First, I will say that I'm not comfortable with the lack of oversight and regulation of private security contractors. If we (the Army) shot up a bunch of civilians there would be 15-6s all over the place, people would be getting court martialed, commanders would be getting relieved, the works. The only reason Blackhawk is getting in trouble, as far as I can see, is because the Iraqi government is upset.
That said, people are overreacting to this whole "mercenary" thing. As has been mentioned the number 100,000 covers ALL the contractors of any type in Iraq. The vast majority of those are people like the Indians that work at the laundry point, the guys from Ratheon that got hired to come over here and install CREW systems (electronic warfare), the corporation that manages non-Iraqi terps, the firefighters, etc. All of those people are present on our FOB, but there are no security contractors on our FOB. All the force pro is handled by soldiers.
Within the security contractors there is another divide. A lot of the security contractors are basically third country nationals (Africa or Far East, I'm not exactly sure where) who are hired to hold an M4 and guard the entrance to the PX in the IZ or or watch a check point inside a secured area or something. These guys have almost no gear besides their weapon. The ones in more exposed locations, like checkpoints, are wearing the requisite body armor and helmet. But the guys inside the IZ don't have anything but a khaki uniform, a boonie hat, and their M4. I've never seen any of them with sidearms, night vision, medical kits, or even spare magazines (maybe one). All secure U.S. military facilities (hospital, FOBs, headquarters, entrance to the IZ) are still guarded by U.S. soldiers.
The last, and probably smallest, category is the more high speed contractors like Blackwater, Dynecorp, etc. These guys do have the more sophisticated body armor, side arms, sometimes tactical radios, and roll around in SUVs equipped with radios, BFTs, CREW systems, and sometimes turrets w/ crew served weapons. These guys do things from providing security to KBR convoys to securing non-military U.S. government facilities.
It wouldn't surprise me if security contractors are sometimes used to do things that it is illegal for the military to do. But the reason for the majority of them is to perform duties, like securing State Department officials or guarding parts of the IZ, that the military does not have the combat power to do. We are stretched thin as it is. The reason you will see a draw down in Iraq next summer is because over half of the Army brigade combat teams are deployed right now. There simply is no one available to replace the surge. I'm sure the Marines are in a similar situation. We flat out do not have the combat power to fritter away on securing all the various government personnel and facilities scattered all over Iraq.
Which is where the security contractors come in. By hiring out the a lot of the security work the military is free to do our job and destroy the enemy. (Don't get me wrong, we aren't even doing that. But that's a topic for a whole different thread.) If the military was twice as big we'd have the soldiers to stand guard on anything we wanted. But it isn't. And the size of the military is statutorily regulated, so they can't just go out and hire more people.
There are some things about security contractors that aren't good. They could definitely use some more oversight, and I'm not very comfortable with the idea of them being deployed stateside. But hiring some guys to drive State Department officials around Baghdad is a far cry from King George. I think we can put the revolution off a little bit longer.