





transferring,anddonatingexcesspersonalpropertydividedbythelineitemsofpropertydisposedviaR/T/D.Theunitcost forR/T/Dwas23%lower thanplanned. Actual lineitemsdisposedbyR/T/Dwere193,000versus210,000lineitems planned. DRMS instituted more rigorous propertyaccountability requirements in response to GovernmentAccountability Office concerns. More property wasdowngraded to scrap and less entered the R/T/D path ofdisposal. Additionally, total costs associated with R/T/Dwere decreased for similar property-related reasons, asmoreitemsweredeterminedtobescrapanddidnotgointotheR/T/Darea.

Useable Sales unit cost goal is calculated from all costsassociated with the public sales of surplus useablepersonal property divided by the number of line itemsof property sold. The unit cost for Useable Sales was6% below the goal in FY 2007. The majority of useableproperty is sold through a Commercial Venture partner-ship;andwhile thereonly362,804 line itemssoldversus699,700lineitemsplannedforsale(a48%decrease),therewas an even greater decrease in cost (more than 51%).TheHazardousWaste(HW)Disposalunitcostgoaliscal-culated from the non-contract costs associated with en-vironmentally regulated disposal of HW divided by thenumber of pounds of HW disposed. The unit cost for

HW Disposal was above plan due primarily to decreasein workload (207 million pounds disposed versus 230million pounds planned). The disposal workload wasunder plan by 10% due to a decrease of HW propertyturned over to DRMS (some of this decrease may be theresult of the “greening efforts” of the Military Services).

TheRecycling/Disposal(R/D)unitcostgoaliscalculatedfromthecostofeitherstoringinalandfillordestructionofthosenon-hazardousitems,includingpropertythatrequiresdemil-itarizationandscrap,thatremainattheendofthedisposalprocessaswellasthecostofallrecyclingprocessesdividedbythenumberofpoundsofpropertydisposed.TheactualR/Dunitcost forFY2007was18%higher thanplanned.ThisisattributedtotheincreasedeffortsoftheControlledPropertyCenters(CPCs)toensurenounauthorizedpropertyis released to the public. As a result of these efforts,more property was downgraded to scrap and destroyed.

FINANCIAL RESULTS

The Net Cost of Operations, which includes costs notrecovered by the Defense-wide Working Capital Fund(military construction depreciation, imputed expenses,and accounting adjustments), reflects an excessexpenses of over revenue of approximately $67.1 million.


Reutilization and Marketing Consolidated and Combined Financial StatementsAs of and for the Years Ended September 30, 2007 and 2006





UNAUDITED


Reutilization & Marketing


2007 2006

ASSETS (Note 2)

Intragovernmental:

Accounts Receivable (Note 4) $ 417 $ (33)

Total Intragovernmental Assets 417 (33)

Cash and Other Monetary Assets (Note 6) 7,421 7,971

Accounts Receivable, Net (Note 4) 5,075 1,641


Other Assets (Note 5) 164 118

TOTAL ASSETS 75,294 76,575


Intragovernmental:








NET POSITION

Cumulative Results of Operations – Other Funds (31,618) (40,637)

TOTAL NET POSITION (31,618) (40,637)





UNAUDITED




2007 2006

PROGRAM COSTS

Gross Costs $ 319,970 $ 298,076

(Less: Earned Revenue) (252,889) (316,180)

Net Program Costs 67,081 (18,104)

NET COST OF OPERATIONS $ 67,081 $ (18,104)




UNAUDITED




2007 2006


Beginning Balances $ (40,637) $ (38,425)



Transfers-in/out without reimbursement (+/-) (341,500) 900


Transfers-in/out without reimbursement (+/-) 403,453 (31,366)


Total Financing Sources 76,099 (20,316)

Net Cost of Operations (+/-) 67,080 (18,104)

Net Change 9,019 (2,212)

Ending Balances (31,618) (40,637)




Other adjustments (rescissions, etc.) (+/-) - (173)


Ending Balances - -

NET POSITION $ (31,618) $ (40,637)




UNAUDITED

DEFENSE LOGISTICS AGENCY WORKING CAPITAL FUNDReutilization & Marketing


2007 2006



Unobligated balance, brought forward, October 1 $ - $ -

Budget authority:

Appropriation 3,766 1,950

Contract authority 341,104 290,405


Earned

Collected 249,060 321,589

Change in receivables from Federal sources 3,825 (5,508)


Advance received 3,701 2,341

Without advance from Federal sources 41 (3,663)

Subtotal 601,497 607,114

Nonexpenditure transfers, net, anticipated and actual (341,500) 900

Permanently not available 81,107 (317,609)

Total Budgetary Resources $ 341,104 $ 290,405




UNAUDITED

DEFENSE LOGISTICS AGENCY WORKING CAPITAL FUNDReutilization & Marketing


2007 2006



Reimbursable $ 341,104 $ 290,405

Total Status of Budgetary Resources 341,104 290,405







Obligations incurred net (+/-) 341,104 290,405

Less: Gross outlays (318,480) (295,317)


from Federal sources (+/-) (3,866) 9,172






Net Outlays:

Gross outlays 318,480 295,316

Less: Offsetting collections (252,761) (323,930)

Net Outlays $ 65,719 $ (28,614)



Document Automation & Production Service Activity Group – Overview



DocumentAutomation&ProductionServiceActivityGroup-Overview



Document Automation & Production Service

TheDocumentAutomation&ProductionService(DAPS)isresponsibleforprinting,duplicating,anddocumentauto-mationprograms.Thisresponsibilityencompassesthefullrangeofautomatedservicestoinclude:documentworkflowconversion,electronicstorageandoutput,anddistributionofhardcopyanddigitalinformation.DAPSprovidestimesensitive,competitivelypriced,highqualityproductsandservices that are either produced in-house or procuredthroughtheGovernmentPrintingOffice.DAPSmanagesitsmissionthroughaheadquarters,locatedinMechanicsburg,PA,andaworldwidenetworkof187productionfacilities.DuringFY2007,DAPSearnedapproximately$824.7millioninrevenueandemployed730civiliansatyear-end.Majorcustomerswere:AirForce(23%),Navy(28%),Army(21%),Defense Agencies (22%), and non-DoD customers (6%).

Mission

ThemissionofDAPSistoprovidebestvaluedocumentau-tomationandmanagementservicesinsupportofAmerica’sArmedForcesandFederalAgencies.DAPS’valuetoDoDischaracterizedbytwoelements.First,DAPSprovidesafullportfolioofbestvaluedocumentservicesrangingfromtradi-tionaloffsetprinting,throughon-demandoutput,toonlinedocumentservicesandworkflow.Second,DAPSactivelyfunctionsasatransformationagentmovingDoDtowardstheuseofonlinedocumentsandservices.Theseservicesinclude building libraries of digital documents to permitonlineaccess,providingmultifunctionaldevices(thatprintfromnetworks,copy,faxandscan)incustomerworkspaces,andconvertingpaperdocumentstotargetdigitalformats.

Strategic Goals

DAPSiscommittedtothefollowinggoals:

• Servingasamajorcatalystintransformingbusinessby revolutionizingdocumentautomationservices;

• Rapidly utilizing technology for agile and responsive internalbusinesssolutions;

• Aggressively pursuing partnerships with government, industry,andsuppliers;

• EnsuringtheDAPSworkforceisenabledtodeliverand sustainworld-classperformance;

• Strivingtoreducecosts,simplifyorgationalstructure, eliminateunnecessaryfacilities,andensurethat equipmentandpersonnelarecommensuratewiththe workload;and

• Aligningourprocessestofocusonimprovingthe qualityofourproductsandserviceswhilemeetingor exceedingourcustomers’deliveryrequirements.

Program Initatives and Accomplishments

Distribute and Print Service is aDAPSfielded readinessenhancementservice thatsupports theAirForceMaterielCommand’srequirementfor“hardcopy”printedtechnicalmanuals and other related documents. The Air Forcemaintainsa libraryof130,000 technicalmanuals thatarecomprisedofmorethan13millionpagesandareneededby asmanyas10,000users. Under this service, theAirForceprovidestheprintorder,distributionlist,anddigitalfiles of the required technical documents; and DAPSforwards these files to the most strategically located ofits 175 worldwide production facilities - where they areprintedandeithershippedtoorpickedupbythecustomer.

Financial Document Workfl ow (FDW) is a certifiedDAPS fielded system capable of creating, approving,storing, managing, and routing financial documentsthrough its automated workflow. FDW allows usersto process a variety of financial documents in auniform, auditable manner, in some cases withoutrequiring any manual handling. FDW reduces financialdocument creation time by approximately 50 percent.


Conversion to Digital Format: This performance metricmeasures the number of pages that were convertedto digital format during the year. Conversions are ac-complished either in-house or by contract and includehardcopy to digital, system output to digital, and fromoneformofdigitaltoanother.Actualproductionof38.3-


DocumentAutomation&ProductionServiceActivityGroup-Overview


UnitCostResults FY07Actual

UnitCostperIn-HouseProductionUnit .0559 .0451

FY07Goal

Financial Performance Measures

In addition to program performance measures, DAPSmeasures the effectiveness of program budgeting andexecution with a unit cost performance measure. Itmeasuresthetotalunitsproducedrelativetothetotalcosttoproducethoseitems.

DAPS produced 7% more in-house units than planned(2,819 million actual versus 2,638 million planned); andactualin-housecostswerealmost14%lowerthanplanned($127.3millionactualversus$147.4millionplanned). Byincurring significantly less cost, while producing slightlyfewerunits,DAPSwasable tobetter itsunitcostgoalbymorethan19%.

Financial Results

The Net Cost of Operations, which includes costsnot recovered by the Defense-wide Working CapitalFund (military construction depreciation, imputedexpenses, and accounting adjustments), reflects anexcess of expenses over revenue of less than $77,000.

million pages was 42% below the goal to convert 66.4million pages. The primary reason for the below planresult was a decrease in the number of procurement so-licitationpagesprocessed throughProcurementGateway.

Product Rework: In-house rework percentage is usedto measure the quality of delivered products. This per-formance metric is calculated by dividing revenue lostfrom orders not accepted by the total in-house pro-duction revenue. During FY 2007, DAPS achieved arework percentage of 0.25, exceeding its goal of 0.27%.

Customer Satisfaction: ThisperformancemetricmeasuressatisfiedcustomersasthepercentageofcustomersrankingDAPSperformanceas“satisfied”or“verysatisfied.”DAPSusesasurveyprofessionallypreparedandadministeredbyanindependentcommercialentitytodetermineanoverallcustomer satisfaction rating. DAPS achieved a customersatisfaction ratingof97% forFY2007,exceeding itsgoalof90%.

On-Time Delivery (In-house Production):Thisperformancemetricmeasuresthetimelinessofcustomerordercomple-tion.TheperformancemetriciscalculatedbydividingthetotalnumberofordersfilledontimebyaDAPSownedandoperatedproductionfacility(in-house)bythetotalnumberofordersfilledbythese facilities. DAPSachievedanon-timedelivery rateof 99.22%, exceeding its goal of 98%.


Document Automation & Production ServiceConsolidated and Combined Financial StatementsAs of and for the Years Ended September 30, 2007 and 2006





UNAUDITED




2007 2006

ASSETS (Note 2)

Intragovernmental:



Cash and Other Monetary Assets (Note 6) - 4,129

Accounts Receivable, Net (Note 4) 159 233

Inventory and Related Property, Net (Note 7) 5,132 8,705


Other Assets (Note 5) 1,495 (3)

TOTAL ASSETS 21,915 26,949


Intragovernmental:





Military Retirement and Other Federal


Other Liabilities (Notes 12 & 13) (55,369) (57,734)


NET POSITION

Cumulative Results of Operations – Other Funds (10,539) (5,143)

TOTAL NET POSITION (10,539) (5,143)





UNAUDITED




2007 2006

PROGRAM COSTS

Gross Costs $ 824,783 $ 352,905


Net Program Costs 77 (3,433)

NET COST OF OPERATIONS 77$ (3,433)$




UNAUDITED




2007 2006


Beginning Balances $ (5,143) $ (9,611)

Beginning Balances, as adjusted (5,143) (9,611)


Transfers-in/out without reimbursement (+/-) - 19


Transfers-in/out without reimbursement (+/-) (10,518) (4,204)



Net Cost of Operations (+/-) 77 (3,433)

Net Change (5,396) 4,468

Ending Balances $ (10,539) $ (5,143)




UNAUDITED

DEFENSE LOGISTICS AGENCY WORKING CAPITAL FUNDDocument Automation & Production Service


2007 2006



Unobligated balance, brought forward, October 1 $ (30,820) $ (35,476)

Recoveries of prior year unpaid obligations 161 -

Budget authority:

Contract authority 2,824 3,118


Earned

Collected 351,327 351,474

Change in receivables from Federal sources 1,413 129


Advance received (859) 197

Without advance from Federal sources 4,274 115

Subtotal 358,979 355,033

Nonexpenditure transfers, net, anticipated and actual - 19

Permanently not available (2,607) 6,114





UNAUDITED

DEFENSE LOGISTICS AGENCY WORKING CAPITAL FUNDDocument Automation & Production Service


2007 2006



Reimbursable $ 349,561 $ 356,510

Subtotal 349,561 356,510


Apportioned (23,848) (30,820)

Subtotal (23,848) (30,820)










Less: Recoveries of prior year obligations, actual (161) -


from Federal sources (+/-) (5,687) (243)






Net Outlays:



Net Outlays $ (10,518) $ (4,185)

The accompanying notes are an integral part of these statements



GENERAL FUND

Consolidated and Combined Financial StatementsAs of and for the Years Ended September 30, 2007 and 2006

GENERAL FUND


UNAUDITED


DEFENSE LOGISTICS AGENCY GENERAL FUND


2007 2006

ASSETS (Note 2)

Intragovernmental:

Fund Balance with Treasury (Note 3)

Entity $ 725,689 $ 783,763

Accounts Receivable (Note 4) 17,933 7,945


Accounts Receivable, Net (Note 4) 268 365


Other Assets (Note 5) - 562

TOTAL ASSETS 1,138,620 1,219,241


Intragovernmental:


Other Liabilities (Note 10) 5,694 5,274




Environmental and Disposable Liabilities (Note 9) 263,625 246,088

Other Liabilities (Note 10) 3,682 3,296


NET POSITION

Unexpended Appropriations – Other Funds 689,926 780,802

Cumulative Results of Operations – Other Funds 152,273 160,823

TOTAL NET POSITION 842,199 941,625




GENERAL FUND

UNAUDITED




2007 2006

PROGRAM COSTS

Gross Costs $ 704,110 $ 377,072


Net Program Costs 649,978 350,227

NET COST OF OPERATIONS $ 649,978 $ 350,227


GENERAL FUND


UNAUDITED




2007 2006


Beginning Balances $ 160,824 $ (116,351)




Transfers-in/out w ithout reimbursement (+/-) (98,526) (71,901)

Imputed f inancing from costs absorbed by others 2,078 2,205

Other (+/-) - 68,513

Total Financing Sources 641,427 627,403

Net Cost of Operations (+/-) 649,978 350,228

Net Change (8,551) 277,175



Beginning Balances 780,802 688,786



Appropriations transferred-in/out (+/-) 11,012 (8,266)

Other adjustments (rescissions, etc.) (+/-) (10,335) (16,322)



Net Change (90,876) 92,017


NET POSITION $ 842,199 $ 941,627



GENERAL FUND

UNAUDITED

DEPARTMENT OF DEFENSEDEFENSE LOGISTICS AGENCY GENERAL FUND


2007 2006



Unobligated balance, brought forward, October 1 $ 192,244 $ 160,922

Recoveries of prior year unpaid obligations 15,209 48,770

Budget authority:

Appropriation 646,322 745,191


Earned

Collected 13,297 20,470

Change in receivables from Federal sources 9,807 6,907


Without advance from Federal sources 3,813 -

Subtotal 673,239 772,568

Nonexpenditure transfers, net, anticipated and actual 11,012 (8,266)

Permanently not available (10,336) (16,321)



GENERAL FUND


UNAUDITED

DEPARTMENT OF DEFENSEDEFENSE LOGISTICS AGENCY GENERAL FUND


2007 2006



Direct $ 634,841 $ 738,065

Reimbursable 26,541 27,363

Subtotal 661,382 765,428


Apportioned 185,686 108,488

Subtotal 185,686 108,488

Unobligated balance not available 34,300 83,757


















Net Outlays:



Net Outlays $ 705,073 $ 608,751



Notes to the Consolidated and Combined Financial StatementsAs of and for the Years Ended September 30, 2007 and 2006


GENERAL FUND

GENERAL FUND


Note 1. Significant Accounting Policies

A. Basis of Presentation

Thesefinancialstatementshavebeenpreparedtoreportthefinancialpositionandresultsofoperationsof theDefenseLogisticsAgency(DLA)GeneralFund(GF),asrequiredbytheChiefFinancialOfficersActof1990,expandedbytheGovernmentManagementReformAct of 1994, andotherappropriate legislation. The financial statements havebeenprepared fromthebooksandrecordsofDLA inac-cordancewiththeDepartmentofDefense(DoD),FinancialManagementRegulation(FMR),theOfficeofManagementand Budget (OMB) Circular A-136, Financial ReportingRequirements, and to the extent possible generallyaccepted accounting principles (GAAP). Effective 4thQuarter, Fiscal Year (FY) 2006, DoD no longer publishesconsolidating/combining financial statements. The ac-companyingfinancial statements account for all resourcesfor which DLA is responsible, unless otherwise noted.

Informationrelativetoclassifiedassets,programs,andopera-tionsisexcludedfromthestatementsorotherwiseaggregat-edandreportedinsuchamannerthatitisnotdiscernable.

TheDLAisunabletofullyimplementallelementsofGAAPandtheOMBCircularA-136duetolimitationsofitsfinancialandnonfinancialmanagementprocesses and systems thatfeedintothefinancialstatements.TheDLAhasdeployedafullyintegratedEnterpriseResourcePlanning(ERP)systemtoamajorportionofitsbusiness.TheEnterpriseBusinessSystem(EBS)reachedfulloperationalcapacityinJuly2007and is capable of fully supporting financial transactionsandofdeliveringGAAPfinancialstatements.However,aportionoftheinformationfedtoEBSstillderivesitsreportedvaluesandinformationformajorassetandliabilitycatego-rieslargelyfromnonfinancialsystems,suchasinventoryandlogistic systems. These systemsweredesigned to supportreporting requirements formaintainingaccountabilityoverassets and reporting the status of federal appropriationsrather than preparing financial statements in accordancewith GAAP. The DLA continues to implement processand system improvements addressing these limitations.

TheDoDcurrentlyhas several auditor identifiedfinancialstatement material weaknesses. Of these the DLA GF

has the following: (1) Financial Management Systems,(2) Intragovernmental Eliminations, (3) UnsupportedAccounting Entries, (4) Fund Balance with Treasury(FBWT), (5) Environmental Liabilities, (6) GeneralProperty,Plant,andEquipment,and(7)AccountsPayable.

B. Mission of the DLA

TheDLA’sprimarymissionistoprovidebestvaluelogisticsintegratedsolutionstomeettheneedsofAmerica’sArmedForces and other designated customers in peace and inwararoundtheclock,aroundtheworld. Supportbeginswithjointplanningforpartsusedinnewweaponssystems,extendsthroughproductionandcontractsupport,distribu-tionandwarehousing,andconcludeswiththedisposalofmateriel that isobsolete,wornout,orno longerneeded.

The DLA provides supply support, technical/logisticsservicesandqualitysupporttoallbranchesoftheMilitaryandothernonDoDcustomers.Theservicesprovidedfallinto the following activity groups: Supply Management,DefenseDistributionCenter (DDC),DefenseReutilizationandMarketingService(DRMS),andDocumentAutomationand Production Service (DAPS). Supply Managementis comprised of NonEnergy and Energy. NonEnergysupply is further divided into the following supplychains: Clothing and Textiles, Medical, Subsistence,ConstructionandEquipment,Aviation,Land,andMaritime.

C. Appropriations and Funds

TheDLAGFreceivesitsappropriationsandfundsasgeneralfunds. The DLA uses these appropriations and funds toexecute itsmissionsandsubsequently reporton resourceusage.

General funds are used for financial transactions fundedby congressional appropriations including personnel,operation and maintenance; research and develop-ment; procurement; and military construction accounts.

The Operation and Maintenance appropriation financesOtherLogisticsServices,OtherLogisticsPrograms,anden-vironmentalprograms.

TheResearch,Development,Test,andEvaluation(RDT&E)appropriationfinancesthedevelopmentofmajorupgrades


GENERAL FUND

that increase the performance of existing systems, thepurchase of test articles, and the developmental testingand/orinitialoperationaltestandevaluationpriortosystemacceptance.

The Procurement Defense-Wide appropriation financesmission essential equipment, including automated dataprocessing,telecommunicationsequipmentandpassengercarrying vehicles that afford a high degree of efficiency,effectiveness,andproductivity in theaccomplishmentofDLA’slogisticsmission.

TheMilitaryConstruction(MILCON)appropriationfinancesthe construction of facilities to support DLA’s logisticsupportmissiontoincludeDoDfuelinfrastructureprojects(strategic refuelingmission, environmental concerns, andfuel operations). The DLA suballots MILCON funds tocertainentitiessuchastheU.S.ArmyCorpsofEngineers(USACE)fortheexecutionofspecificauthorizedprograms.

TheFamilyHousingappropriationfinancestheroutineop-erations,maintenanceandconstruction improvementsof201militaryfamilyhousingunits.Routineoperationandmaintenanceincludesmanagementcosts,utilitycostsandcyclical maintenance such as painting and renovations.

D. Basis of Accounting

For FY 2007, DLA’s financial management systems areunable to meet all of the requirements for full accrualaccounting. Many of DLA’s financial and nonfinancialfeeder systems andprocessesweredesigned and imple-mentedpriortotheissuanceofGAAPforfederalagencies.These systems were not designed to collect and recordfinancial informationonthefullaccrualaccountingbasisasrequiredbyGAAP.MostofDLA’slegacysystemsweredesigned to record information on a budgetary basis.

TheDoDhasundertakeneffortstodeterminetheactionsrequired to bring its financial and nonfinancial feedersystemsandprocessesintocompliancewithGAAP.OnesuchactionisthecurrentrevisionofitsaccountingsystemstorecordtransactionsbasedontheU.S.StandardGeneralLedger (USSGL). Starting in 2001, DLA undertook amajorinitiativetoimplementanERPsystem.Thiseffort,now known as EBS, became fully operational as of July2007.TheDLAplanstoexpandEBS,aUSSGLcompliantsystem,toallGFappropriationsexcept forMILCONand

a small portion of RDT&E funding. Until all of DLA’sfinancial and nonfinancial feeder systems and processesareupdatedtocollectandreportfinancialinformationasrequired by GAAP, DLA’s financial data will be derivedfrom budgetary transactions (obligations, disbursements,and collections), transactions from nonfinancial feedersystems,andaccrualsmadeformajoritemssuchaspayrollexpenses,accountspayable,andenvironmentalliabilities.

Inaddition,DoDidentifiesprogramcostsbaseduponthemajor appropriation groups provided by the Congress.Currentprocessesandsystemsdonotcaptureandreportac-cumulatedcostsformajorprogramsbaseduponperformancemeasuresasrequiredbytheGovernmentPerformanceandResultsAct.TheDoDisworkingtowardsacostreportingmethodology that meets the need for cost informationrequiredbytheStatementofFederalFinancialAccountingStandards (SFFAS) No. 4, Managerial Cost AccountingConcepts and Standards for the Federal Government.

E. Revenues and Other Financing Sources

TheDLAreceivescongressionalappropriationsasfinancingsourcesforgeneralfundsoneitheranannualormulti-yearbasis.Whenauthorizedbylegislation,theseappropriationsaresupplementedbyrevenuesgeneratedbysalesofgoodsorservices.TheDLArecognizesrevenueasaresultofcostsincurred for goods or services provided to other federalagenciesandthepublic.FullcostpricingisDLA’sstandardpolicyforservicesprovidedasrequiredbyOMBCircularA-25,UserCharges.TheDLArecognizesrevenuewhenearnedwithin the constraints of current system capabilities. Insomeinstances,revenueisrecognizedwhenbillsareissued.

TheDLAdoesnotincludenonmonetarysupportprovidedby U.S. allies for common defense and mutual securityin amounts reported in the Statement of Net Cost andthe Note 12, Reconciliation of Net Cost of Operationsto Budget. The U.S. has cost sharing agreements withothercountries. Examples includecountrieswhere thereis amutualor reciprocaldefense agreement,whereU.S.troopsarestationed,orwhere theU.S.Fleet is inaport.

F. Recognition of Expenses

Forfinancialreportingpurposes,DoDpolicyrequirestherecognitionofoperatingexpenses in theperiod incurred.However,becauseDLA’sfinancialandnonfinancialfeeder

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systemswerenotdesigned tocollectandrecordfinancialinformation on the full accrual accounting basis, accrualsaremadeformajoritemssuchaspayrollexpenses,accountspayable, environmental liabilities, and unbilled revenue.

G. Accounting for Intragovernmental Activities

Preparationofreliablefinancialstatementsrequirestheelim-inationoftransactionsoccurringamongentitieswithinDoDorbetweentwoormorefederalagencies.However,DLAcannotaccuratelyeliminateintragovernmentaltransactionsbycustomerbecauseallofDLA’ssystemsdonot trackatthetransactionlevel.Generally,sellerentitieswithinDoDprovidesummaryseller-sidebalancesforrevenue,accountsreceivable,andunearnedrevenuetothebuyer-sideinternalDoD accounting offices. In most cases, the buyer-siderecordsareadjustedtoagreewithDoDseller-sidebalances.IntraDoDintragovernmentalbalancesaretheneliminated.The volume of intragovernmental transactions is so largethat after-the-fact reconciliations cannot be accomplishedeffectivelywithexistingorforeseeableresources.TheDoDis developing long-term system improvements to ensureaccurate intragovernmental information, to include suffi-cient up-front edits and controls eliminating the need forafter-the-factreconciliations.

TheU.S.TreasuryFinancialManagementServiceisrespon-sible foreliminating transactionsbetweenDoDandotherfederal agencies. The Treasury Financial Manual Part 2– Chapter 4700, Agency Reporting Requirements for theFinancialReportoftheUnitedStatesGovernmentandtheU.S. Treasury’s Federal Intragovernmental TransactionsAccounting Policy Guide provide guidance for reportingand reconciling intragovernmental balances. While DLAisunable to fully reconcile intragovernmental transactionswithallfederalpartners,DLAisabletoreconcilebalancespertainingtoFederalEmployees’CompensationActtrans-actionswiththeDepartmentofLaborandbenefitprogramtransactions with the Office of Personnel Management.

TheDoD’sproportionateshareofpublicdebtandrelatedexpensesoftheFederalGovernmentisnotincluded.TheFederalGovernmentdoesnotapportiondebtanditsrelatedcoststofederalagencies.TheDoD’sfinancialstatements,therefore,donotreportanyportionof thepublicdebtor

interest thereon, nor do the statements report the sourceof public financing whether from issuance of debt or taxrevenues.

FinancingfortheconstructionofDoDfacilitiesisobtainedthrough appropriations. To the extent this financing ulti-mately may have been obtained through the issuance ofpublicdebt, interestcostshavenotbeencapitalizedsincetheU.S.Treasurydoesnotallocatesuchinterestcoststothebenefitingagencies.

H. Funds with the US Treasury

The DLA’s monetary financial resources are maintainedin U.S. Treasury accounts. The disbursing offices of theDefenseFinanceandAccountingService(DFAS),theMilitaryServices,theUSACE,andtheDepartmentofState’sfinancialservicecentersprocess themajorityofDLA’scashcollec-tions, disbursements, and adjustments worldwide. Eachdisbursingstationpreparesmonthlyreportsthatprovidein-formationto theU.S.Treasuryoncheckissues,electronicfundtransfers,interagencytransfers,anddeposits.

In addition, DFAS sites and the USACE Finance Centersubmit reports to the U.S. Treasury by appropriation oninteragency transfers, collections received, and disburse-mentsissued.TheU.S.TreasuryrecordsthisinformationtotheapplicableFBWTaccount.DifferencesbetweenDLA’srecorded balance in FBWT accounts and U.S. Treasury’sFBWT accounts sometimes result, and are subsequentlyreconciled.

I. Accounts Receivable

As presented in the Balance Sheet, accounts receivableincludes three categories: accounts, claims, and refundsreceivable from other federal entities or from the public.Allowancesforuncollectibleaccountsduefromthepublicare based on the Analysis of Receivables by Age Groupmethod. The DoD does not recognize an allowancefor estimated uncollectible amounts from other federalagencies. Claimsagainstother federalagenciesare toberesolvedbetweentheagenciesinaccordancewithdisputeresolutionprocedures.TheseproceduresaredefinedintheIntragovernmentalBusinessRulespublishedintheTreasuryFinancial Manual and are available for download athttp://www.fms.treas.gov/tfm/vol1/07-03.pdf.


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J. General Property, Plant, and Equipment

In FY 2006, the DoD revised the real property capital-ization threshold from $100 thousand to $20 thousand.The current $100 thousand capitalization thresholdremains unchanged for the remaining General PP&Ecategories. The DLA has not fully implemented thisrevised policy due to system and process limitations.

General PP&E assets are capitalized at historical acquisi-tion cost plus capitalized improvements when an assethasauseful lifeof twoormoreyearsand theacquisitioncostequalsorexceedstheDoDcapitalizationthresholdof$100 thousand. The DoD also requires capitalization ofimprovement costs over theDoDcapitalization thresholdof$100thousandforGeneralPP&E.TheDoDdepreciatesallGeneralPP&E,otherthanland,onastraight-linebasis.

General PP&E previously capitalized at amounts below$100thousandwaswrittenoffGeneralFundfinancialstate-mentsinFY1998.

K. Advances and Prepayments

The DoD’s policy is to record advances and prepay-ments in accordance with GAAP. As such, paymentsmade in advance of the receipt of goods and servicesare reportedasanasseton theBalanceSheet. TheDLAfollows DoD’s policy to expense and/or properly classifyassets when the related goods and services are received.

L. Other Assets

Other assets include those assets, such as civil serviceemployee pay advances, travel advances, and certaincontractfinancingpaymentsthatarenotreportedelsewhereonDLA’sBalanceSheet.

The DLA conducts business with commercial contrac-torsundertwoprimarytypesofcontracts:fixedpriceandcost reimbursable. To alleviate the potential financialburden on the contractor that long-term contracts cancause, DLA may provide financing payments. ContractfinancingpaymentsaredefinedintheFederalAcquisitionRegulations, Part 32, as authorized disbursements ofmonies toacontractorprior toacceptanceof suppliesorservicesbytheGovernment.Contractfinancingpayments

clauses are incorporated in the contract terms and con-ditions and may include advance payments, perfor-mance-basedpayments,commercialadvanceand interimpayments, progress payments based on cost, and interimpayments under certain cost-reimbursement contracts.

Contract financing payments do not include invoicepayments,paymentsforpartialdeliveries,leaseandrentalpayments,orprogresspaymentsbasedonapercentageorstageofcompletion,whichtheDefenseFederalAcquisitionRegulation Supplement authorizes only for constructionof real property, shipbuilding, and ship conversion, alter-ation, or repair. Progress payments for real property arereportedasconstruction inprogress. It isDoDpolicy torecordcertaincontractfinancingpaymentsasOtherAssets.

M. Contingencies and Other Liabilities

TheSFFASNo.5,AccountingforLiabilitiesof theFederalGovernment,asamendedbySFFASNo.12,RecognitionofContingentLiabilitiesArisingfromLitigation,definesacon-tingencyasanexistingcondition,situation,orsetofcircum-stances that involvesanuncertaintyas topossiblegainorloss.Theuncertaintywillberesolvedwhenoneormorefutureeventsoccuror fail tooccur. TheDLA recognizescontingentliabilitieswhenpasteventsorexchangetransac-tionsoccur,afuturelossisprobable,andthelossamountcanbereasonablyestimated.

Financialstatementreportingislimitedtodisclosurewhenconditionsforliabilityrecognitiondonotexistbutthereisat least a reasonablepossibility of incurring a loss or ad-ditional losses. Examples of loss contingencies includethecollectibilityofreceivables,pending,orthreatenedliti-gation, and possible claims and assessments. The DLA’srisk of loss and resultant contingent liabilities arise frompending or threatened litigation or claims and assess-ments due to events such as vehicle accidents; propertyor environmental damages; and contract disputes.

Other liabilities arise as a result of anticipated disposalcostsforDLA’sassets.Thistypeofliabilityhastwocom-ponents:nonenvironmentalandenvironmental.Consistentwith SFFAS No. 6, Accounting for Property, Plant andEquipment, recognition of an anticipated environmen-tal disposal liability begins when the asset is placed intoservice. Nonenvironmental disposal liabilities are rec-ognized for assets when management decides to dispose

GENERAL FUND


of an asset based upon DoD’s policy, which is con-sistent with SFFAS No. 5, Accounting for Liabilities ofFederalGovernment. TheDLAhasnot fully implement-ed these policies due to system and process limitations.

N. Accrued Leave

TheDLAreportsasliabilitiescivilianearnedleave,exceptsick leave, thathasbeenaccruedandnotusedasof theBalance Sheet date. Sick and other types of nonvestedleaveareexpensedastaken.Theliabilityreportedattheendoftheaccountingperiodreflectsthecurrentpayrates.

O. Net Position

NetPositionconsistsofunexpendedappropriationsandcu-mulativeresultsofoperations.

Unexpended appropriations represent the amountsof authority that are unobligated and have not beenrescinded or withdrawn. Unexpended appropria-tions also represent amounts obligated for whichlegal liabilities for payments have not been incurred.

Cumulative results of operations represent the net differ-ence, since inception of an activity, between expensesand losses and financing sources (including appropria-tions, revenue, and gains). Beginning with FY 1998,the cumulative results also include donations andtransfer in and out of assets that were not reimbursed.

P. Unexpended Obligations

The DLA obligates funds to provide goods and servicesfor outstanding orders not yet delivered. The financial

statements do not reflect this liability for payment forgoods and services not yet delivered, unless title passes.

Q. Undistributed Disbursements and Collections

Undistributeddisbursementsandcollectionsrepresentthedifferencebetweendisbursementsandcollectionsmatchedat the transaction level to a specific obligation, payable,or receivable in DLA’s activity field records as opposedto those reported by the U.S. Treasury. These amountsshouldagreewith theundistributedamounts reportedonthe monthly accounting reports. Intransit payments arethose payments that have been made but have not beenrecorded in the fundholder’s accounting records. Thesepaymentsareappliedtotheentities’outstandingaccountspayable balance. Intransit collections are those collec-tions from other agencies or entities that have not beenrecordedintheaccountingrecords.Thesecollectionsarealso applied to the entities’ accounts receivable balance.

The DoD policy is to allocate supported undistributeddisbursements and collections between federal and non-federal categories based on the percentage of distributedfederal and nonfederal accounts payable and accountsreceivable. Unsupported undistributed disbursementsare recorded in accounts payable. Unsupported un-distributed collections are recorded in other liabilities.

R. Significant Events

Beginning 4th Quarter, FY 2007 the Department beganpresenting the Statement of Financing (SOF) as a note inaccordance with OMB Circular A-136. The SOF will nolongerbeconsideredabasicstatementandisnowreferredtoasReconciliationofNetCostofOperations toBudget.



Total Entity Assets $ 1,138,620 $ 1,219,241

Total Assets $ 1,138,620 $ 1,219,241

Note 2. Entity Assets


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Fund Balances

Appropriated Funds $ 725,689 $ 783,763

Total Fund Balances $ 725,689 $ 783,763

Fund Balances Per Treasury Versus Agency

Fund Balance per DLA 725,689 783,763

Reconciling Amount $ (725,689) $ (783,763)

Note 3. Fund Balance with Treasury

The DLA shows a reconciling net difference of $725.7million with U.S. Treasury. TheU.S. Treasurymaintainsand reports fund balances at the Treasury Index appro-priation level. Defense Agencies, to include DLA, areincluded at the Treasury Index 97 appropriation level,an aggregate level that does not provide identificationof the separate Defense Agencies. As a result, the U.S.Treasury does not separately report an amount for DLAand,therefore,theentireDLAFundBalancewithTreasury(FBWT) amount is reflected as a reconciling amount.



Unobligated Balance

Available $ 185,686 $ 108,487

Unavailable 34,300 83,758

Obligated Balance not yet Disbursed 527,619 599,814

NonFBWT Budgetary Accounts (21,916) (8,296)

Total $ 725,689 $ 783,763

Status of Fund Balance with Treasury

The DLA’s Status of Fund Balance with Treasuryreflects the budgetary resources to support the FBWT.

UnobligatedBalance represents thecumulativeamountofbudgetary authority that has not been set aside to coveroutstandingobligations. UnobligatedBalance isclassifiedas available or unavailable and is associated with appro-priations expiring at fiscal year end that remain availableonlyforobligationadjustmentsuntiltheaccountisclosed.

ObligatedBalancenotyetDisbursedrepresentsfundsthathavebeenobligatedforgoodsthathavenotbeenreceived,services that have not been performed, and goods andservices that have been delivered/received but not yetpaid.

NonbudgetaryFBWTincludesentityandnonentityFBWTaccounts which represents adjustments that do not havebudgetaryauthority, suchasunavailable receiptaccountsorclearingaccounts.

NonFBWT Budgetary Accounts represents adjust-ments to budgetary accounts that do not affect FBWT.DLA’s NonFBWT Budgetary Accounts consist of unfilledcustomer orders without advance and accounts re-ceivables. This category reduces the Status of FBWT.

Unobligated balances are segregated to show availableand unavailable amounts in the note schedule. Thereare no restrictions on DLA’s unobligated balances.

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As of September 30 2005 2006 2007(Decrease)/

Increase from FY2006 to 2007


Total Problem Disbursements

(Absolute Value)

Unmatched Disbursements(UMDs) $ 28 $ 163 $ 674 $ 511

Negative UnliquidatedObligations (NULO) 6 50 55 5

In-Transit Disbursements 3,410 6,837 11,066 4,229

Total $ 3,444 $ 7,050 $ 11,795 $ 4,745

Disclosures Related to Problem Disbursements

ProblemDisbursementsarereportedasanabsolutevalueamount.Absolutevalueisthesumofthepositivevaluesofdebitandcredit transactionswithoutregardtotheplusorminussigns.

An Unmatched Disbursement occurs when a payment isnotmatchedtoacorrespondingobligationintheaccount-ingsystem.

ANegativeUnliquidatedObligationoccurswhenapaymentismadeagainstavalidobligation,butthepaymentisgreaterthan theamountof theobligation recorded in theofficialaccountingsystem.Thesepaymentshavebeenmadeusing

2007 2006

As of September 30 Gross AmountDue

Allowance ForEstimated

Uncollectibles




IntragovernmentalReceivables $ 17,933 N/A $ 17,933 $ 7,945

Nonfederal Receivables(From the Public) 268 0 268 365

Total AccountsReceivable $ 18,201 $ 0 $ 18,201 $ 8,310

availablefundsandarebasedonvalidreceivingreportsforgoodsandservicesdeliveredundervalidcontracts.

TheIntransitsrepresenttheabsolutevalueofdisbursementsandcollectionsmadebyaDepartmentofDefensedisburs-ingactivityonbehalfofanaccountableactivityandhavenotbeenpostedtotheaccountingsystem.

Beginning with 2nd Quarter, FY 2007, intransit disburse-mentsarereportedasanabsolutevalueasopposedtonetamounts disclosed in prior years. This reporting changeappliestoamountsinthenotescheduleforboththecurrentandcomparativeyears.

Note 4. Accounts Receivable


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Intragovernmental Nonfederal Intragovernmental Nonfederal

(Amounts in

CATEGORY

Nondelinquent

Current $ 17,917 $ 186 $ 10,754 $ 365

Delinquent

1 to 30 days $ 16 $ 1 $ (2,810) $ 0

31 to 60 days 0 73 0 0

61 to 90 days 0 2 0 0

91 to 180 days 0 0 0 0

181 days to 1 year 0 5 0 0

Subtotal $ 17,933 $ 267 $ 7,944 $ 365

Less SupportedUndistributedCollections 0 1 0 0

Total $ 17,933 $ 268 $ 7,944 $ 365

Aged Accounts Receivable

Abnormal Balance

TheIntragovernmentaldelinquentreceivablebalanceasof4thQuarter,FY2006reflectsanabnormalbalanceof$2.8millioninthe1to30dayagingcategory.DuringSeptember2006,theDefenseFinanceandAccountingService(DFAS)billedandcollectedapproximately$312 thousand for theDefenseMicroElectronicsActivitysales.However,thiscol-lectionwasinadvertentlykeyedasa$3.1millioncollection.ThisresultedinanegativeAccountsReceivablebalanceof$2.8million(thedifferencebetweentherecordedamountand the actual collection). The DLA took appropriateaction to correct the error during 1st Quarter, FY 2007.

Collection Action for Delinquent Receivables

Intragovernmental delinquent receivables balance as of4thQuarter,FY2007is$16thousandforthe1to30dayagingcategory.Thisbalanceresultedfromanadministra-tiveerrorwhichpreventedthecollectionfrombeingpostedcorrectlyduetoalackofsupportingdocumentation.TheDLA and DFAS, which provides accounting functionsfor DLA, resolved the issue by obtaining the necessarydocuments in October 2007 after 4th Quarter close.

Nonfederal delinquent receivables balance as of4thQuarter, FY2007 is $81 thousand. Thede-linquent debt represents refund receivables forduplicatepaymentstovendorsandoverpaymentstotravelers.Approximately$76thousandisbeingrecoupedbyinternaloffsetwheretheoverpaymentwill be deducted from a future invoice receivedfrom the vendor. The remaining $5 thousandhas been referred to the Debt ManagementOffice in accordance Department of DefenseFinancial Management policy and procedures.

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Nonfederal Other Assets

Outstanding Contract Financing Payments $ 0 $ 550

Other Assets (With the Public) 0 12

Total Nonfederal Other Assets $ 0 $ 562

Total Other Assets $ 0 $ 562

Note 5. Other Assets

Note 6. General PP&E, Net

2007 2006

As of September 30 Depreciation/Amortization

Method

ServiceLife

Acquisition Value

(AccumulatedDepreciation/Amortization)

Net BookValue

Prior FY NetBook Value


Major AssetClasses

Construction-in-Progress N/A N/A $ 394,730 $ N/A $ 394,730 $ 426,606

Total GeneralPP&E $ 394,730 $ 0 $ 394,730 $ 426,606

TheDLAGeneralFund(GF)GeneralProperty,PlantandEquipment(PP&E)consistsofonlyconstructioninprogress(CIP). The CIP is funded by the Military Construction(MILCON) and Family Housing appropriations. The CIPaccount isused toaccumulate thecostsof realpropertyassets under construction until the construction iscompleted and the assets are available for use. Thesecosts include direct labor, direct material and overhead,aswellasengineeringanddesigncosts.Whenconstruc-tioniscompletedandtheconstructedassetisavailablefor

use,theassetistransferredfromtheDLAGFCIPaccountto the appropriate Service’s General PP&E account.

For MILCON projects, DLA transfers resources to theU.S.ArmyCorpsofEngineers,NavyFacilitiesEngineeringCommand, and the Air Force to manage and executeconstruction projects. These agencies maintain CIPaccountsforeachconstructionprojecttheyaremanagingand are responsible for facilitating the transfer ofcompletedassetstotheapplicablerealpropertyaccount.


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Intragovernmental Liabilities

Other $ 4,967 $ 5,132

Total Intragovernmental Liabilities $ 4,967 $ 5,132

Nonfederal Liabilities

Accounts Payable 2,256 2,090

Military Retirement and Other FederalEmployment Benefits 6,223 6,787

Environmental Liabilities 243,664 204,824

Other Liabilities 2,218 2,413

Total Nonfederal Liabilities $ 254,361 $ 216,114

Total Liabilities Not Covered by BudgetaryResources $ 259,328 $ 221,246

Total Liabilities Covered by Budgetary Resources $ 37,093 $ 56,370

Total Liabilities $ 296,421 $ 277,616

Note 7. Liabilities Not Covered by Budgetary Resources

LiabilitiesnotcoveredbybudgetaryresourcesareliabilitiesforwhichCongressionalactionisneededbeforebudgetaryresourcescanbeprovided.TheDLAGeneralFundcurrentyear liabilities not covered by budgetary resources areprimarilycomprisedofenvironmentalliabilities.Theseen-vironmentalliabilitiesareestimatesrelatedtofutureevents,andthereforeareunfunded.


Intragovernmental liabilities other primarily consist ofthe 4th Quarter, FY 2007 estimated unemploymentcompensation.

Nonfederal liabilities other consist of accruals recordedbyDLAforunfundedleaveduetocivilianemployees.Italsoincludestheunpaidportionofcompensatorytimeand

credithoursnot taken,butearnedbyemployeeswhoareentitled to compensation. The DLA began recording anaccrualforcivilianemployeecompensatorytimeandcredithoursearnedbutnotusedduring3rdQuarter,FY2006inaccordancewithDepartmentofDefenseguidance.

Military Retirement and Other Federal Employment Benefits

MilitaryRetirementandOtherFederalEmploymentBenefitsnot covered by budgetary resources are comprised ofvariousemployeeactuarial liabilitiesnotdueandpayableduringthecurrentfiscalyear.TheseliabilitiesareprimarilycomprisedofFederalEmployeesCompensationActbenefitsfor$6.2million.RefertoNote11,MilitaryRetirementandOtherFederal EmploymentBenefits, for additionaldetailsanddisclosures

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2007 2006

As of September 30 AccountsPayable

Interest, Penalties,and Administrative

FeesTotal Total


IntragovernmentalPayables $ 9,173 $ N/A $ 9,173 $ 3,781

Nonfederal Payables(to the Public) 8,024 0 8,024 12,390

Total $ 17,197 $ 0 $ 17,197 $ 16,171

Note 8. Accounts Payable

TheDLA’ssystemsdonottrackallintragovernmentaltransac-tionsbycustomeratthetransactionlevel.Therefore,internalDepartmentofDefensebuyer-sidebalancesareadjustedtoagreewithinternalseller-sidebalancesforrevenue,accounts

receivable,andunearnedrevenue.Accountspayablewereadjusted by reclassifying amounts between federal andnonfederalaccountspayable.


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Current Liability Noncurrent Liability Total Total


Environmental Liabilities--Nonfederal

ActiveInstallations—Installation RestorationProgram (IRP) andBuilding Demolitionand Debris Removal(BD/DR) $ 29,761 $ 186,685 $ 216,446 $ 197,765

Environmental CorrectiveAction 16 11,518 11,534 11,534

Installation RestorationProgram 15,444 20,201 35,645 36,789

Total EnvironmentalLiabilities $ 45,221 $ 218,404 $ 263,625 $ 246,088

Note 9. Environmental Liabilities and Disposal Liabilities

Environmental Disclosures

The DLA’s environmental liabilities (EL) are from currentand out-year Remedial Action Cost Engineering &Requirements(RACER)estimatesfor508sites,344activeand164BaseRealignmentandClosure(BRAC).InAugustFY2006,DLAexecutedtheRACERmodelanditgeneratedtheFY2007CosttoComplete(CTC)estimateswhicharean estimation of anticipated costs necessary to completeenvironmental restoration requirements. The CTCestimatesforthefirstyearplustheunliquidatedobligationsas of year end equal the current liability. All remainingCTC estimates are categorized as noncurrent liabilities.

TheDLAhasdevelopedaplanforcollectingandreportingEL for Non Defense Environmental Restoration Program(NonDERP) contamination at DLA managed installa-tions including government-owned contractor-operated(GOCO)fuelpointsandforService-ownedandoperatedfuel terminals where DLA stores fuel. To obtain theService-ownedfuelterminalsdata,DLAdevelopedanen-vironmentaltemplatethatwillbeprovidedtotheMilitaryServicesaftertheOfficeoftheUnderSecretaryofDefense(Comptroller)resolvesrealpropertyrecordinconsistenciesbetweentheMilitaryServicesandDLA.Thistemplatewillbe used to populate the Environmental Disclosures table

andforthereportingofoverseasbaseELinthe1stQuarter,FY2008financialstatement.

Applicable Laws and Regulations for Cleanup Requirements

The DLA is required to clean up contamination resultingfrompastwaste disposal practices, leaks, spills andotherprior activities, which may have created a public healthorenvironmental risk. TheDLA is required to follow theComprehensive Environmental Response, Compensation,and Liability Act; Resource Conservation and RecoveryAct;andtheSuperfundAmendmentsandReauthorizationActtocleanupcontaminationoninstallationsmanagedbyDLAincoordinationwithregulatoryagencies.Thiscleanupmay at times extend beyond installation boundaries ontoprivatelyownedpropertyandtositeswhereDLAisnamedas a potentially responsible party by a regulatory agency.

Types of Environmental Liabilities and Disposal Liabilities

TheDLAhascleanuprequirementsforDefenseEnvironmentalRestorationProgram(DERP)sitesatactiveinstallations,BaseRealignment and Closure (BRAC) installations, and sitesat active installations that are not covered by DERP. All

GENERAL FUND


cleanupisdoneincoordinationwithregulatoryagencies,other responsible parties, and current property owners.

Methods for Assigning Estimated Total Cleanup Costs to Current Operating Periods.

The DLA uses the RACER model, an independentlyvalidated model, to estimate environmental costs. TheDLAvalidates themodel inaccordancewithDepartmentof Defense (DoD) Instruction 5000.61 andprimarily usesthemodeltoestimatetheliabilitiesbasedondatareceivedduringapreliminaryassessmentandinitialsiteinvestigation.

Incompliancewithaccountingstandards,DLAisdevelop-ingaprocesstocaptureandexpensethecostsforcleanupassociated with General Property, Plant and Equipment(PP&E). Initial Data on the environmental cost linked toGeneral PP&E was gathered during FY 2006 and is thebasisforthedevelopment,implementation,andreporting.

Nature of Estimates and the Disclo-sure of Information Regarding Possible Changes Due to Inflation, Deflation, Technology, or Applicable Laws and Regulations.

TheDLAhadchangesinestimatesresultingfromchangesin site conditions, changes in recent groundwatermodeling data, better site characterization and improvedanalysis by program managers. The EL are expectedto fluctuate due to changes in agreements with regula-tory agencies, deflation, inflation, and technology. TheFY2007CTChas incorporated theDoD inflation factors

into the NonDERP closure estimates. The latest versionof RACER (2007) was used to rebaseline estimates.

Uncertainty Regarding the Accounting Estimates used to Calculate the Reported Environmental Liabilities.

TheELforDLAarebasedonaccountingestimatesandas-sumptionsthatarebelievedtobereasonablebaseduponinformationavailableatthetimeoftheRACERcalculation.Theactualresultsmaymateriallyvaryfromtheaccountingestimatesifagreementswiththeregulatoryagenciesrequiredifferentremediationthananticipatedatthetimeofthecal-culation.Theliabilitiescanbefurtherimpactediffurtherinvestigationof theenvironmentalsitesdisclosescontam-ination different than known at the time of the estimate.

AlthoughDLAhasinstitutedextensiveinternalcontrolstoensurethattheseestimatesareaccurateandreproducible,they are generally considered accurate at +/- 40%. Thestated noncurrent liability is an estimate of future liabili-ties,as themajorityofDLAsiteswill requirecleanup forupto30years.Estimatesforworkthataremorethan1to2yearsinthefuturemaybesubjecttosignificantchange.

Liability for Overseas Bases

Inaddition to the liabilities reportedabove,DLAhas thepotential to incur costs for restoration initiatives in con-junctionwith returningoverseasDefense facilities tohostnations.TheDLAisunabletoprovideareasonableestimateatthistimebecausetheextentofrestorationrequiredisnotknown.


GENERAL FUND


CurrentLiability

NoncurrentLiability

Total Total


Intragovernmental

FECA Reimbursement tothe Department of Labor $ 582 $ 171 $ 753 $ 888

Other Liabilities 4,941 0 4,941 4,386

Total IntragovernmentalOther Liabilities $ 5,523 $ 171 $ 5,694 $ 5,274

Nonfederal

Accrued Funded Payrolland Benefits $ 390 $ 0 $ 390 $ 0

Accrued Unfunded AnnualLeave 2,218 0 2,218 2,413

Other Liabilities 1,074 0 1,074 883

Total Nonfederal OtherLiabilities $ 3,682 $ 0 $ 3,682 $ 3,296

Total Other Liabilities $ 9,205 $ 171 $ 9,376 $ 8,570

Note 10. Other Liabilities


Intragovernmental Other Liabilities consists primarily ofamounts for unfunded unemployment compensation notcoveredbythecurrentyear’sbudgetauthority.

Nonfederal Other Liabilities is comprised of contractholdbacks related to Operations and Maintenance andMilitaryConstructionprojectsmanagedbytheU.S.ArmyCorpsofEngineers.Contractholdbacksarewithheldfromcontractors pending completion of related payments foropencontracts.

GENERAL FUND


2007 2006

As of September 30Present Value

of Benefits

AssumedInterest

Rate (%)

(Less: AssetsAvailable to Pay

Benefits)Unfunded Liability

Present Value ofBenefits


FECA $ 6,223 $ 0 $ 6,223 $ 6,787

Total OtherActuarialBenefits $ 6,223 $ 0 $ 6,223 $ 6,787

Total MilitaryRetirement andOther FederalEmploymentBenefits: $ 6,223 $ 0 $ 6,223 $ 6,787

Note 11. Military Retirement and Other Federal Employment Benefits

Actuarial Calculations

The DLA actuarial liability for workers’ compensationbenefitsisdevelopedbytheDepartmentofLabor’s(DOL)Employment Standards Administration and provided toDLAat theendofeachfiscalyear. The liability includestheexpectedliabilityfordeath,disability,medical,andmis-cellaneous costs for approved compensation cases. Theliabilityisdeterminedusingamethodthatutilizeshistoricalbenefitpaymentpatternstopredicttheultimatepayments.Theprojectedannualbenefitpaymentsarethendiscount-ed to the present value using the Office of Managementand Budget’s (OMB) economic assumptions for 10-yearU.S.Treasurynotesandbonds.Costoflivingadjustments(COLAs)andmedicalinflationfactorsarealsoappliedtothecalculationofprojectedfuturebenefits.

Actuarial Cost Method and Assumptions

The liability for future workers’ compensation benefitsincludestheexpectedliabilityfordeath,disability,medical,andmiscellaneouscostsforapprovedcompensationcases,plusacomponentforincurredbutnotreportedclaims.Theliability isdeterminedusingamethod thatutilizeshistori-calbenefitpaymentpatternsrelated toaspecific incurredperiod to predict the ultimate payments related to thatperiod. Consistent with past practice, these projectedannualbenefitpaymentshavebeendiscounted topresentvalueusingOMB’seconomicassumptionsfor10-yearU.S.Treasurynotesandbonds.Interestrateassumptionsutilized

fordiscountingareasfollows:

•4.930%inYear1•5.078%inYear2andthereafter

To provide more specifically for the effects of inflationontheliabilityforfutureworkers’compensationbenefits,wageinflationfactors(COLAs)andmedicalinflationfactors(ConsumerPriceIndexMedical(CPIMs))wereappliedtothecalculationofprojectedfuturebenefits.Thesefactorswere also used to adjust the methodology’s historicalpaymentstocurrentyearconstantdollars.

ThecompensationCOLAsandCPIMsusedintheprojec-tionsforvariouschargebackyears(CBY)wereasfollows:\ CBY COLA CPIM

2007 2.63% 3.74% 2008 2.90% 4.04% 2009 2.47% 4.00% 2010 2.37% 3.94% 2011+ 2.30% 3.94%

Themodel’s resultingprojectionswereanalyzed to insurethat the estimates were reliable. The analysis was basedon two tests: (1) a comparisonof thepercentagechangeintheliabilityamountbyagencytothepercentagechangein theactualpayments,and (2)acomparisonof the ratioof the estimated liability to the actual payment of thebeginningyearcalculatedforthecurrentprojectiontotheliability payment ratio calculated for the prior projection.


GENERAL FUND

Programs Upon Which Actuarial Calculation are Based (Retirement Systems)

TheDLAinteractswith,andisdependentuponthefinancialactivitiesoftheFederalGovernmentasawhole.TheDLA’scivilianemployeesparticipateintheCivilServiceRetirementSystem (CSRS) and the Federal Employees RetirementSystem(FERS)whiletheMilitaryRetirementSystem(MRS)coversmilitarypersonnel.Additionally,personnelcovered



Intragovernmental Costs $ 130,994 $ 239,667

Public Costs 573,116 137,406

Total Costs $ 704,110 $ 377,073

Intragovernmental Earned Revenue (22,323) (15,339)

Public Earned Revenue (31,809) (11,506)

Total Earned Revenue $ (54,132) $ (26,845)

Net Cost of Operations $ 649,978 $ 350,228

Note 12. General Disclosures Related to the Statement of Net Cost

Intragovernmentalcostsandearnedrevenuesarerelatedto transactions made between two reporting entitieswithintheFederalGovernment.Publiccostsandearnedrevenues are exchange transactions made between thereportingentityandanonfederalentity.

TheDLA’ssystemsdonottrackallintragovernmentaltrans-actionsbycustomerat the transaction level. Therefore,internalDepartmentofDefensebuyer-sidebalancesareadjusted to agree with internal seller-side balances forrevenue.Expenseswereadjustedbyreclassifyingamountsbetweenfederalandnonfederalexpenses.

TheStatementofNetCostisuniquebecauseitsprinciplesaredrivenonunderstandingthenetcostofprogramsand/

or organizations that the Federal Government supportsthrough appropriations or other means. This statementprovides gross and net cost information that can berelated to theamountofoutputoroutcome for a givenprogram and/or organization administered by a respon-siblereportingentity.

Theamountspresentedinthisstatementdonotmeetac-counting standards and are based on budgetary obliga-tions, disbursement and collection transactions, as wellasnonfinancialfeedersystems,adjustedtorecordknownaccrualsformajoritemssuchaspayrollexpenses,accountspayable,andenvironmentalliabilities.

byFERSandMRSalsohavevaryingcoverageunderSocialSecurity. TheDLAfinancesonlyaportionof thecivilianpensions. While reporting and funding civilian pensionsunder CSRS and FERS is the responsibility of Office ofPersonnel Management, DLA recognizes an imputedexpense for the portion of civilian employee pension’sbenefiton theStatementofNetCost. TheDLAalsorec-ognizes corresponding imputed revenue from the civilianemployeepension’sbenefitontheStatementofChangesinNetPosition.

GENERAL FUND



Cumulative Resultsof Operations


CumulativeResults ofOperations



Civilian CSRS/FERSRetirement $ 935 $ 0 $ 1,072 $ 0

Civilian Health 1,138 0 1,127 0

Civilian Life Insurance 5 0 5 0

Total Imputed Financing $ 2,078 $ 0 $ 2,204 $ 0

Imputed Financing

The amounts DLA remits to the Office of PersonnelManagement (OPM) by and for employees covered bytheCivilianServiceRetirementSystem,FederalEmployeeRetirement System, Federal Employee Health BenefitsandFederalEmployeeGroupLife Insurance,donot fullycover the Federal Government’s cost to provide thesebenefits. The financial statements include an imputedcost made to recognize the difference between the gov-ernment’s andDLA’s costs of providing these benefits totheemployeesandcontributionsmadebyand for them.The OPM provides the cost factors to Defense Finance

Note 13. Disclosures Related to the Statement of Changes in Net Position



Net Amount of Budgetary Resources Obligated forUndelivered Orders at the End of the Period $ 510,628 $ 585,269

Note 14. Disclosures Related to the Statement of Budgetary Resources

TheDLAapportionmentcategoriesforobligationsincurredare Category A direct and reimbursable obligations andCategoryBdirectobligations.Thetablebelowsummarizestheapportionmentcategories

($millions) CategoryA CategoryB Totals

DirectObligationsIncurred 380.6 254.3 634.9

ReimbursableObligations

Incurred 26.5 0.0 26.5

Total 407.1 254.3 661.4

&AccountingService (DFAS) forcomputationof imputedfinancingcost.TheDFASprovidesthecoststotheOfficeoftheUnderSecretaryofDefense(PersonnelandReadiness)(OUSD (P&R)) and DLA for validation. After validation,OUSD (P&R) provides the imputed costs to the reportingcomponents for inclusion in their financial statements.

Other Disclosures

The $10.3 million in Other adjustments (rescissions,etc) are permanent reductions to unexpended appro-priations in Operations and Maintenance, Research,Development,Test&EvaluationandMilitaryConstruction.

Other Disclosures

The Statement of Budgetary Resources (SBR) includes in-traentitytransactionsbecausethestatementsarepresentedascombined.

To improve financial reporting, during FY 2006 DLAbeganusingfinancialdatafromsourcesystemforfinancialreporting. Previous reports were derived from otherbudgetarysystems.Asaresultoftherevisedprocess,a$33.6millionadjustmentwasrequiredin4thQuarter,FY2007tobring theSBRandSF-133 total actual resourcescollectedcarried forward balance in to agreement. The FY 2007yearend closing entries will eliminate future differences.


GENERAL FUND



Resources Used to Finance Activities:

Budgetary Resources Obligated:

Obligations incurred $ 661,382 $ 765,428

Less: Spending authority from offsettingcollections and recoveries (-) (42,126) (76,147)

Obligations net of offsetting collections andrecoveries 619,256 689,281

Net Obligations $ 619,256 $ 689,281

Other Resources:

Transfers in/out without reimbursement (+/-) (98,526) (71,901)


Net Other Resources Used to Finance Activities $ (96,448) $ (1,184)

Total Resources Used to Finance Activities $ 522,808 $ 688,097

Resources Used to Finance Items not Part of the Net

Cost of Operations:

Undelivered Orders (-) 74,642 (104,434)

Unfilled Customer Orders 3,815 0

Resources that fund expenses recognizedin prior Periods (-) (924) (41,952)

Resources that finance the acquisition ofassets (-) (158) 0

Other (+/-) 98,526 3,389

Total Resources Used to Finance Items not Part of the

Net Cost of Operations $ 175,901 $ (142,997)

Total Resources used to Finance the Net Cost of

Operations $ 698,709 $ 545,100

Note 15. Reconciliation of Net Cost of Operations to Budget

GENERAL FUND




Components of Net Cost of Operations that will not

Require or Generate Resources in the Current

Period:

Components Requiring or Generating Resources in Future Periods:

Increase in annual leave liability $ 0 $ 32

Increase in environmental and disposalLiability 17,537 0

Other (+/-) 166 3,061

Total Components Requiring or GeneratingResources in Future Periods $ 17,703 $ 3,093

Components not Requiring or Generating Resources:

Revaluation of assets or liabilities (+/-) 7,492 29,587

Other (73,926) (227,552)

Total Components not Requiring or GeneratingResources $ (66,434) $ (197,965)

Total Components of Net Cost of Operations that will

not Require or Generate Resources in the Current

Period $ (48,731) $ (194,872)

Net Cost of Operations $ 649,978 $ 350,228

The Reconciliation of Net Cost of Operations to BudgetprovidesinformationonthetotalresourcesusedbyDLA-boththosereceivedthroughthebudgetandthosereceivedby other means. It reconciles the budgetary obligationsincurredtothenetcostofoperationforagivenreportingperiod.Itarticulatesanddetailstherelationshipbetweennetobligationsfrombudgetaryaccountingandnetcostofoperationsfromproprietaryaccounting.

DuetoDLA’sfinancialsystemlimitations,budgetarydataisnotinagreementwithproprietaryexpensesandassetscapi-

talized.Thedifferencebetweenbudgetaryandproprietarydataisapreviouslyidentifieddeficiency.

The reconciliation requires that adjustments be processedbecause of imbalances between the budgetary and pro-prietary amounts recorded in DLA’s accounting systems.The balancing entries for DLA include adjustments withan absolute value of $0.6 million to Other ComponentsNot Requiring or Generating Resources and $5.5 millionto Revaluation of Assets or Liabilities lines. These ad-justments were required in order to bring the recon-ciliation into agreement with the Statement of Net Cost.

Reconciliation of Net Cost of Operations to Budget (Continued):


GENERAL FUND

The following note schedule lines are presented ascombined instead of consolidated due to intraa-gency budgetary transactions not being eliminated:

•ObligationsIncurred

• Less:SpendingAuthorityfromOffsettingCollections andRecoveries

•ObligationsNetofOffsettingCollectionsand Recoveries

• Less:OffsettingReceipts

• NetObligations

•UndeliveredOrders

• UnfilledCustomerOrdersThe$38.1millionchangebetween4thQuarter,FY2007and 4th Quarter, FY 2006 in Liabilities Not Covered byBudgetaryResourcesontheBalanceSheet(Note7)differsfromthe$17.7millionamountreportedasof4thQuarter,FY2007inComponentsRequiringorGeneratingResourcesinFuturePeriodonthisnoteschedule.The$20.4milliondif-ferenceiscomprisedofa$0.9milliondecreasesinthefuturefundedliabilitiesand$19.5milliondecreasefromreclassi-fyingenvironmentalliabilitiesfromuncoveredtocovered.

Other Disclosures

Other Resources or Adjustments to Net ObligatedResources that Do Not Affect Net Cost of Operations:Other.ThislineconsistsoftransfersoutofConstructioninProgress(CIP)totheappropriateServicesuponcompletion.

ComponentsRequiringorGeneratingResourcesinFuturePeriod:Other.Thislineconsistsprimarilyoffuturefundedexpenseforreestablishedaccountspayableforacancelledappropriation.

Components Not Requiring or Generating Resources:Other. This lineconsistsprimarilyofoperatingexpensesthatwerereclassifiedasCIP.


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Annual Financial ReportFiscal year 2007

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