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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549




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Form 10-Q

(Mark One)

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


For the quarterly period ended June 30, 2004

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

For the transition period
from  to

Commission File Number: 001-16821

UNITED DEFENSE INDUSTRIES, INC.

(Exact name of Registrant as Specified in its
charter)


|                                                         |  |                                  
|-------------------------------------------------------- |  | ---------------------------------
|Delaware                                                 |  | 52-2059782                       
|(State or other jurisdiction of
    incorporation)       |  | (IRS Employer Identification No.)
|                                                        
|1525 Wilson Boulevard, Suite 700
    Arlington, Virginia |  | 22209                            
|(Address of Principal Executive
    Offices)             |  | (Zip Code)                       



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(703) 312-6100

(Registrants telephone number, including
area code)


(Former Name, Former Address and Former Fiscal
Year, if Changed Since Last Report)

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

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

At July 23, 2004 there were
52,854,692 shares outstanding of the Registrants
common stock, par value $.01 per share.



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UNITED DEFENSE INDUSTRIES, INC.

INDEX

|                                   |  |                                                                                                                                      |    |      |    | 
|---------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------ | -- | ---- | -- | 
|                                   |  |                                                                                                                                      |    | Page
|                                   |  |                                                                                                                                      |    |     
|PART I  FINANCIAL
    INFORMATION
|Item 1.                            |  | Consolidated Financial Statements 
    United Defense Industries, Inc.                                                              |    |      |    | 
|                                   |  | Consolidated Balance Sheets as of
    December 31, 2003 and June 30, 2004 (unaudited)                                                |    |      | 2  | 
|                                   |  | Unaudited Consolidated Statements of Operations
    for the three months and six months ended June 30, 2003 and
    2004             |    |      | 3  | 
|                                   |  | Unaudited Consolidated Statements of Changes in
    Stockholders Equity for the three months and six months
    ended June 30, 2004 |    |      | 4  | 
|                                   |  | Unaudited Consolidated Statements of Cash Flows
    for the six months ended June 30, 2003 and 2004                                  |    |      | 5  | 
|                                   |  | Notes to Unaudited Consolidated Financial
    Statements                                                                             |    |      | 6  | 
|Item 2.                            |  | Managements Discussion and Analysis of the
    Results of Operations and Financial Condition                                        |    |      | 14 | 
|Item 3.                            |  | Quantitative and Qualitative Disclosures about
    Market Risk                                                                       |    |      | 19 | 
|Item 4.                            |  | Controls and Procedures                                                                                                              |    |      | 20 | 
|PART II  OTHER
    INFORMATION   
|Item 2.                            |  | Repurchase of Common Stock by the Issuer                                                                                             |    |      | 21 | 
|Item 4.                            |  | Submission of Matters to a Vote of Security
    Holders                                                                              |    |      | 21 | 
|Item 6.                            |  | Exhibits and Reports on Form 8-K                                                                                                     |    |      | 22 | 
|Signature                          |  |                                                                                                                                      | 23 |     

1



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##### 



UNITED DEFENSE INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)


|                                                        |                                      |                                                                                                                                                                                                                       |           |               |         |   |           |           |         | 
|------------------------------------------------------- | ------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------- | ------------- | ------- | - | --------- | --------- | ------- | 
|                                                        |                                      | December 31, 2003                                                                                                                                                                                                     |           | June 30, 2004
|                                                        |                                      |                                                                                                                                                                                                                       |           |              
|ASSETS                                                 
|Current assets:                                         |                                      |                                                                                                                                                                                                                       |           |               |         |   |           |          
|                                                        |                                      | Cash and cash equivalents                                                                                                                                                                                             |           | $             | 286,730 |   |           | $         | 274,546 | 
|                                                        |                                      | Trade receivables, net                                                                                                                                                                                                |           |               | 168,625 |   |           |           | 221,848 | 
|                                                        |                                      | Long-term contract inventories                                                                                                                                                                                        |           |               | 389,394 |   |           |           | 352,277 | 
|                                                        |                                      |                                                                                                                                                                                                                       |           |               |         |   |           |          
|                                                        |                                      | Other current assets                                                                                                                                                                                                  |           |               | 20,127  |   |           |           | 15,700  | 
|                                                        | Total current assets                 |                                                                                                                                                                                                                       |           | 864,876       |         |   |           | 864,371   |        
|Property, plant and equipment, net                      |                                      |                                                                                                                                                                                                                       | 181,283   |               |         |   | 195,506   |          
|Goodwill, net                                           |                                      |                                                                                                                                                                                                                       | 342,843   |               |         |   | 363,582   |          
|Intangible assets, net                                  |                                      |                                                                                                                                                                                                                       | 14,222    |               |         |   | 13,705    |          
|Prepaid pension and postretirement benefit cost         |                                      |                                                                                                                                                                                                                       | 128,997   |               |         |   | 125,810   |          
|Restricted cash                                         |                                      |                                                                                                                                                                                                                       | 12,244    |               |         |   | 11,676    |          
|Other assets                                            |                                      |                                                                                                                                                                                                                       | 46,699    |               |         |   | 30,954    |          
|                                                        |                                      |                                                                                                                                                                                                                       |           |               |         |   |           |          
|Total assets                                            |                                      | $                                                                                                                                                                                                                     | 1,591,164 |               |         | $ | 1,605,604 |          
|                                                        |                                      |                                                                                                                                                                                                                       |           |               |         |   |           |          
|                                                       
|LIABILITIES AND STOCKHOLDERS EQUITY
    (DEFICIT)     
|Current liabilities:                                    |                                      |                                                                                                                                                                                                                       |           |               |         |   |           |          
|                                                        |                                      | Current portion of long-term debt                                                                                                                                                                                     |           | $             | 52,043  |   |           | $         | 48,495  | 
|                                                        |                                      | Accounts payable, trade and other                                                                                                                                                                                     |           |               | 124,502 |   |           |           | 110,848 | 
|                                                        |                                      | Advanced payments                                                                                                                                                                                                     |           |               | 462,304 |   |           |           | 454,201 | 
|                                                        |                                      | Deferred tax liability                                                                                                                                                                                                |           |               | 16,280  |   |           |           | 17,852  | 
|                                                        |                                      | Accrued and other liabilities                                                                                                                                                                                         |           |               | 133,963 |   |           |           | 132,262 | 
|                                                        |                                      |                                                                                                                                                                                                                       |           |               |         |   |           |          
|                                                        | Total current liabilities            |                                                                                                                                                                                                                       |           | 789,092       |         |   |           | 763,658   |        
|Long-term liabilities:                                  |                                      |                                                                                                                                                                                                                       |           |               |         |   |           |          
|                                                        |                                      | Long-term debt, net of current portion                                                                                                                                                                                |           |               | 524,946 |   |           |           | 498,926 | 
|                                                        |                                      | Accrued pension and postretirement benefit cost                                                                                                                                                                       |           |               | 51,538  |   |           |           | 47,531  | 
|                                                        |                                      | Deferred tax liability                                                                                                                                                                                                |           |               | 17,695  |   |           |           | 20,773  | 
|                                                        |                                      | Other liabilities                                                                                                                                                                                                     |           |               | 80,812  |   |           |           | 80,369  | 
|                                                        |                                      |                                                                                                                                                                                                                       |           |               |         |   |           |          
|                                                        | Total liabilities                    |                                                                                                                                                                                                                       |           | 1,464,083     |         |   |           | 1,411,257 |        
|Commitments and contingencies Stockholders
    equity: |                                      |                                                                                                                                                                                                                       |           |               |         |   |           |          
|                                                        |                                      | Common stock $.01 par value,
    150,000,000 shares authorized; 52,220,189 issued and
    outstanding at December 31, 2003; 52,839,822 and
    51,971,022, issued and outstanding, respectively, at
    June 30, 2004 |           |               | 522     |   |           |           | 518     | 
|                                                        | Additional paid-in-capital           |                                                                                                                                                                                                                       |           | 183,337       |         |   |           | 196,768   |        
|                                                        | Deferred compensation                |                                                                                                                                                                                                                       |           | (197          | )       |   |           | (4,054    | )      
|                                                        | Retained (deficit) earnings          |                                                                                                                                                                                                                       |           | (54,304       | )       |   |           | 2,200     |        
|                                                        | Accumulated other comprehensive loss |                                                                                                                                                                                                                       |           | (2,277        | )       |   |           | (1,085    | )      
|                                                        |                                      |                                                                                                                                                                                                                       |           |               |         |   |           |          
|                                                        | Total stockholders equity           |                                                                                                                                                                                                                       |           | 127,081       |         |   |           | 194,347   |        
|                                                        |                                      |                                                                                                                                                                                                                       |           |               |         |   |           |          
|Total liabilities and stockholders equity              |                                      | $                                                                                                                                                                                                                     | 1,591,164 |               |         | $ | 1,605,604 |          
|                                                        |                                      |                                                                                                                                                                                                                       |           |               |         |   |           |          

See accompanying notes.

2



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##### 



UNITED DEFENSE INDUSTRIES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except shares and per share
data)


|                                  |                                                           |                             |        |                           |         |      |        |            |         |   |         |            |         |   |         |            |         | 
|--------------------------------- | --------------------------------------------------------- | --------------------------- | ------ | ------------------------- | ------- | ---- | ------ | ---------- | ------- | - | ------- | ---------- | ------- | - | ------- | ---------- | ------- | 
|                                  |                                                           |                             |        |                          
|                                  |                                                           | Three Months Ended June 30, |        | Six Months Ended June 30,
|                                  |                                                           |                             |        |                          
|                                  |                                                           | 2003                        |        | 2004                      |         | 2003 |        | 2004      
|                                  |                                                           |                             |        |                           |         |      |        |           
|Revenue:                          |                                                           |                             |        |                           |         |      |        |            |         |   |         |            |         |   |         |           
|                                  | Sales                                                     |                             | $      | 553,453                   |         |      | $      | 576,306    |         |   | $       | 1,019,976  |         |   | $       | 1,123,383  |        
|Costs and expenses:               |                                                           |                             |        |                           |         |      |        |            |         |   |         |            |         |   |         |           
|                                  | Cost of sales                                             |                             |        | 447,180                   |         |      |        | 455,216    |         |   |         | 809,763    |         |   |         | 890,303    |        
|                                  | Selling, general and administrative expenses              |                             |        | 41,868                    |         |      |        | 38,372     |         |   |         | 78,938     |         |   |         | 77,131     |        
|                                  | Research and development                                  |                             |        | 4,155                     |         |      |        | 9,225      |         |   |         | 6,035      |         |   |         | 15,778     |        
|                                  |                                                           |                             |        |                           |         |      |        |            |         |   |         |            |         |   |         |           
|                                  |                                                           | Total expenses              |        |                           | 493,203 |      |        |            | 502,813 |   |         |            | 894,736 |   |         |            | 983,212 | 
|                                  |                                                           |                             |        |                           |         |      |        |            |         |   |         |            |         |   |         |           
|Income from operations            |                                                           |                             | 60,250 |                           |         |      | 73,493 |            |         |   | 125,240 |            |         |   | 140,171 |           
|                                  | Earnings related to investments in foreign
    affiliates |                             |        | 6,106                     |         |      |        | 560        |         |   |         | 11,655     |         |   |         | 6,376      |        
|                                  | Interest income                                           |                             |        | 983                       |         |      |        | 933        |         |   |         | 1,897      |         |   |         | 1,906      |        
|                                  | Interest expense                                          |                             |        | (7,213                    | )       |      |        | (6,448     | )       |   |         | (14,701    | )       |   |         | (12,902    | )      
|                                  |                                                           |                             |        |                           |         |      |        |            |         |   |         |            |         |   |         |           
|Total other expense               |                                                           |                             | (124   | )                         |         |      | (4,955 | )          |         |   | (1,149  | )          |         |   | (4,620  | )         
|                                  |                                                           |                             |        |                           |         |      |        |            |         |   |         |            |         |   |         |           
|Income before income taxes        |                                                           |                             | 60,126 |                           |         |      | 68,538 |            |         |   | 124,091 |            |         |   | 135,551 |           
|Provision for income taxes        |                                                           |                             | 24,050 |                           |         |      | 27,735 |            |         |   | 49,636  |            |         |   | 52,865  |           
|                                  |                                                           |                             |        |                           |         |      |        |            |         |   |         |            |         |   |         |           
|Net income                        |                                                           | $                           | 36,076 |                           |         | $    | 40,803 |            |         | $ | 74,455  |            |         | $ | 82,686  |           
|                                  |                                                           |                             |        |                           |         |      |        |            |         |   |         |            |         |   |         |           
|Earnings per common share-basic   |                                                           | $                           | 0.70   |                           |         | $    | 0.78   |            |         | $ | 1.44    |            |         | $ | 1.58    |           
|                                  |                                                           |                             |        |                           |         |      |        |            |         |   |         |            |         |   |         |           
|                                  | Weighted average common shares outstanding                |                             |        | 51,887,761                |         |      |        | 52,405,438 |         |   |         | 51,809,472 |         |   |         | 52,402,577 |        
|Earnings per common share-diluted |                                                           | $                           | 0.68   |                           |         | $    | 0.765  |            |         | $ | 1.41    |            |         | $ | 1.55    |           
|                                  |                                                           |                             |        |                           |         |      |        |            |         |   |         |            |         |   |         |           
|                                  | Weighted average common shares outstanding                |                             |        | 52,783,806                |         |      |        | 53,338,275 |         |   |         | 52,696,743 |         |   |         | 53,349,444 |        

See accompanying notes.

3



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UNITED DEFENSE INDUSTRIES, INC.

CONSOLIDATED STATEMENTS

OF CHANGES IN STOCKHOLDERS
EQUITY


(In thousands)


|                                                                                  |  |        |     |            |  |              |         |           |  |               |        |       |  |   |         |   |  |   |        |   |  |   |         |  
|--------------------------------------------------------------------------------- |  | ------ | --- | ---------- |  | ------------ | ------- | --------- |  | ------------- | ------ | ----- |  | - | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                                                                  |  |        |     |            |  |              |         |           |  | Accumulated   |        |      
|                                                                                  |  |        |     | Additional |  |              |         | Retained  |  | Other         |        |      
|                                                                                  |  | Common |     | Paid-In    |  | Deferred     |         | (Deficit) |  | Comprehensive |        |      
|                                                                                  |  | Stock  |     | Capital    |  | Compensation |         | Earnings  |  | (Loss)/Gain   |        | Total
|                                                                                  |  |        |     |            |  |              |         |           |  |               |        |      
|Balance, December 31, 2003                                                        |  | $      | 522 |            |  | $            | 183,337 |           |  | $             | (197   | )     |  | $ | (54,304 | ) |  | $ | (2,277 | ) |  | $ | 127,081 |  
|Amortization of deferred stock compensation                                       |  |        |     |            |  |              |         |           |  |               | 657    |       |  |   |         |   |  |   |        |   |  |   | 657     |  
|Issuance of restricted stock awards                                               |  |        |     |            |  |              | 4,514   |           |  |               | (4,514 | )     |  |   |         |   |  |   |        |   |  |   |        |  
|Exercise of stock options                                                         |  |        | 5   |            |  |              | 7,798   |           |  |               |        |       |  |   |         |   |  |   |        |   |  |   | 7,803   |  
|Tax benefit from stock options                                                    |  |        |     |            |  |              | 4,105   |           |  |               |        |       |  |   |         |   |  |   |        |   |  |   | 4,105   |  
|Stock repurchased                                                                 |  |        | (9  | )          |  |              | (6,028  | )         |  |               |        |       |  |   | (23,140 | ) |  |   |        |   |  |   | (29,177 | )
|Net foreign currency translation                                                  |  |        |     |            |  |              |         |           |  |               |        |       |  |   |         |   |  |   | (987   | ) |  |   | (987    | )
|Change in fair value of foreign currency and
    interest rate hedges, net of tax |  |        |     |            |  |              |         |           |  |               |        |       |  |   |         |   |  |   | 2,179  |   |  |   | 2,179   |  
|Net income for period ended June 30, 2004                                         |  |        |     |            |  |              |         |           |  |               |        |       |  |   | 82,686  |   |  |   |        |   |  |   | 82,686  |  
|                                                                                  |  |        |     |            |  |              |         |           |  |               |        |       |  |   |         |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                        |  |        |     |            |  |              |         |           |  |               |        |       |  |   |         |   |  |   |        |   |  |   | 83,878  |  
|                                                                                  |  |        |     |            |  |              |         |           |  |               |        |       |  |   |         |   |  |   |        |   |  |   |         |  
|Balance, June 30, 2004                                                            |  | $      | 518 |            |  | $            | 193,726 |           |  | $             | (4,054 | )     |  | $ | 5,242   |   |  | $ | (1,085 | ) |  | $ | 194,347 |  
|                                                                                  |  |        |     |            |  |              |         |           |  |               |        |       |  |   |         |   |  |   |        |   |  |   |         |  

See accompanying notes.

4



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##### 



UNITED DEFENSE INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


|                                                                                  |                                                                |                  |         |         |   |   |         |         |  
|--------------------------------------------------------------------------------- | -------------------------------------------------------------- | ---------------- | ------- | ------- | - | - | ------- | ------- | -
|                                                                                  |                                                                |                 
|                                                                                  |                                                                | Six Months Ended
|                                                                                  |                                                                | June 30,        
|                                                                                  |                                                                |                 
|                                                                                  |                                                                | 2003             |         | 2004   
|                                                                                  |                                                                |                  |         |        
|Operating activities                                                              |                                                                |                  |         |         |   |   |         |        
|Net income                                                                        |                                                                | $                | 74,455  |         |   | $ | 82,686  |        
|Adjustments to reconcile net income to cash
    provided by operating activities: |                                                                |                  |         |         |   |   |         |        
|                                                                                  | Depreciation                                                   |                  |         | 13,410  |   |   |         | 14,367  |  
|                                                                                  | Amortization of software                                       |                  |         | 2,415   |   |   |         | 2,532   |  
|                                                                                  | Amortization of other intangibles                              |                  |         | 6,595   |   |   |         | 3,674   |  
|                                                                                  | Amortization of financing costs                                |                  |         | 1,549   |   |   |         | 1,622   |  
|                                                                                  | Deferred tax provision                                         |                  |         | 30,280  |   |   |         | 4,728   |  
|Changes in assets and liabilities:                                                |                                                                |                  |         |         |   |   |         |        
|                                                                                  | Trade receivables                                              |                  |         | 4,713   |   |   |         | (47,978 | )
|                                                                                  | Inventories                                                    |                  |         | 63,480  |   |   |         | 42,508  |  
|                                                                                  | Other assets                                                   |                  |         | (777    | ) |   |         | 20,944  |  
|                                                                                  | Prepaid pension and postretirement benefit cost                |                  |         | (2,150  | ) |   |         | 3,187   |  
|                                                                                  | Accounts payable, trade and other                              |                  |         | (30,501 | ) |   |         | (10,441 | )
|                                                                                  | Advanced payments                                              |                  |         | (54,933 | ) |   |         | (10,340 | )
|                                                                                  | Accrued and other liabilities                                  |                  |         | (13,091 | ) |   |         | 1,130   |  
|                                                                                  | Accrued pension and postretirement benefit cost                |                  |         | 3,355   |   |   |         | (3,334  | )
|                                                                                  |                                                                |                  |         |         |   |   |         |        
|Cash provided by operating activities                                             |                                                                |                  | 98,800  |         |   |   | 105,285 |        
|                                                                                  |                                                                |                  |         |         |   |   |         |        
|Investing activities                                                              |                                                                |                  |         |         |   |   |         |        
|                                                                                  | Capital expenditures                                           |                  |         | (23,762 | ) |   |         | (19,662 | )
|                                                                                  | Purchase of Kaiser Compositek, Cercom and Hawaii
    Shipyards |                  |         |        |   |   |         | (44,412 | )
|                                                                                  |                                                                |                  |         |         |   |   |         |        
|Cash used in investing activities                                                 |                                                                |                  | (23,762 | )       |   |   | (64,074 | )      
|                                                                                  |                                                                |                  |         |         |   |   |         |        
|Financing activities                                                              |                                                                |                  |         |         |   |   |         |        
|                                                                                  | Payments on long-term debt                                     |                  |         |        |   |   |         | (29,569 | )
|                                                                                  | Proceeds from sale of common stock                             |                  |         | 1,592   |   |   |         | 7,803   |  
|                                                                                  | Common stock repurchased                                       |                  |         |        |   |   |         | (29,177 | )
|                                                                                  |                                                                |                  |         |         |   |   |         |        
|Cash provided (used in) financing activities                                      |                                                                |                  | 1,592   |         |   |   | (50,943 | )      
|                                                                                  |                                                                |                  |         |         |   |   |         |        
|Effect of exchange rate changes on cash                                           |                                                                |                  | 4,424   |         |   |   | (2,452  | )      
|                                                                                  |                                                                |                  |         |         |   |   |         |        
|Increase (decrease) in cash and cash equivalents                                  |                                                                |                  | 81,054  |         |   |   | (12,184 | )      
|Cash and cash equivalents, beginning of year                                      |                                                                |                  | 106,802 |         |   |   | 286,730 |        
|                                                                                  |                                                                |                  |         |         |   |   |         |        
|Cash and cash equivalents, end of period                                          |                                                                | $                | 187,856 |         |   | $ | 274,546 |        
|                                                                                  |                                                                |                  |         |         |   |   |         |        

See accompanying notes.

5



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##### 



UNITED DEFENSE INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS

June 30, 2004




|   |                      
|-- | ---------------------
|1. | Basis of Presentation

The financial information presented as of any
date other than December 31 has been prepared from the
books and records without audit. Financial information as of
December 31, 2003 presented in this quarterly report has
been derived from the audited financial statements of United
Defense Industries, Inc., but does not include all the
associated disclosures required by generally accepted accounting
principles. In the opinion of management, the accompanying
unaudited interim financial statements contain all adjustments
(consisting of normal, recurring adjustments) necessary to
present fairly our financial position as of June 30, 2004
and the results of operations for the three months and six
months ended June 30, 2004 and cash flows for the six
months ended June 30, 2004. The results of operations are
not necessarily indicative of the results that may be expected
for the year ending December 31, 2004. These unaudited
consolidated financial statements should be read in conjunction
with the financial statements and the notes thereto included in
our Annual Report on Form 10-K for the year ended
December 31, 2003 and our Quarterly Report on Form 10-Q for
the quarter ended March 31, 2004.



|   |                                                 
|-- | ------------------------------------------------
|2. | Summary of Significant Accounting
    Principles



| |                                                             
| | ------------------------------------------------------------
| | Revenue and Profit Recognition for
    Contracts-in-Progress

We use different techniques for estimating and
recording revenues depending on the type and characteristics of
the contract. Sales are recognized on most fixed-price
production contracts when the risks and rewards of ownership
have been transferred to the customer. For our DoD production
contracts, those criteria are typically met when the manufacture
of the product is completed and the customer has certified it as
meeting the contract specifications and as having passed quality
control tests. For our foreign production contracts, sales are
generally recorded upon shipment of products to the customer,
which corresponds to when the risks and rewards of ownership
transfer. Gross margin on each unit delivered or accepted is
recognized, based on an estimate of the margin that will be
realized over the life of the related contract. We evaluate
estimates of gross margin on production contracts and recognize
changes in estimates of gross margins during the period in which
those changes are determined. Sales under fixed-price ship
repair and maintenance contracts are recognized as work is
performed. Under this method, contract costs are expensed as
incurred and sales are recognized simultaneously based on the
ratio of direct labor inputs and other costs incurred to date
compared to estimated total direct labor inputs and total costs.
Sales under cost reimbursement contracts for research,
engineering, prototypes, ship repair and maintenance and certain
other contracts are recorded as costs are incurred and include
estimated fees in the proportion that costs incurred to date
bear to total estimated costs. Award fees are recorded as
revenue when the award is earned. We charge any anticipated
losses on a contract to operations as soon as those losses are
determined.

Stock-Based
Compensation

At June 30, 2004, we had a stock-based
employee compensation plan, which is described more fully in our
Form 10K for the year ended December 31, 2003. On
April 13, 2004 our stockholders approved an amendment and
restatement of our stock-based plan, renamed the Incentive Award
Plan, in order to (i) reserve an additional
2,000,000 shares for use under the plan, (ii) qualify
the plan for certain awards pertaining to Sec. 162(m) of the
Internal Revenue Code, and (iii) add the ability to make
grants of other equity-based compensation. We account for the
plan under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. Accordingly, we
record compensation expense over the vesting period in our
consolidated statements of operations if the option price is
less than fair value of the common stock at the date an option
is granted. On January 20, 2004, the Board of Directors
authorized issuance of 141,000 shares of restricted stock
and new stock options to purchase 500,000 common shares at
an exercise price of $31.80. The compensation recorded in the
financial

6



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

statements reflects the amortization based on
vesting of stock options and restricted stock. The following
table illustrates the effect on net income and earnings per
share if we had elected to apply the fair value recognition
provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee
compensation.

|                                                                                                                                                    |                       |                                       |        |                  |  |      |        |      |  |   |        |      |  |   |        |      | 
|--------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ------------------------------------- | ------ | ---------------- |  | ---- | ------ | ---- |  | - | ------ | ---- |  | - | ------ | ---- | 
|                                                                                                                                                    |                       |                                       |        |                 
|                                                                                                                                                    |                       | Three Months Ended                    |        | Six Months Ended
|                                                                                                                                                    |                       | June 30,                              |        | June 30,        
|                                                                                                                                                    |                       |                                       |        |                 
|                                                                                                                                                    |                       | 2003                                  |        | 2004             |  | 2003 |        | 2003
|                                                                                                                                                    |                       |                                       |        |                  |  |      |        |     
|                                                                                                                                                    |                       |                                      
|                                                                                                                                                    |                       | (In thousands, except per share data)
|Reported net income                                                                                                                                 |                       | $                                     | 36,076 |                  |  | $    | 40,803 |      |  | $ | 74,455 |      |  | $ | 82,686 |     
|Add back: Compensation expense recorded, net of
    related tax effects                                                                             |                       |                                       | 12     |                  |  |      | 231    |      |  |   | 24     |      |  |   | 394    |     
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |                       |                                       | (1,049 | )                |  |      | (1,619 | )    |  |   | (2,098 | )    |  |   | (3,066 | )   
|                                                                                                                                                    |                       |                                       |        |                  |  |      |        |      |  |   |        |      |  |   |        |     
|Pro forma net income                                                                                                                                |                       | $                                     | 35,039 |                  |  | $    | 39,415 |      |  | $ | 72,381 |      |  | $ | 80,014 |     
|                                                                                                                                                    |                       |                                       |        |                  |  |      |        |      |  |   |        |      |  |   |        |     
|Earnings per share:                                                                                                                                 |                       |                                       |        |                  |  |      |        |      |  |   |        |      |  |   |        |     
|                                                                                                                                                    | Basic  as reported   |                                       | $      | 0.70             |  |      | $      | 0.78 |  |   | $      | 1.44 |  |   | $      | 1.58 | 
|                                                                                                                                                    |                       |                                       |        |                  |  |      |        |      |  |   |        |      |  |   |        |     
|                                                                                                                                                    | Basic  pro forma     |                                       | $      | 0.68             |  |      | $      | 0.75 |  |   | $      | 1.40 |  |   | $      | 1.53 | 
|                                                                                                                                                    |                       |                                       |        |                  |  |      |        |      |  |   |        |      |  |   |        |     
|                                                                                                                                                    | Diluted  as reported |                                       | $      | 0.68             |  |      | $      | 0.77 |  |   | $      | 1.41 |  |   | $      | 1.55 | 
|                                                                                                                                                    |                       |                                       |        |                  |  |      |        |      |  |   |        |      |  |   |        |     
|                                                                                                                                                    | Diluted  pro forma   |                                       | $      | 0.66             |  |      | $      | 0.74 |  |   | $      | 1.37 |  |   | $      | 1.50 | 
|                                                                                                                                                    |                       |                                       |        |                  |  |      |        |      |  |   |        |      |  |   |        |     

Stock
Repurchase

In April 2004, the Board of Directors authorized
the repurchase of up to $100 million of our common stock.
During the second quarter of 2004 we repurchased
868,800 shares at an aggregate cost of $29.2 million.

New
Accounting Pronouncements

On January 17, 2003 the FASB issued FASB
Interpretation No. 46 (FIN 46), Consolidation of
Variable Interest Entities. FIN 46 becomes effective
in the first quarter of 2004 and requires a variable interest
entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable
interest entitys activities or entitled to receive a
majority of the entitys residual returns or both. In
general, a variable interest entity is a corporation,
partnership, trust, or any other legal structure used for
business purposes that either (a) does not have equity
investors with voting rights, or (b) has equity investors
that do not provide sufficient financial resources for the
entity to support its activities. The adoption of the
Interpretation had no significant impact on our financial
statements.

In December 2003, the FASB issued
SFAS No. 132R, Employers Disclosure about
Pensions and Other Postretirement Benefits.
SFAS No. 132R requires additional disclosures about
defined benefit pension plans and other post retirement benefit
plans. The standard requires, among other things, additional
disclosures about the assets held in employer sponsored pension
plans, disclosures relating to plan asset investment policy and
practices, disclosure of expected contributions to be made to
the plans and expected benefit payments to be made by the plans.
Annual disclosures applicable to our U.S. pension and post
retirement plans were required to be made in our financial
statements for the year ended December 31, 2003. Annual
disclosures relating to our non-U.S. plans will be required
for the year ending December 31, 2004. We

7



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

have adopted this pronouncement as of
December 31, 2003 for all of our U.S. plans.
Disclosure of estimated future benefit payments is effective for
fiscal years ending after June 15, 2004.



|   |                                    
|-- | -----------------------------------
|3. | Investments in Affiliated Companies

Our investment in our 51% owned foreign joint
venture in Turkey, FNSS Savunma Sistemleri A.S.
(FNSS), is accounted for using the equity method
because we do not control it due to our partners veto
rights over certain decisions, although we do have the ability
to exercise influence over its operating and financial policies.
Our share of the earnings from our investment in Turkey was
$6.1 million and $0.6 million for the three months
ended June 30, 2003 and 2004, and $11.7 million and
$6.4 million for the six months ended June 30, 2003
and 2004. Our reported earnings from FNSS potentially could have
been $5.3 million higher. However, a dividend payment from
FNSS in 2005 is unlikely and since FNSS does not have a contract
for production beyond 2004, its ability to pay
dividends in future years is unclear. Consequently this
deterioration in the outlook for recoverability of our
investment in FNSS is viewed as other than temporary. Limiting
our FNSS-derived income to the level recorded to date results in
eliminating our investment balance in FNSS.

The following table reports financial results
from our joint venture in Turkey (FNSS).

|              |  |                    |        |                  |  |      |        |      |  |   |         |  |  |   |         | 
|------------- |  | ------------------ | ------ | ---------------- |  | ---- | ------ | ---- |  | - | ------- |  |  | - | ------- | 
|              |  |                    |        |                 
|              |  | Three Months Ended |        | Six Months Ended
|              |  | June 30,           |        | June 30,        
|              |  |                    |        |                 
|              |  | 2003               |        | 2004             |  | 2003 |        | 2004
|              |  |                    |        |                  |  |      |        |     
|              |  |                   
|              |  | (In thousands)    
|Sales         |  | $                  | 77,879 |                  |  | $    | 62,081 |      |  | $ | 119,732 |  |  | $ | 113,688 | 
|Cost of sales |  |                    | 36,910 |                  |  |      | 29,274 |      |  |   | 57,290  |  |  |   | 53,509  | 
|Net income    |  |                    | 11,082 |                  |  |      | 11,725 |      |  |   | 20,340  |  |  |   | 23,130  | 



|   |                     
|-- | --------------------
|4. | Comprehensive Income

Comprehensive income was $74.5 million and
$83.9 million for the six-month periods ended June 30,
2003 and 2004, respectively. Comprehensive income consists
primarily of net income, net foreign currency translation
adjustments and fair value adjustments of foreign currency and
interest rate hedges, net of taxes.



|   |               
|-- | --------------
|5. | Long-Term Debt

In August 2001, we entered into a credit facility
with various banks that included $600 million of term loan
facilities and a $200 million revolving credit facility. In
July 2002 we amended the credit facility to borrow an additional
$300 million for the purchase of United States Marine
Repair, Inc. (USMR). We incurred $5.5 million
in additional financing fees that have been deferred and
amortized over the remaining term of the credit facility using
the effective interest method.

Outstanding borrowings on the term loan
facilities were $547 million at June 30, 2004. The
facilities bear interest at variable rates with a weighted
average rate of 3.42% at June 30, 2004. These loans are due
through 2009 and provide for quarterly principal and interest
payments. Principal payments of $29.6 million were made
during the first half of 2004.



|   |                                               
|-- | ----------------------------------------------
|6. | Pension and Other Post Retirement
    Benefits

At December 31, 2003, we revised the
discount rate assumption used in the determination of net
pension and post retirement costs and benefit obligations from
6.5% to 6.0%. On January 1, 2004 the rate of return
assumption used for the actuarial estimates of these benefit
programs was unchanged at 8.5%.

8



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Components of Net Periodic Benefit Cost for the
three months and six months ended June 30:

|                                    |  |                             |         |                           |  |                  |         |                |  |      |        |      |  |      |        |      |  |   |         |   |  |   |         |   |  |   |        |   |  |   |        |  
|----------------------------------- |  | --------------------------- | ------- | ------------------------- |  | ---------------- | ------- | -------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------- | - |  | - | ------ | - |  | - | ------ | -
|                                    |  |                             |         |                          
|                                    |  | Three Months Ended June 30, |         | Six Months Ended June 30,
|                                    |  |                             |         |                          
|                                    |  |                             |         |                           |  |                  |         |               
|                                    |  | Pension Benefits            |         | Other Benefits            |  | Pension Benefits |         | Other Benefits
|                                    |  |                             |         |                           |  |                  |         |               
|                                    |  | 2003                        |         | 2004                      |  | 2003             |         | 2004           |  | 2003 |        | 2004 |  | 2003 |        | 2004
|                                    |  |                             |         |                           |  |                  |         |                |  |      |        |      |  |      |        |     
|Service Cost                        |  | $                           | 4,445   |                           |  | $                | 4,775   |                |  | $    | 369    |      |  | $    | 386    |      |  | $ | 8,890   |   |  | $ | 9,551   |   |  | $ | 739    |   |  | $ | 772    |  
|Interest Cost                       |  |                             | 10,381  |                           |  |                  | 10,696  |                |  |      | 829    |      |  |      | 838    |      |  |   | 20,762  |   |  |   | 21,392  |   |  |   | 1,658  |   |  |   | 1,676  |  
|Expected return on plan assets      |  |                             | (13,559 | )                         |  |                  | (14,154 | )              |  |      | (1,300 | )    |  |      | (1,363 | )    |  |   | (27,118 | ) |  |   | (28,308 | ) |  |   | (2,600 | ) |  |   | (2,726 | )
|Amortization of prior service costs |  |                             | 448     |                           |  |                  | 458     |                |  |      | 34     |      |  |      | 34     |      |  |   | 896     |   |  |   | 917     |   |  |   | 69     |   |  |   | 68     |  
|Amortization of net loss            |  |                             | 556     |                           |  |                  | 1,390   |                |  |      | 1      |      |  |      | 5      |      |  |   | 1,112   |   |  |   | 2,779   |   |  |   | 1      |   |  |   | 10     |  
|                                    |  |                             |         |                           |  |                  |         |                |  |      |        |      |  |      |        |      |  |   |         |   |  |   |         |   |  |   |        |   |  |   |        |  
|Net periodic benefit cost (income)  |  | $                           | 2,271   |                           |  | $                | 3,165   |                |  | $    | (67    | )    |  | $    | (100   | )    |  | $ | 4,542   |   |  | $ | 6,330   |   |  | $ | (134   | ) |  | $ | (200   | )
|                                    |  |                             |         |                           |  |                  |         |                |  |      |        |      |  |      |        |      |  |   |         |   |  |   |         |   |  |   |        |   |  |   |        |  



|   |                              
|-- | -----------------------------
|7. | Commitments and Contingencies

Termination
Claims

In 1994 the Crusader program was initiated to
develop for the U.S. Army an integrated and extensively
automated two-vehicle artillery system consisting of a 155mm,
self-propelled howitzer and a resupply vehicle. During the
lifetime of the program, we were the sole-source prime
contractor for its design and development. The Armys plan
called for fielding of 480 Crusader systems, but in May 2002 the
Secretary of Defense announced the termination of the program.
The Army gave us formal notice of termination on August 7,
2002, and we subsequently received Army funding to accomplish an
orderly closeout of Crusader activities and transition key
Crusader technologies to the Future Combat Systems
(FCS) Non Line of Sight-Cannon (NLOS-C)
program. The Crusader termination resulted in a reduction to our
workforce of approximately 180 employees. Through the period
ended June 30, 2004, we incurred and invoiced the
U.S. Government for $39.2 million of termination
costs, of which $36.2 million has been recovered from the
U.S. Government. In order to complete the Crusader
termination process, we are negotiating a final termination
settlement with the Army which we expect to conclude in due
course.

Legal
Proceedings

As a government contractor, we are subject to the
audit, review, and investigative authority of various
U.S. Government agencies. Depending upon the particular
jurisdictional statute, violations of federal procurement rules
may result in contract price reductions or refunds, civil
penalties, and/or criminal penalties. Government contractors
that violate the False Claims Act and/or other applicable laws
may be suspended or debarred from receiving further government
contracts. Given our dependence on U.S. Government
contracts, suspension or debarment is an inherent risk that
could readily have a material adverse effect on us. Our policy
is to cooperate with governmental investigations and inquiries
regarding compliance matters, and we also make voluntary
disclosures of compliance issues to governmental agencies as
appropriate. In the ordinary course of business, we provide
information on compliance matters to various government
agencies, and we expect to continue to do so in the future. For
example, as previously disclosed, in 2002 we were served with a
grand jury subpoena issued by the United States District Court
for the Eastern District of Virginia, seeking information
regarding a 2000 contract between us and the Italian government
for the upgrading of amphibious assault vehicles. We believe
that the grand jury investigation seeks to ascertain whether any
violation of the Foreign Corrupt Practices Act occurred in
connection with the Italian contract. While we are not aware of
any such violation, and we are cooperating with the
investigation, it is too early for us to determine whether the
ultimate outcome of the investigation would have a material
adverse impact on our results of operations or financial
position.

9



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

From time to time we are involved in legal
proceedings arising in the ordinary course of our business. We
believe that we have adequately reserved for these liabilities
and that there is no litigation pending that we expect to have a
material adverse effect on our results of operations or
financial condition.

Environmental
Matters

We incur costs annually to comply with
environmental laws. Operating and maintenance costs associated
with environmental compliance and prevention of pollution at our
facilities are a normal, recurring part of operations, are not
significant relative to total operating costs or cash flows, and
are generally allowable as contract costs under our contracts
with the U.S. Government (Allowable Costs).

As with compliance costs, a significant portion
of our expenditures for remediation of existing contamination at
our facilities consist of Allowable Costs. However, as of
June 30, 2004, we had accrued approximately
$33 million to cover any investigation and/or remediation
costs that may not be Allowable Costs. The amount accrued is
based on reasonable estimates, although there is a possibility
that amounts in excess of costs accrued may be incurred. The
most significant of the estimated liabilities are related to
ongoing remediation efforts.

One of our largest shipyards is located in
San Diego, California. Pursuant to a demand from the
California Regional Water Quality Control Board, we completed a
study of sedimentary contamination in San Diego Bay. Once
definitive clean-up criteria are established, we expect that we
will be required to begin remediation procedures with respect to
the contamination. We anticipate that the total cost associated
with the remediation phase will range from $6 million to
$9 million, although it is conceivable that costs could be
as high as $30 million if the most stringent clean-up
standard were to be adopted. Up to $9 million of such
remediation costs, to the extent the costs are not recovered on
USMRs government contracts or from other responsible
parties, may be recoverable from USMRs former
shareholders, under an escrow arrangement established in 1997
when the San Diego operation was acquired by USMR. Also, a
further $15 million escrow fund was established in our 2002
acquisition of USMR, which we believe is available in respect of
USMRs sediment exposure. We have asserted claims against
both escrow funds, primarily on account of the potential
remediation exposure at San Diego.

Since approximately 1941, we (and, prior to our
formation, Northern Ordnance, Inc. and then FMC) have operated a
manufacturing and engineering facility in Fridley, Minnesota.
The majority of the Fridley facility was historically owned by
the U.S. Navy (the Navy property), but had been
operated by us under contract with and on behalf of the Navy. In
June 2004 we purchased the Navy property and most of the
associated equipment for $6.5 million. Since the early
1980s, the Navy has expended more than $29 million in
site investigation and remediation costs on the property, and
the Navy has indicated that it anticipates spending a further
$10.3 million on such matters at the site. The Navy has
engaged us in discussions as to whether we should pay a portion
of its remediation expenses at Fridley, and offered to resolve
the matter if we would pay approximately $8.4 million for
such purpose. We dispute any responsibility for such costs, and
also believe that any remediation costs that we may incur
concerning the Navy property would constitute Allowable Costs.
However, there is substantial uncertainty regarding the ultimate
terms on which the matter might be resolved.



|   |             
|-- | ------------
|8. | Acquisitions

On February 5, 2004, we completed the
acquisition of the assets of Kaiser Compositek, Inc.
(KCI) for an initial purchase price of
$8.3 million. KCI, located in Brea, California, is a
provider to government and industry sectors with particular
emphasis on primary structures fabricated with polymeric
composites. The acquisition is expected to enhance and expand
our development of advanced weapon systems and combat vehicles.

10



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On March 1, 2004 we purchased certain assets
and liabilities of the Pearl Harbor, Hawaii Ship repair
operations of Pacific Shipyards International, LLC and Honolulu
Shipyards, Inc. for a purchase price after adjustments of
$15 million. The Pearl Harbor ship repair business is being
operated by a newly formed subsidiary, Hawaii Shipyards, Inc.
(HSI), which positions USMR as the largest private
supplier of ship repair and overhaul services for naval vessels
stationed in Pearl Harbor, Hawaii, which is the third largest
homeport for naval vessels. Principals of the predecessor entity
serve as directors of HSI.

On March 1, 2004 we completed the
acquisition of Cercom, Inc. of Vista, California for the
purchase price of $21.2 million. Cercom is a producer of
advanced ceramic materials and supplier of light-weight ceramic
armor. The acquisition is expected to enhance our market
presence regarding survivability solutions in specialty metals
and composites.



|   |                   
|-- | ------------------
|9. | Earnings Per Share

Basic and diluted earnings per share results for
all periods presented were computed based on the net income for
the respective periods. The weighted average number of common
shares outstanding during the period was used in the calculation
of basic earnings per share and this number of shares was
increased by the effects of dilutive stock options based on the
treasury stock method in the calculation of diluted earnings per
share. The dilutive stock options for the quarters ended
June 30, 2004 and 2003 were 932,837 and 896,045,
respectively and for the six months ended June 30, 2004 and
2003 were 946,867 and 887,271, respectively.



|    |                                 
|--- | --------------------------------
|10. | Information on Business Segments

We operate in two reportable business segments:
Defense Systems and Ship Repair and Maintenance. USMR is
categorized under the business segment Ship Repair and
Maintenance. All other business operations are categorized
as Defense Systems. We use earnings before interest
and taxes as the measure of financial performance for each
segment.

11



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Summary unaudited financial data for each of our
business segments for the three months and six months ended
June 30, 2003 and 2004 follow:

|                                                                |  |                    |         |                  |  |      |         |      |  |   |           |   |  |   |           |  
|--------------------------------------------------------------- |  | ------------------ | ------- | ---------------- |  | ---- | ------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                |  |                    |         |                 
|                                                                |  | Three Months Ended |         | Six Months Ended
|                                                                |  | June 30,           |         | June 30,        
|                                                                |  |                    |         |                 
|                                                                |  | 2003               |         | 2004             |  | 2003 |         | 2004
|                                                                |  |                    |         |                  |  |      |         |     
|                                                                |  |                   
|                                                                |  | (In thousands)    
|Sales:                                                          |  |                    |         |                  |  |      |         |      |  |   |           |   |  |   |           |  
|Defense Systems                                                 |  | $                  | 435,421 |                  |  |      | 424,776 |      |  |   | 776,004   |   |  |   | 834,664   |  
|Ship Repair and Maintenance                                     |  |                    | 118,032 |                  |  |      | 151,530 |      |  |   | 243,972   |   |  |   | 288,719   |  
|                                                                |  |                    |         |                  |  |      |         |      |  |   |           |   |  |   |           |  
|Total sales                                                     |  |                    | 553,453 |                  |  |      | 576,306 |      |  |   | 1,019,976 |   |  |   | 1,123,383 |  
|Earnings related to investments in foreign
    affiliates:      |  |                    |         |                  |  |      |         |      |  |   |           |   |  |   |           |  
|Defense Systems                                                 |  |                    | 6,106   |                  |  |      | 560     |      |  |   | 11,655    |   |  |   | 6,376     |  
|Ship Repair and Maintenance                                     |  |                    |        |                  |  |      |        |      |  |   |          |   |  |   |          |  
|                                                                |  |                    |         |                  |  |      |         |      |  |   |           |   |  |   |           |  
|Total earnings related to investments in foreign
    affiliates |  |                    | 6,106   |                  |  |      | 560     |      |  |   | 11,655    |   |  |   | 6,376     |  
|Depreciation and amortization:                                  |  |                    |         |                  |  |      |         |      |  |   |           |   |  |   |           |  
|Defense Systems                                                 |  |                    | 6,107   |                  |  |      | 5,729   |      |  |   | 11,733    |   |  |   | 11,370    |  
|Ship Repair and Maintenance                                     |  |                    | 4,175   |                  |  |      | 5,129   |      |  |   | 8,344     |   |  |   | 9,160     |  
|Corporate                                                       |  |                    | 1,171   |                  |  |      | 20      |      |  |   | 2,343     |   |  |   | 43        |  
|                                                                |  |                    |         |                  |  |      |         |      |  |   |           |   |  |   |           |  
|Total depreciation                                              |  |                    | 11,453  |                  |  |      | 10,878  |      |  |   | 22,420    |   |  |   | 20,573    |  
|Capital spending:                                               |  |                    |         |                  |  |      |         |      |  |   |           |   |  |   |           |  
|Defense Systems                                                 |  |                    | 4,785   |                  |  |      | 12,337  |      |  |   | 6,940     |   |  |   | 15,690    |  
|Ship Repair and Maintenance                                     |  |                    | 15,544  |                  |  |      | 2,249   |      |  |   | 16,790    |   |  |   | 3,734     |  
|Corporate                                                       |  |                    | 32      |                  |  |      | 20      |      |  |   | 32        |   |  |   | 238       |  
|                                                                |  |                    |         |                  |  |      |         |      |  |   |           |   |  |   |           |  
|Total capital spending                                          |  |                    | 20,361  |                  |  |      | 14,606  |      |  |   | 23,762    |   |  |   | 19,662    |  
|Income before interest and taxes:                               |  |                    |         |                  |  |      |         |      |  |   |           |   |  |   |           |  
|Defense Systems                                                 |  |                    | 62,804  |                  |  |      | 68,849  |      |  |   | 129,770   |   |  |   | 138,988   |  
|Ship Repair and Maintenance                                     |  |                    | 9,155   |                  |  |      | 9,117   |      |  |   | 16,525    |   |  |   | 15,844    |  
|Corporate                                                       |  |                    | (5,603  | )                |  |      | (3,913  | )    |  |   | (9,400    | ) |  |   | (8,285    | )
|                                                                |  |                    |         |                  |  |      |         |      |  |   |           |   |  |   |           |  
|Total income before interest and taxes                          |  |                    | 66,356  |                  |  |      | 74,053  |      |  |   | 136,895   |   |  |   | 146,547   |  
|Interest, net                                                   |  |                    | (6,230  | )                |  |      | (5,515  | )    |  |   | (12,804   | ) |  |   | (10,996   | )
|                                                                |  |                    |         |                  |  |      |         |      |  |   |           |   |  |   |           |  
|Income before income taxes                                      |  | $                  | 60,126  |                  |  | $    | 68,538  |      |  | $ | 124,091   |   |  | $ | 135,551   |  
|                                                                |  |                    |         |                  |  |      |         |      |  |   |           |   |  |   |           |  

|                            |  |   |           |  |  |                |           |          |  |  |  |  |  |  |  | 
|--------------------------- |  | - | --------- |  |  | -------------- | --------- | -------- |  |  |  |  |  |  |  | 
|                            |  |   |           |  |  | December 31,   |           | June 30,
|                            |  |   |           |  |  |                |           |         
|                            |  |   |           |  |  | 2003           |           | 2004    
|                            |  |   |           |  |  |                |           |         
|                            |  |   |           |  |  |               
|                            |  |   |           |  |  | (In thousands)
|Total assets: (a)           |  |   |           |  |  |                |           |          |  |  |  |  |  |  |  | 
|Defense Systems             |  | $ | 852,863   |  |  |                | 853,763   |         
|Ship Repair and Maintenance |  |   | 438,575   |  |  |                | 466,902   |         
|Corporate and eliminations  |  |   | 299,726   |  |  |                | 284,939   |         
|                            |  |   |           |  |  |                |           |         
|Total assets                |  | $ | 1,591,164 |  |  |                | 1,605,604 |         
|                            |  |   |           |  |  |                |           |         



---



|    |                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Goodwill and other intangible assets and related
    amortization, and net pension and other post retirement benefits
    are included in the respective business segments. Corporate
    assets primarily include cash and cash equivalents and deferred
    financing costs.

12



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |             
|--- | ------------
|11. | Income Taxes

We account for income taxes under the liability
method. Under this method, deferred tax assets and liabilities
are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws expected to be
effective when these differences reverse.

The provisions for income taxes for the three and
six months ended June 30, 2004 were $27.7 million and
$52.9 million, respectively, which increased by
$3.7 million and $3.2 million, respectively from the
same periods in 2003 primarily due to higher taxable income. The
income tax provision in 2004 reflects an effective tax rate of
39%.



|    |                           
|--- | --------------------------
|12. | Related Party Transactions

In October 1997, The Carlyle Group
(Carlyle) formed United Defense Industries, Inc. as
a wholly-owned entity in order to acquire our predecessor,
United Defense, L.P. Beginning with our initial public offering
in December 2001, Carlyle began to sell major portions of its
United Defense holdings. On April 30, 2004 Carlyle
completed the sale of its remaining 4.5 million United
Defense shares. In connection with our initial public offering,
we entered into agreements with Carlyle pursuant to which
Carlyle had the right to designate up to four nominees for our
Board of Directors, so long as Carlyle owned greater than 20% of
our voting stock. By virtue of Carlyles sales of United
Defense shares, such agreements have lapsed. Nonetheless, three
individuals affiliated with Carlyle (Messrs. Carlucci,
Clare, and Conway) were re-elected to our Board of Directors at
our annual meeting on April 13, 2004, and Carlyle may
thereby continue to influence our operations.

Commencing with Carlyles acquisition of
United Defense in October 1997, we agreed to pay Carlyle for
various management and consulting services under a management
agreement with Carlyle. The management agreement was terminated
in March 2004, and in connection with the termination, we made a
final payment of $3.0 million to Carlyle for services
rendered from January 1, 2002 through March 31, 2004.
We had not previously paid to Carlyle for services during this
period.

In June 2002 we entered into an agreement with
CPU Technology, Inc. (CPU/ T) to purchase component
and design services regarding electronic subsystems for the
Bradley program. We currently have $2.8 million in purchase
orders with CPU/ T. Certain Carlyle affiliates are minority
stockholders of CPU/ T and collectively have the right to
appoint two of the six members of CPU/ Ts board.

We recognized $9.1 million and
$6.3 million of royalties, license fees and technical
service fees during the six month periods ended June 30,
2003 and 2004, respectively, from our Turkish joint venture.

Our subsidiary, HSI, makes purchases of goods and
services from various entities which are owned and controlled by
its current officers or directors. Purchases are made pursuant
to teaming agreements, other preferred supplier agreements, and
purely competitive procurements. The aggregate amount of
purchases by HSI from all related party businesses during the
three and six month periods ended June 30, 2004 were
$1.7 million and $1.8 million respectively. It is our
policy that any transactions with related parties be on terms
that are no less favorable than those available from unrelated
third parties. The transactions with related parties entered
into by our subsidiary HSI are on terms that we believe are
consistent with this policy.

13



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##### 





|        |                                                                                                                  
|------- | -----------------------------------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of the Results of Operations and Financial Condition 
    June 30, 2004

Special Note Regarding Forward Looking
Statements

Our Form 10-Q disclosure and analysis
concerning our operations, cash flows and financial position,
including, in particular, the likelihood of our success in
developing and expanding our business and the realization of
sales from our backlog, include forward-looking statements
within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act. Statements that are
predictive in nature, that depend upon or refer to future events
or conditions, or that include words such as
expects, anticipates,
intends, plans, believes,
estimates and similar expressions are
forward-looking statements. Although these statements are based
upon assumptions we consider reasonable, they are subject to
risks and uncertainties that are described more fully below and
in our annual report on Form 10-K for the year ended
December 31, 2003, our quarterly report on Form 10-Q
for the quarter ended March 31, 2004, and our Prospectus
Supplement dated April 26, 2004. Accordingly, we can give
no assurance that we will achieve the results anticipated or
implied by our forward-looking statements.

Overview

United Defense is a leader in the design,
development and production of combat vehicles, artillery
systems, naval guns, missile launchers and precision munitions
used by the U.S. Department of Defense (DoD)
and more than 40 foreign militaries, and is the leading
U.S. provider of non-nuclear ship repair, modernization and
conversion services to the U.S. Navy and related government
agencies. For many of our key DoD programs, we are either the
sole-source prime contractor and systems integrator or have been
selected as the subcontractor to provide a major element or
system in the overall program. We conduct global operations
through our manufacturing facilities in the United States and
Sweden, our ship repair facilities in key homeport locations for
the U.S. Navy, a manufacturing joint venture in Turkey, and
co-production programs with various other governments and
foreign contractors.

The Carlyle Group (Carlyle) formed
United Defense Industries, Inc. in October 1997 to facilitate
the acquisition of United Defense, L.P., our predecessor entity.
In July 2002 we acquired USMR from Carlyle. On April 30,
2004, Carlyle completed the sale of the final portion of its
holdings of our common stock.

We had a firm funded backlog of approximately
$2.2 billion as of June 30, 2004, a substantial
majority of which was derived from sole-source, prime contracts.
Approximately 81% of our sales for the six months ended
June 30, 2004 were to the U.S. Government, primarily
to agencies of the DoD (excluding sales conducted under DoD
Foreign Military Sales programs), or through subcontracts with
other government contractors.

Our results of operations, particularly revenue,
gross profits and cash flows, vary significantly from period to
period, depending largely upon the timing of our delivery of
finished products, the terms of our contracts and our level of
export sales. As a result, period-to-period comparisons may show
substantial changes disproportionate to our underlying business
activity. Period-to-period comparisons are also affected by
acquisitions where the results of operations for the acquired
business are included in our results only for periods subsequent
to the date of acquisition.

Our contracts typically fall into two categories,
cost-plus and fixed-price. Our contracts for research,
engineering, prototypes, and some other matters are typically
cost-plus arrangements, under which we are reimbursed for
approved costs and also receive a fee. Our production contracts
are typically fixed-price arrangements under which we assume the
risk of cost overruns and receive the benefit of cost savings.
Our repair and maintenance contracts are a mix of fixed-price
and cost-plus arrangements with a recent trend toward cost-plus.
All of our DoD contracts, whether we are the prime contractor or
a subcontractor, are subject to audit and cost controls. As a
result, the DoD has the right to object to our costs as being
unallowable in kind or amount, which can preclude recovery of
these costs on both cost-plus and negotiated fixed-price
contracts.

14



---



##### 



There were no material changes to our major
programs from those described in our Form 10-K Report for
the year ended December 31, 2003, other than normal
additional funding as new contracts are negotiated and awarded,
and the Mk-38 Minor Caliber Gun System program described below.
See, however, the discussion under Emerging Trends and
Uncertainties below.

Mk-38
Minor Caliber Gun System

In June 2004, we received a contract for
production, engineering support and spares for the MK 38
Mod 2 Machine Gun System Alteration program from the
U.S. Navy with a value that could reach
$395.5 million. This is our first major award for a minor
caliber gun. The Mk 38 Machine Gun System is used aboard
U.S. Navy surface combatant ships for ship self-protection.
The current gun system features a 25-mm man-operated cannon that
is not stabilized. Under this program, we will upgrade the 25-mm
cannon with a fully stabilized gun mount that can be fired
remotely. The gun mount includes on-board target acquisition
capabilities that can detect targets and control the fire of the
gun.

Under the contract, we expect to receive orders
for Mk 38 Mod 2 Machine Gun Systems throughout the life of
the contract through 2010. We have received the first order,
totaling $6.8 million under this contract, for eight
upgraded Mk 38 Mod 2 Machine Gun Systems and spares,
to be delivered in late 2004. Under the terms of the contract,
the Navy can order additional Mk 38s and support through
2010, up to the $395.5 million contract ceiling.

Business Segments, Products and
Programs

We operate in two business segments: Defense
Systems and Ship Repair and Maintenance. Our Defense Systems
program portfolio consists of a mix of weapons systems
development, production, upgrade and life cycle support
programs. Our Ship Repair and Maintenance business segment
consists of ship repair, maintenance, and modernization service
programs. Revenue generated from each of our major programs is
summarized below.

|                            |                                         |                    |       |                  |  |         |       |      |  |   |         |       |  |   |         |       | 
|--------------------------- | --------------------------------------- | ------------------ | ----- | ---------------- |  | ------- | ----- | ---- |  | - | ------- | ----- |  | - | ------- | ----- | 
|                            |                                         |                    |       |                 
|                            |                                         | Three Months Ended |       | Six Months Ended
|                            |                                         | June 30,           |       | June 30,        
|                            |                                         |                    |       |                 
|                            |                                         | 2003(a)            |       | 2004             |  | 2003(a) |       | 2004
|                            |                                         |                    |       |                  |  |         |       |     
|                            |                                         |                    |       |                 
|                            |                                         | (In millions)      |       | (In millions)   
|Defense Systems:            |                                         |                    |       |                  |  |         |       |      |  |   |         |       |  |   |         |      
|                            | Bradley Family of Vehicles              |                    | $     | 121.0            |  |         | $     | 98.2 |  |   | $       | 210.8 |  |   | $       | 210.6 | 
|                            | Naval Ordnance(b)                       |                    |       | 78.2             |  |         |       | 85.4 |  |   |         | 127.0 |  |   |         | 158.9 | 
|                            | Vertical Launch Systems                 |                    |       | 27.3             |  |         |       | 32.3 |  |   |         | 49.3  |  |   |         | 61.1  | 
|                            | Future Combat Systems(c)                |                    |       | 37.2             |  |         |       | 48.9 |  |   |         | 80.4  |  |   |         | 116.3 | 
|                            | Artillery Systems(d)                    |                    |       | 44.3             |  |         |       | 35.9 |  |   |         | 55.6  |  |   |         | 63.1  | 
|                            | Combat, Engineering & Recovery Vehicles |                    |       | 26.9             |  |         |       | 20.8 |  |   |         | 66.3  |  |   |         | 45.7  | 
|                            | Assault, Amphibious Vehicles            |                    |       | 32.9             |  |         |       | 10.0 |  |   |         | 62.4  |  |   |         | 17.0  | 
|                            | Other                                   |                    |       | 67.6             |  |         |       | 93.3 |  |   |         | 124.2 |  |   |         | 162.0 | 
|                            |                                         |                    |       |                  |  |         |       |      |  |   |         |       |  |   |         |      
|Total Defense Systems       |                                         |                    | 435.4 |                  |  |         | 424.8 |      |  |   | 776.0   |       |  |   | 834.7   |      
|Ship Repair and Maintenance |                                         |                    | 118.1 |                  |  |         | 151.5 |      |  |   | 244.0   |       |  |   | 288.7   |      
|                            |                                         |                    |       |                  |  |         |       |      |  |   |         |       |  |   |         |      
|Total                       |                                         | $                  | 553.5 |                  |  | $       | 576.3 |      |  | $ | 1,020.0 |       |  | $ | 1,123.4 |      
|                            |                                         |                    |       |                  |  |         |       |      |  |   |         |       |  |   |         |      



---



|    |                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | 2003 revenue by program modified for changes in
    program categories. No changes to segment or total period
    revenue.                       
|   
|(b) | Modified to include Bofors naval ordnance program
    revenues previously included in Other.                                                   
|   
|(c) | Future Combat Systems including Non Line-of-Sight
    Cannon previously included in Artillery Systems                                          
|   
|(d) | Modified to include Bofors artillery program
    revenues previously included in Other and move
    Future Combat Systems to separate category.

15



---



##### 



For a more detailed description of our business
and principal operating programs, see our Form 10-K Report
for the year ended December 31, 2003.

Emerging Trends and Uncertainties

We expect our Turkish joint venture entity, FNSS,
to complete its existing vehicle production contracts by
December 31, 2004. Although FNSS is pursuing opportunities
for further combat vehicle work, no contracts have yet been
signed, and we accordingly expect FNSS to experience at least a
break in production work beginning at year end. (If FNSS is
ultimately unsuccessful at obtaining further contracts, of
course, that break would most likely turn into a permanent
shutdown.) Under such circumstances, we discontinued recording
our share of earnings from FNSS in the second quarter, and would
also expect royalty income from the venture to cease during the
first quarter of 2005. The discontinuance of FNSS earnings from
the remainder of 2004 would, unless replaced by other sources,
cause our profit before tax for the year to decline by
approximately $20 million from 2003. If neither earnings
nor royalties should resume from FNSS during 2005, our profit
before tax for the year would, unless replaced by other sources,
decline by approximately $13 million from 2004.

Regarding our U.S. land combat vehicle
business, we have previously noted that the period during which
the U.S. Army continues to award significant work on
Current Force vehicles which we produce, such as the Bradley,
may not dovetail with the period during which the Army begins to
call for production of replacement designs, such as the Manned
Ground Vehicles envisioned for the Future Combat Systems
(FCS) program. (See Managements
Discussion and Analysis  Emerging Trends and
Uncertainties  Land Combat Vehicles in our
Report on Form 10-K for the year ended December 31,
2003.) To the extent that a substantial gap were to develop
between the completion of Bradley work and the commencement of
FCS production, we have noted that a prolonged suspension of
production could reduce our workforce and employee skill base
and necessitate the contraction of our manufacturing facilities.

Recent developments regarding both the Bradley
and FCS programs, taken in combination, may affect the risk of a
production suspension. Regarding FCS, the Army has announced a
restructuring of the program intended to (i) accelerate the
movement of some FCS technologies into Current Force vehicles,
(ii) obtain pre-production artillery vehicles (the NLOS-C
vehicle, for which we have design responsibility) by 2008 and
begin regular fielding of the vehicles by 2010, and
(iii) postpone the fielding of most other new FCS vehicles
to 2014. Regarding the Bradley program, Congress recently
included $275 million for further Bradley modernization in
its FY05 appropriation for DoD, which we believe would provide
continued production work for us until mid-2007. Also, the Army
has proposed to restructure its combat force in a way which
would call for the modernization of 600 or more additional
Bradleys. The Army has not yet indicated when it would seek such
modernization funding, nor the exact configuration to which the
additional vehicles would be modernized, but much of our prior
Bradley modernization work has generated revenues of
$1 million or more per vehicle. The modernization of the
additional Bradleys, if ultimately approved by DoD, funded by
Congress, and awarded to us, would likely be performed over
approximately a three-year period beginning during 2005. The
combined effect of the FCS and Bradley developments would most
likely be to at least postpone the risk of a production
suspension.

16



---



##### 



Results of Operations

The following table summarizes key income
statement financial results:

|                                                          |                             |                    |         |                  |   |      |         |         |   |  |           |         |   |  |           |         |  
|--------------------------------------------------------- | --------------------------- | ------------------ | ------- | ---------------- | - | ---- | ------- | ------- | - |  | --------- | ------- | - |  | --------- | ------- | -
|                                                          |                             |                    |         |                 
|                                                          |                             | Three Months Ended |         | Six Months Ended
|                                                          |                             | June 30,           |         | June 30,        
|                                                          |                             |                    |         |                 
|                                                          |                             | 2003               |         | 2004             |   | 2003 |         | 2004   
|                                                          |                             |                    |         |                  |   |      |         |        
|                                                          |                             |                    |         |                 
|                                                          |                             | (In thousands)     |         | (In thousands)  
|Revenue:                                                  |                             |                    |         |                  |   |      |         |         |   |  |           |         |   |  |           |        
|                                                          | Defense Systems             |                    | $       | 435,422          |   |      | $       | 424,776 |   |  | $         | 776,004 |   |  | $         | 834,664 |  
|                                                          | Ship Repair and Maintenance |                    |         | 118,031          |   |      |         | 151,530 |   |  |           | 243,972 |   |  |           | 288,719 |  
|                                                          |                             |                    |         |                  |   |      |         |         |   |  |           |         |   |  |           |        
|Total Revenue                                             |                             |                    | 553,453 |                  |   |      | 576,306 |         |   |  | 1,019,976 |         |   |  | 1,123,383 |        
|Cost of sales:                                            |                             |                    |         |                  |   |      |         |         |   |  |           |         |   |  |           |        
|                                                          | Defense Systems             |                    |         | 346,441          |   |      |         | 322,234 |   |  |           | 598,318 |   |  |           | 634,655 |  
|                                                          | Ship Repair and Maintenance |                    |         | 100,739          |   |      |         | 132,982 |   |  |           | 211,445 |   |  |           | 255,648 |  
|                                                          |                             |                    |         |                  |   |      |         |         |   |  |           |         |   |  |           |        
|Total cost of sales                                       |                             |                    | 447,180 |                  |   |      | 455,216 |         |   |  | 809,763   |         |   |  | 890,303   |        
|Gross Profit:                                             |                             |                    |         |                  |   |      |         |         |   |  |           |         |   |  |           |        
|                                                          | Defense Systems             |                    |         | 88,981           |   |      |         | 102,542 |   |  |           | 177,686 |   |  |           | 200,009 |  
|                                                          | Ship Repair and Maintenance |                    |         | 17,292           |   |      |         | 18,548  |   |  |           | 32,527  |   |  |           | 33,071  |  
|                                                          |                             |                    |         |                  |   |      |         |         |   |  |           |         |   |  |           |        
|Total gross profit                                        |                             |                    | 106,273 |                  |   |      | 121,090 |         |   |  | 210,213   |         |   |  | 233,080   |        
|Gross profit % of sales:                                  |                             |                    |         |                  |   |      |         |         |   |  |           |         |   |  |           |        
|                                                          | Defense Systems             |                    |         | 20.4             | % |      |         | 24.1    | % |  |           | 22.9    | % |  |           | 24.0    | %
|                                                          | Ship Repair and Maintenance |                    |         | 14.7             | % |      |         | 12.2    | % |  |           | 13.3    | % |  |           | 11.5    | %
|Total gross profit % of sales                             |                             |                    | 19.2    | %                |   |      | 21.0    | %       |   |  | 20.6      | %       |   |  | 20.7      | %      
|Selling, general and administrative expenses:             |                             |                    |         |                  |   |      |         |         |   |  |           |         |   |  |           |        
|                                                          | Defense Systems             |                    | $       | 33,731           |   |      | $       | 28,942  |   |  | $         | 62,936  |   |  | $         | 59,904  |  
|                                                          | Ship Repair and Maintenance |                    |         | 8,137            |   |      |         | 9,430   |   |  |           | 16,002  |   |  |           | 17,227  |  
|                                                          |                             |                    |         |                  |   |      |         |         |   |  |           |         |   |  |           |        
|Total selling, general and administrative expenses        |                             |                    | 41,868  |                  |   |      | 38,372  |         |   |  | 78,938    |         |   |  | 77,131    |        
|Research and development                                  |                             |                    | 4,155   |                  |   |      | 9,225   |         |   |  | 6,035     |         |   |  | 15,778    |        
|                                                          |                             |                    |         |                  |   |      |         |         |   |  |           |         |   |  |           |        
|Income from operations                                    |                             |                    | 60,250  |                  |   |      | 73,493  |         |   |  | 125,240   |         |   |  | 140,171   |        
|Earnings related to investments in foreign
    affiliates |                             |                    | 6,106   |                  |   |      | 560     |         |   |  | 11,655    |         |   |  | 6,376     |        
|                                                          | Interest income             |                    |         | 983              |   |      |         | 933     |   |  |           | 1,897   |   |  |           | 1,906   |  
|                                                          | Interest expense            |                    |         | (7,213           | ) |      |         | (6,448  | ) |  |           | (14,701 | ) |  |           | (12,902 | )
|                                                          |                             |                    |         |                  |   |      |         |         |   |  |           |         |   |  |           |        
|Net interest expense                                      |                             |                    | (6,230  | )                |   |      | (5,515  | )       |   |  | (12,804   | )       |   |  | (10,996   | )      
|                                                          |                             |                    |         |                  |   |      |         |         |   |  |           |         |   |  |           |        
|                                                          | Income before income taxes  |                    |         | 60,126           |   |      |         | 68,538  |   |  |           | 124,091 |   |  |           | 135,551 |  
|                                                          |                             |                    |         |                  |   |      |         |         |   |  |           |         |   |  |           |        
|Provision for income taxes                                |                             |                    | 24,050  |                  |   |      | 27,735  |         |   |  | 49,636    |         |   |  | 52,865    |        
|                                                          |                             |                    |         |                  |   |      |         |         |   |  |           |         |   |  |           |        
|                                                          | Net income                  |                    | $       | 36,076           |   |      | $       | 40,803  |   |  | $         | 74,455  |   |  | $         | 82,686  |  
|                                                          |                             |                    |         |                  |   |      |         |         |   |  |           |         |   |  |           |        

Revenue

Revenue of $576.3 million for the three
months ended June 30, 2004 was $22.8 million, or 4%
higher than the $553.5 million for the comparable period in
2003. Defense Systems segment revenue of $424.8 million was
$10.6 million lower than the $435.4 million in the
second quarter of 2003 driven by timing of Bradley and Assault
Amphibious Vehicle deliveries. Ship Repair and Maintenance
segment revenue of $151.5 million was $33.5 million,
or 28.4% higher than the same period in 2003 when our
U.S. Navy workload was partially disrupted due to the
deployment of vessels for Operation Iraqi Freedom. In addition,
higher sales in the quarter ended June 30, 2004 reflect
continued focus by the U.S. Navy on ship maintenance in
anticipation of future operations.

17



---



##### 



Revenue of $1.1 billion for the six months
ended June 30, 2004 was $103.4 million, or 10.1%
higher than the same six month period in 2003. Ship Repair and
Maintenance segment revenue was $288.7 million, or 18.3%
higher than the same period in 2003 due partially to the 2003
deployment of vessels for Operation Iraqi Freedom and partially
to the 2004 U.S. Navy focus on ship maintenance in
anticipation of future operations. Defense Systems segment
revenue for the six months ended June 30, 2003 of
$834.7 million was $58.7 million, or 7.6% higher than
the year-earlier period driven by increased DD(X) Advanced Gun
System (AGS) and FCS development work, as well as a
surge in deliveries of vehicle components and spare parts.

Gross
profit

Gross profit of $121.1 million for the
three-month period ended June 30, 2004 was
$14.8 million higher than the $106.3 million for the
corresponding period in 2003. Gross profit as a percentage of
sales for the three months ended June 30, 2004 was 21.0%
compared with 19.2% for the same period in 2003. The Defense
Systems segments gross profit rate for the three months
ended June 30, 2004 and 2003 was 24.1% and 20.4%,
respectively. The higher gross profit rate in 2004 was due to an
increase in royalties from our Turkish joint venture and
improved operating margins throughout the segment. The Ship
Repair and Maintenance segments gross profit rate was
12.2% for the three months ended June 30, 2004 compared
with 14.7% in the prior year period due primarily to the timing
of award fees on cost plus contracts.

Gross profit of $233.1 million for the six
months ended June 30, 2004 was $22.9 million higher
than the $210.2 million for the same period in 2003. Gross
profit as a percent of sales for the six months ended
June 30, 2004 was 20.7% compared with 20.6% in the same
prior period. The Defense Systems segment gross profit rate for
the six months ended June 30, 2004 and 2003 was 24.0% and
22.9%, respectively. The higher gross profit rate in 2004 was
due to improved profit margins on production and spare part
contracts. The Ship Repair and Maintenance segment gross profit
as a percent of sales for the six months ended June 30,
2004 and 2003 was 11.5% and 13.3%, respectively. The lower gross
profit rate in 2004 is due primarily to the timing of award fees.

Selling,
general and administrative expenses

Selling, general and administrative expenses for
the three months ended June 30, 2004 were
$38.4 million, or $3.5 million lower than the
$41.9 million for the same period in 2003. Selling, general
and administrative expenses for the six months ended
June 30, 2004 and 2003 were $77.1 million and
$78.9 million, respectively. The reduction is due primarily
to reduced amortization of intangible expense and higher
proposal costs in 2003 associated with the FCS program.

Research
and development

Research and development spending was
$9.2 million for the three months ended June 30, 2004
compared with $4.2 million for the corresponding prior
period. Research and development spending for the six months
ended June 30, 2004 and 2003 was $15.8 million and
$6.0 million, respectively. These increases were primarily
associated with higher spending on several projects related to
new market opportunities such as for active protection and a
risk mitigation project.

Earnings
from foreign affiliates

Earnings from foreign affiliates was
$0.6 million for the three months ended June 30, 2004,
a decrease of $5.5 million from the $6.1 million for
the same period last year. Earnings from foreign affiliates in
the six months ended June 30, 2004 and 2003 were
$6.4 million and $11.7 million, respectively. Due to
the diminished outlook for the receipt of future dividends from
FNSS, our Turkish joint venture, we discontinued recording our
share of earnings from FNSS in the second quarter of 2004.

Interest
expense

Net interest expense was $5.5 million in the
three months ended June 30, 2004 compared with
$6.2 million in the same period in 2003. Net interest
expense for the six month period ended June 30, 2004

18



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and 2003 was $11.0 million and
$12.8 million, respectively. The lower interest expense in
2004 was primarily due to a lower debt level in 2004.


Provision
for Income Taxes

The income tax provision for the three-month
period ended June 30, 2004 was $27.7 million compared
with $24.1 million for the same prior period. The income
tax provisions for the six months ended June 30, 2004 and
2003 were $52.9 million and $49.6 million,
respectively. The provision for income taxes is based on an
estimated annual effective income tax rate of 39% and 40% for
2004 and 2003, respectively.

Liquidity, Capital Resources and Financial
Condition

Cash provided by operating activities was
$105.3 million for the six-month period ended June 30,
2004 compared with $98.8 million in the same prior period,
a $6.5 million increase. The primary reason for the
increase was higher net income.

Cash used in investing activities was
$64.1 million for the six-month period ended June 30,
2004 compared with $23.7 million in the prior year period.
The increase is primarily attributable to three acquisitions we
made during the six-month period: Kaiser Compositek for
$8.3 million, Cercom for $21.2 million, and Hawaii
Shipyards for $15 million. Additionally, in June, 2004 we
completed a $6.5 million purchase from the U.S. Navy
for its portion of the land and facility which we operate in
Fridley, Minnesota.

Cash used in financing activities was
$50.9 million for the six-month period ended June 30,
2004, compared with $1.6 million of cash provided in the
same period in 2003. We purchased $29.2 million in shares
of United Defense stock under a stock repurchase program
initiated during the second quarter of 2004. In addition, our
debt repayment during the six-month period ended June 30,
2004 was $29.6 million versus none in the same period in
2003 per our repayment schedule. Proceeds from the exercise
of stock options increased to $7.8 million in 2004.

Based on current levels of operations and
anticipated growth, we believe that our cash from operations,
together with other available sources of liquidity, including
borrowings available under the revolving credit facility, will
be sufficient to fund anticipated capital expenditures and make
required payments of principal and interest on debt, including
payments due under our senior credit facility, for the
foreseeable future. Additionally, the cash on hand is sufficient
to permit the company to continue to execute a share repurchase
of up to the remaining $70.8 million authorized by our
Board of Directors.



|        |                                                                               
|------- | ------------------------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    About Market Risk  June 30, 2004

All of our financial instruments that are
sensitive to market risk are entered into for purposes other
than trading.

Forward Currency Exchange Risk

We conduct some of our operations outside the
United States in functional currencies other than the
U.S. dollar. To mitigate the risk associated with
fluctuating currencies on short-term and long-term foreign
currency-denominated transactions, we enter into foreign
currency forward exchange contracts. We do not enter into
foreign currency forward exchange contracts for trading purposes.

Interest Rate Risk

Borrowings under our senior secured credit
facility are sensitive to changes in interest rates. As of
June 30, 2004 the weighted average interest rate on the
$72.5 million Term A borrowings and on the
$474.9 million Term B borrowings was 3.42%. Loans made
pursuant to the Term A loan facility require equal quarterly
amortization payments of $6.3 million, with a final payment
due on August 13, 2007. On April 29, 2004, we made a
mandatory $9.9 million debt repayment to the Term A lenders
pursuant to the excess cash flow provisions in the current
credit facility. This payment eliminated the amortization
payment due to the Term A lenders on June 30, 2004 and
reduces the Term A amortization due on September 30, 2004 by

19



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##### 



$3.6 million. Loans made pursuant to the
Term B facility require quarterly amortization payments of
$6.7 million beginning on March 31, 2004 until
June 30, 2007, and $49.4 million each quarter
thereafter, with the final payment being due on August 13,
2009.


In January 2002, we entered into an interest rate
protection agreement to mitigate risks associated with variable
interest rate borrowings under our senior secured credit
facility. The specified contract amount of this interest rate
swap agreement is $173 million. The agreement entitles us
to pay a base interest rate of 3.45%, in return for the right to
receive a floating interest rate which is based on three-month
LIBOR as of each quarterly measurement date. In the event the
three-month LIBOR at the measurement date exceeds 6%, the base
interest rate is adjusted to the then effective LIBOR up to a
maximum of 8%. USMR had also entered into an interest rate
protection agreement to mitigate risks associated with variable
interest rate borrowings. The specified amount of the agreement
is $20 million which matured on January 29, 2004. The
net cash amounts paid or received on these agreements are
accrued and recognized as an adjustment to interest expense.



|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

We maintain disclosure controls and procedures
designed to ensure that information required to be disclosed in
our Companys Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the
SECs rules and forms, and that such information is
accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls
and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, and management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship
of possible controls and procedures. Also, from time to time we
make investments in unconsolidated entities, the largest of
which has been the 51% ownership position we have held in our
Turkish affiliate since 1989. As we do not control or manage
such entities, the disclosure controls and procedures with
respect thereto may be substantially more limited than those we
maintain with respect to our consolidated subsidiaries.

As of June 30, 2004, we carried out an
evaluation, under the supervision and with the participation of
our management, including the Chief Executive Officer and the
Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on
the foregoing, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
were effective.

There have been no significant changes in our
internal controls or in other factors that could significantly
affect the internal controls subsequent to the date we completed
the evaluation.

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##### 



PART II

OTHER INFORMATION

June 30, 2004



|        |                                             
|------- | --------------------------------------------
|Item 2. | Repurchase of Common Stock by the
    Issuer

The following table provides the information
related to our repurchase of common stock starting in May 2004.

|                          |  |                      |         |                     |  |                      |       |                       |  |  |         |  |  |   |         | 
|------------------------- |  | -------------------- | ------- | ------------------- |  | -------------------- | ----- | --------------------- |  |  | ------- |  |  | - | ------- | 
|                          |  |                      |         |                     |  |                      |       | (In thousands)       
|                          |  |                      |         |                     |  | Total Number         |       | Approximate Dollar   
|                          |  |                      |         |                     |  | of Shares (or Units) |       | Value of Shares (or  
|                          |  | Total Number         |         | Average             |  | Purchased as Part of |       | Units) that may yet  
|                          |  | of Shares (or Units) |         | Price Paid          |  | Publicly Announced   |       | be Purchased Under   
|Period                    |  | Purchased            |         | per Share (or Unit) |  | Plans or Programs    |       | the Plans or Programs
|                          |  |                      |         |                     |  |                      |       |                      
|April 1 to April 30, 2004 |  |                      | 0       |                     |  | $                    |      |                       |  |  | 0       |  |  | $ | 100,000 | 
|May 1 to May 30, 2004     |  |                      | 269,500 |                     |  |                      | 34.30 |                       |  |  | 269,500 |  |  |   | 90,756  | 
|June 1 to June 30, 2004   |  |                      | 599,300 |                     |  |                      | 33.26 |                       |  |  | 599,300 |  |  |   | 70,823  | 

In March 2004, the board of directors authorized
the purchase of up to $100 million of our common stock. The
repurchase plan was announced on March 5, 2004 and expires
on March 5, 2005. During the second quarter of 2004 we
repurchased 868,800 shares at an aggregate cost of
$29.2 million.



|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

We held our annual meeting of stockholders on
April 13, 2004. The matters voted upon at the meeting and
the corresponding results are set forth below.

1. The election of nine directors to hold
office until next annual meeting of stockholders and until their
respective successors have been elected or appointed:

|                        |  |     |            |          |  |  |            | 
|----------------------- |  | --- | ---------- | -------- |  |  | ---------- | 
|                        |  | For |            | Withheld
|                        |  |     |            |         
|Frank C. Carlucci       |  |     | 31,414,237 |          |  |  | 18,534,302 | 
|Peter J. Clare          |  |     | 48,068,506 |          |  |  | 1,880,033  | 
|William E. Conway, Jr.  |  |     | 49,157,168 |          |  |  | 791,371    | 
|C. Thomas Faulders, III |  |     | 48,093,621 |          |  |  | 1,854,918  | 
|Robert J. Natter        |  |     | 49,816,316 |          |  |  | 132,223    | 
|J.H. Binford Peay, III  |  |     | 47,683,222 |          |  |  | 1,165,317  | 
|Thomas W. Rabaut        |  |     | 49,499,580 |          |  |  | 445,959    | 
|Francis Raborn          |  |     | 49,157,168 |          |  |  | 791,371    | 
|John M. Shalikashvili   |  |     | 30,874,057 |          |  |  | 19,074,482 | 

2. Stockholder approval of the amendment and
restatement of the United Defense Stock Option Plan to
(i) increase the number of shares issuable under the plan
by 2,000,000 shares, (ii) qualify the plan for awards
which may satisfy the requirements of performance based
compensation under Section 162(m) of the Internal Revenue
Code of 1986 as amended, and (iii) add the ability to make
grants of other equity-based compensation.

|    |            |         |  |         |           |                  |  |  |        |  |  |  |           | 
|--- | ---------- | ------- |  | ------- | --------- | ---------------- |  |  | ------ |  |  |  | --------- | 
|For |            | Against |  | Abstain |           | Broker Non-Votes
|    |            |         |  |         |           |                 
|    | 41,349,607 |         |  |         | 4,570,100 |                  |  |  | 56,031 |  |  |  | 3,972,801 | 

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##### 





|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K

(a) Exhibits



| |                                                                         
| | ------------------------------------------------------------------------
| | 10.23 Amended and restated Stock Option Plan
    (Incentive Award Plan).
|
| | 31.1  Certification of Chief Executive
    Officer.                     
|
| | 31.2  Certification of Chief Financial
    Officer.                     
|
| | 32.1  Certification of Chief Executive
    Officer.                     
|
| | 32.2  Certification of Chief Financial
    Officer.                     

(b) Reports on Form 8-K



| |                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On April 22, 2004, we filed a report on
    Form 8-K to include our first quarter earnings press
    release.                                                                                                                                                                                 
|
| | On May 3, 2004, we filed a report on
    Form 8-K indicating that we had entered into an
    underwriting agreement with J. P. Morgan Securities, Inc. in
    connection with the public offering of up to
    4,535,571 shares of our common stock by certain named
    selling shareholders.

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##### 



SIGNATURE

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



| |                                
| | -------------------------------
| | UNITED DEFENSE INDUSTRIES, INC.
| | (registrant)                   



| |     |                   
| | --- | ------------------
| | By: | /s/ FRANCIS RABORN

| |                                               
| | ----------------------------------------------
| |                                               
| | Francis Raborn                                
| | Principal Financial and Accounting
    Officer
| | and Authorized Signatory                      

Dated: August 2, 2004

23