##### 









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 September 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 October 29, 2004 there were
50,720,247 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 September 30, 2004 (unaudited)                                     |    |      | 2  | 
|                                   |  | Unaudited Consolidated Statements of Operations
    for the three months and nine months ended September 30,
    2003 and 2004 |    |      | 3  | 
|                                   |  | Unaudited Consolidated Statements of Changes in
    Stockholders Equity for the nine months ended
    September 30, 2004      |    |      | 4  | 
|                                   |  | Unaudited Consolidated Statements of Cash Flows
    for the nine months ended September 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                                  |    |      | 15 | 
|Item 3.                            |  | Quantitative and Qualitative Disclosures about
    Market Risk                                                                 |    |      | 20 | 
|Item 4.                            |  | Controls and Procedures                                                                                                        |    |      | 21 | 
|PART II  OTHER
    INFORMATION   
|Item 2.                            |  | Repurchase of Common Stock by the Issuer                                                                                       |    |      | 22 | 
|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                                                                                                                                                                                                          |           | September 30, 2004
|                                                |                                             |                                                                                                                                                                                                                            |           |                   
|ASSETS                                         
|Current assets:                                 |                                             |                                                                                                                                                                                                                            |           |                    |         |   |           |          
|                                                |                                             | Cash and cash equivalents                                                                                                                                                                                                  |           | $                  | 286,730 |   |           | $         | 319,617 | 
|                                                |                                             | Trade receivables, net                                                                                                                                                                                                     |           |                    | 168,625 |   |           |           | 172,234 | 
|                                                |                                             | Long-term contract inventories                                                                                                                                                                                             |           |                    | 392,850 |   |           |           | 320,452 | 
|                                                |                                             | Other current assets                                                                                                                                                                                                       |           |                    | 20,127  |   |           |           | 18,539  | 
|                                                |                                             |                                                                                                                                                                                                                            |           |                    |         |   |           |          
|                                                | Total current assets                        |                                                                                                                                                                                                                            |           | 868,332            |         |   |           | 830,842   |        
|Property, plant and equipment, net              |                                             |                                                                                                                                                                                                                            | 181,283   |                    |         |   | 194,626   |          
|Goodwill, net                                   |                                             |                                                                                                                                                                                                                            | 342,843   |                    |         |   | 362,479   |          
|Intangible assets, net                          |                                             |                                                                                                                                                                                                                            | 14,222    |                    |         |   | 11,728    |          
|Prepaid pension and postretirement benefit cost |                                             |                                                                                                                                                                                                                            | 128,997   |                    |         |   | 122,836   |          
|Restricted cash                                 |                                             |                                                                                                                                                                                                                            | 12,244    |                    |         |   | 12,053    |          
|Other assets                                    |                                             |                                                                                                                                                                                                                            | 49,587    |                    |         |   | 30,156    |          
|                                                |                                             |                                                                                                                                                                                                                            |           |                    |         |   |           |          
|Total assets                                    |                                             | $                                                                                                                                                                                                                          | 1,597,508 |                    |         | $ | 1,564,720 |          
|                                                |                                             |                                                                                                                                                                                                                            |           |                    |         |   |           |          
|                                               
|LIABILITIES AND STOCKHOLDERS
    EQUITY       
|Current liabilities:                            |                                             |                                                                                                                                                                                                                            |           |                    |         |   |           |          
|                                                | Current portion of long-term debt           |                                                                                                                                                                                                                            | $         | 52,043             |         |   | $         | 52,043    |        
|                                                |                                             | Accounts payable, trade and other                                                                                                                                                                                          |           |                    | 124,502 |   |           |           | 97,561  | 
|                                                |                                             | Advanced payments                                                                                                                                                                                                          |           |                    | 462,304 |   |           |           | 379,580 | 
|                                                |                                             | Current tax liability                                                                                                                                                                                                      |           |                    |        |   |           |           | 13,394  | 
|                                                |                                             | Deferred tax liability                                                                                                                                                                                                     |           |                    | 16,280  |   |           |           | 21,034  | 
|                                                |                                             | Accrued and other liabilities                                                                                                                                                                                              |           |                    | 140,307 |   |           |           | 143,254 | 
|                                                |                                             |                                                                                                                                                                                                                            |           |                    |         |   |           |          
|                                                | Total current liabilities                   |                                                                                                                                                                                                                            |           | 795,436            |         |   |           | 706,866   |        
|Long-term liabilities:                          |                                             |                                                                                                                                                                                                                            |           |                    |         |   |           |          
|                                                |                                             | Long-term debt, net of current portion                                                                                                                                                                                     |           |                    | 524,946 |   |           |           | 485,915 | 
|                                                |                                             | Accrued pension and postretirement benefit cost                                                                                                                                                                            |           |                    | 51,538  |   |           |           | 46,364  | 
|                                                |                                             | Deferred tax liability                                                                                                                                                                                                     |           |                    | 17,695  |   |           |           | 23,664  | 
|                                                |                                             | Other liabilities                                                                                                                                                                                                          |           |                    | 80,812  |   |           |           | 77,362  | 
|                                                |                                             |                                                                                                                                                                                                                            |           |                    |         |   |           |          
|                                                | Total liabilities                           |                                                                                                                                                                                                                            |           | 1,470,427          |         |   |           | 1,340,171 |        
|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; 53,021,452 and
    51,391,952, issued and outstanding, respectively, at
    September 30, 2004 |           |                    | 522     |   |           |           | 514     | 
|                                                | Additional paid-in-capital                  |                                                                                                                                                                                                                            |           | 183,337            |         |   |           | 199,015   |        
|                                                | Deferred compensation                       |                                                                                                                                                                                                                            |           | (197               | )       |   |           | (3,824    | )      
|                                                | Retained (deficit) earnings                 |                                                                                                                                                                                                                            |           | (54,304            | )       |   |           | 28,037    |        
|                                                | Accumulated other comprehensive (loss) gain |                                                                                                                                                                                                                            |           | (2,277             | )       |   |           | 807       |        
|                                                |                                             |                                                                                                                                                                                                                            |           |                    |         |   |           |          
|                                                | Total stockholders equity                  |                                                                                                                                                                                                                            |           | 127,081            |         |   |           | 224,549   |        
|                                                |                                             |                                                                                                                                                                                                                            |           |                    |         |   |           |          
|Total liabilities and stockholders equity      |                                             | $                                                                                                                                                                                                                          | 1,597,508 |                    |         | $ | 1,564,720 |          
|                                                |                                             |                                                                                                                                                                                                                            |           |                    |         |   |           |          

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 |        | Nine months ended
|                                  |                                                           | September 30,      |        | September 30,    
|                                  |                                                           |                    |        |                  
|                                  |                                                           | 2003               |        | 2004              |         | 2003 |        | 2004      
|                                  |                                                           |                    |        |                   |         |      |        |           
|Revenue:                          |                                                           |                    |        |                   |         |      |        |            |         |   |         |            |           |   |         |           
|                                  | Sales                                                     |                    | $      | 507,915           |         |      | $      | 573,399    |         |   | $       | 1,527,891  |           |   | $       | 1,696,782  |          
|Costs and expenses:               |                                                           |                    |        |                   |         |      |        |            |         |   |         |            |           |   |         |           
|                                  | Cost of sales                                             |                    |        | 400,298           |         |      |        | 436,658    |         |   |         | 1,210,061  |           |   |         | 1,326,961  |          
|                                  | Selling, general and administrative expenses              |                    |        | 38,065            |         |      |        | 38,393     |         |   |         | 117,003    |           |   |         | 115,524    |          
|                                  | Research and development                                  |                    |        | 10,717            |         |      |        | 8,030      |         |   |         | 16,752     |           |   |         | 23,808     |          
|                                  |                                                           |                    |        |                   |         |      |        |            |         |   |         |            |           |   |         |           
|                                  |                                                           | Total expenses     |        |                   | 449,080 |      |        |            | 483,081 |   |         |            | 1,343,816 |   |         |            | 1,466,293 | 
|                                  |                                                           |                    |        |                   |         |      |        |            |         |   |         |            |           |   |         |           
|Income from operations            |                                                           |                    | 58,835 |                   |         |      | 90,318 |            |         |   | 184,075 |            |           |   | 230,489 |           
|                                  | Earnings related to investments in foreign
    affiliates |                    |        | 5,003             |         |      |        |           |         |   |         | 16,658     |           |   |         | 6,376      |          
|                                  | Interest income                                           |                    |        | 1,012             |         |      |        | 1,328      |         |   |         | 2,909      |           |   |         | 3,234      |          
|                                  | Interest expense                                          |                    |        | (7,100            | )       |      |        | (6,722     | )       |   |         | (21,801    | )         |   |         | (19,624    | )        
|                                  |                                                           |                    |        |                   |         |      |        |            |         |   |         |            |           |   |         |           
|Total other expense               |                                                           |                    | (1,085 | )                 |         |      | (5,394 | )          |         |   | (2,234  | )          |           |   | (10,014 | )         
|                                  |                                                           |                    |        |                   |         |      |        |            |         |   |         |            |           |   |         |           
|Income before income taxes        |                                                           |                    | 57,750 |                   |         |      | 84,924 |            |         |   | 181,841 |            |           |   | 220,475 |           
|Provision for income taxes        |                                                           |                    | 20,360 |                   |         |      | 32,679 |            |         |   | 69,996  |            |           |   | 85,544  |           
|                                  |                                                           |                    |        |                   |         |      |        |            |         |   |         |            |           |   |         |           
|Net income                        |                                                           | $                  | 37,390 |                   |         | $    | 52,245 |            |         | $ | 111,845 |            |           | $ | 134,931 |           
|                                  |                                                           |                    |        |                   |         |      |        |            |         |   |         |            |           |   |         |           
|Earnings per common share-basic   |                                                           | $                  | 0.72   |                   |         | $    | 1.01   |            |         | $ | 2.16    |            |           | $ | 2.58    |           
|                                  |                                                           |                    |        |                   |         |      |        |            |         |   |         |            |           |   |         |           
|                                  | Weighted average common shares outstanding                |                    |        | 52,029,410        |         |      |        | 51,882,247 |         |   |         | 51,883,593 |           |   |         | 52,240,432 |          
|Earnings per common share-diluted |                                                           | $                  | 0.71   |                   |         | $    | 0.99   |            |         | $ | 2.12    |            |           | $ | 2.54    |           
|                                  |                                                           |                    |        |                   |         |      |        |            |         |   |         |            |           |   |         |           
|                                  | Weighted average common shares outstanding                |                    |        | 52,994,910        |         |      |        | 52,819,743 |         |   |         | 52,802,260 |           |   |         | 53,185,819 |          

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 |  
|Issuance of restricted stock awards                                               |  |        |     |            |  |              | 4,783   |           |  |               | (4,783 | )     |  |   |         |   |  |   |        |   |  |   |        |  
|Amortization of deferred stock compensation                                       |  |        |     |            |  |              |         |           |  |               | 1,156  |       |  |   |         |   |  |   |        |   |  |   | 1,156   |  
|Exercise of stock options                                                         |  |        | 8   |            |  |              | 11,220  |           |  |               |        |       |  |   |         |   |  |   |        |   |  |   | 11,228  |  
|Tax benefit from stock options                                                    |  |        |     |            |  |              | 5,362   |           |  |               |        |       |  |   |         |   |  |   |        |   |  |   | 5,362   |  
|Stock repurchased                                                                 |  |        | (16 | )          |  |              | (5,687  | )         |  |               |        |       |  |   | (52,590 | ) |  |   |        |   |  |   | (58,293 | )
|Net foreign currency translation                                                  |  |        |     |            |  |              |         |           |  |               |        |       |  |   |         |   |  |   | 104    |   |  |   | 104     |  
|Change in fair value of foreign currency and
    interest rate hedges, net of tax |  |        |     |            |  |              |         |           |  |               |        |       |  |   |         |   |  |   | 2,980  |   |  |   | 2,980   |  
|Net income for period ended September 30,
    2004                                |  |        |     |            |  |              |         |           |  |               |        |       |  |   | 134,931 |   |  |   |        |   |  |   | 134,931 |  
|                                                                                  |  |        |     |            |  |              |         |           |  |               |        |       |  |   |         |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                        |  |        |     |            |  |              |         |           |  |               |        |       |  |   |         |   |  |   |        |   |  |   | 138,015 |  
|                                                                                  |  |        |     |            |  |              |         |           |  |               |        |       |  |   |         |   |  |   |        |   |  |   |         |  
|Balance, September 30, 2004                                                       |  | $      | 514 |            |  | $            | 199,015 |           |  | $             | (3,824 | )     |  | $ | 28,037  |   |  | $ | 807    |   |  | $ | 224,549 |  
|                                                                                  |  |        |     |            |  |              |         |           |  |               |        |       |  |   |         |   |  |   |        |   |  |   |         |  

See accompanying notes.

4



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##### 



UNITED DEFENSE INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


|                                                                                  |                                                                |                   |         |         |   |   |         |         |  
|--------------------------------------------------------------------------------- | -------------------------------------------------------------- | ----------------- | ------- | ------- | - | - | ------- | ------- | -
|                                                                                  |                                                                |                  
|                                                                                  |                                                                | Nine months ended
|                                                                                  |                                                                | September 30,    
|                                                                                  |                                                                |                  
|                                                                                  |                                                                | 2003              |         | 2004   
|                                                                                  |                                                                |                   |         |        
|Operating activities                                                              |                                                                |                   |         |         |   |   |         |        
|Net income                                                                        |                                                                | $                 | 111,845 |         |   | $ | 134,931 |        
|Adjustments to reconcile net income to cash
    provided by operating activities: |                                                                |                   |         |         |   |   |         |        
|                                                                                  | Depreciation                                                   |                   |         | 20,170  |   |   |         | 22,886  |  
|                                                                                  | Amortization of software                                       |                   |         | 3,585   |   |   |         | 3,538   |  
|                                                                                  | Amortization of other intangibles                              |                   |         | 11,261  |   |   |         | 7,470   |  
|                                                                                  | Amortization of financing costs                                |                   |         | 2,524   |   |   |         | 2,293   |  
|                                                                                  | Deferred tax provision                                         |                   |         | 33,314  |   |   |         | 10,743  |  
|Changes in operating assets and liabilities:                                      |                                                                |                   |         |         |   |   |         |        
|                                                                                  | Trade receivables                                              |                   |         | (6,733  | ) |   |         | 1,009   |  
|                                                                                  | Inventories                                                    |                   |         | 71,006  |   |   |         | 79,169  |  
|                                                                                  | Other assets                                                   |                   |         | (7,719  | ) |   |         | 21,723  |  
|                                                                                  | Prepaid pension and postretirement benefit cost                |                   |         | (3,452  | ) |   |         | 6,161   |  
|                                                                                  | Accounts payable, trade and other                              |                   |         | (24,626 | ) |   |         | (27,694 | )
|                                                                                  | Advanced payments                                              |                   |         | (37,572 | ) |   |         | (83,318 | )
|                                                                                  | Current tax liability                                          |                   |         |        |   |   |         | 13,956  |  
|                                                                                  | Accrued and other liabilities                                  |                   |         | (6,635  | ) |   |         | 2,273   |  
|                                                                                  | Accrued pension and postretirement benefit cost                |                   |         | 5,252   |   |   |         | (5,018  | )
|                                                                                  |                                                                |                   |         |         |   |   |         |        
|Cash provided by operating activities                                             |                                                                |                   | 172,220 |         |   |   | 190,122 |        
|                                                                                  |                                                                |                   |         |         |   |   |         |        
|Investing activities                                                              |                                                                |                   |         |         |   |   |         |        
|                                                                                  | Capital expenditures                                           |                   |         | (32,247 | ) |   |         | (26,511 | )
|                                                                                  | Purchase of Kaiser Compositek, Cercom and Hawaii
    Shipyards |                   |         |        |   |   |         | (44,570 | )
|                                                                                  |                                                                |                   |         |         |   |   |         |        
|Cash used in investing activities                                                 |                                                                |                   | (32,247 | )       |   |   | (71,081 | )      
|                                                                                  |                                                                |                   |         |         |   |   |         |        
|Financing activities                                                              |                                                                |                   |         |         |   |   |         |        
|                                                                                  | Payments on long-term debt                                     |                   |         | (13,011 | ) |   |         | (39,032 | )
|                                                                                  | Proceeds from sale of common stock                             |                   |         | 2,291   |   |   |         | 11,228  |  
|                                                                                  | Common stock repurchased                                       |                   |         |        |   |   |         | (58,293 | )
|                                                                                  |                                                                |                   |         |         |   |   |         |        
|Cash used in financing activities                                                 |                                                                |                   | (10,720 | )       |   |   | (86,097 | )      
|                                                                                  |                                                                |                   |         |         |   |   |         |        
|Effect of exchange rate changes on cash                                           |                                                                |                   | 5,059   |         |   |   | (57     | )      
|                                                                                  |                                                                |                   |         |         |   |   |         |        
|Increase in cash and cash equivalents                                             |                                                                |                   | 134,312 |         |   |   | 32,887  |        
|Cash and cash equivalents, beginning of year                                      |                                                                |                   | 106,802 |         |   |   | 286,730 |        
|                                                                                  |                                                                |                   |         |         |   |   |         |        
|Cash and cash equivalents, end of period                                          |                                                                | $                 | 241,114 |         |   | $ | 319,617 |        
|                                                                                  |                                                                |                   |         |         |   |   |         |        

See accompanying notes.

5



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##### 



UNITED DEFENSE INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS

September 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 annual disclosures required by generally accepted
accounting principles. Certain amounts in prior period financial
statements have been reclassified to conform to the current
period presentation. 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
September 30, 2004 and the results of operations for the
three months and nine months ended September 30, 2003 and
2004 and cash flows for the nine months ended September 30,
2003 and 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 Reports on
Form 10-Q for the quarters ended March 31 and
June 30, 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 production contracts with foreign customers,
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
quarterly 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 base fees in the proportion
that costs incurred to date bear to total estimated costs. Award
fees are recorded as revenue when contracts are modified to
incorporate the earned award fees. We charge any anticipated
losses on a contract to operations as soon as those losses are
determined.



| |                         
| | ------------------------
| | Stock-Based Compensation

At September 30, 2004, we had a stock-based
employee compensation plan, which is described more fully in our
Form 10-K 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,

6



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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
(of which 136,200 had been issued as of September 30,
2004), and stock options to purchase 500,000 common shares
at an exercise price of $31.80. Additionally, on August 19,
2004, 7,000 shares of restricted stock were authorized and
issued for our independent Directors as part of their
compensation. The compensation recorded in the financial
statements reflects the amortization of deferred compensation
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
(as amended by SFAS 148), Accounting for Stock-Based
Compensation, to stock-based employee compensation.

|                                                                                                                                                    |                       |                                       |        |                   |  |      |        |      |  |   |         |      |  |   |         |      | 
|--------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ------------------------------------- | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------- | ---- |  | - | ------- | ---- | 
|                                                                                                                                                    |                       |                                       |        |                  
|                                                                                                                                                    |                       | Three months ended                    |        | Nine months ended
|                                                                                                                                                    |                       | September 30,                         |        | September 30,    
|                                                                                                                                                    |                       |                                       |        |                  
|                                                                                                                                                    |                       | 2003                                  |        | 2004              |  | 2003 |        | 2004
|                                                                                                                                                    |                       |                                       |        |                   |  |      |        |     
|                                                                                                                                                    |                       |                                      
|                                                                                                                                                    |                       | (In thousands, except per share data)
|Reported net income                                                                                                                                 |                       | $                                     | 37,390 |                   |  | $    | 52,245 |      |  | $ | 111,845 |      |  | $ | 134,931 |     
|Add back: Compensation expense recorded, net of
    related tax effects                                                                             |                       |                                       | 12     |                   |  |      | 300    |      |  |   | 37      |      |  |   | 694     |     
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |                       |                                       | (1,127 | )                 |  |      | (1,603 | )    |  |   | (3,225  | )    |  |   | (4,669  | )   
|                                                                                                                                                    |                       |                                       |        |                   |  |      |        |      |  |   |         |      |  |   |         |     
|Pro forma net income                                                                                                                                |                       | $                                     | 36,275 |                   |  | $    | 50,942 |      |  | $ | 108,657 |      |  | $ | 130,956 |     
|                                                                                                                                                    |                       |                                       |        |                   |  |      |        |      |  |   |         |      |  |   |         |     
|Earnings per share:                                                                                                                                 |                       |                                       |        |                   |  |      |        |      |  |   |         |      |  |   |         |     
|                                                                                                                                                    | Basic  as reported   |                                       | $      | 0.72              |  |      | $      | 1.01 |  |   | $       | 2.16 |  |   | $       | 2.58 | 
|                                                                                                                                                    |                       |                                       |        |                   |  |      |        |      |  |   |         |      |  |   |         |     
|                                                                                                                                                    | Basic  pro forma     |                                       | $      | 0.70              |  |      | $      | 0.98 |  |   | $       | 2.09 |  |   | $       | 2.51 | 
|                                                                                                                                                    |                       |                                       |        |                   |  |      |        |      |  |   |         |      |  |   |         |     
|                                                                                                                                                    | Diluted  as reported |                                       | $      | 0.71              |  |      | $      | 0.99 |  |   | $       | 2.12 |  |   | $       | 2.54 | 
|                                                                                                                                                    |                       |                                       |        |                   |  |      |        |      |  |   |         |      |  |   |         |     
|                                                                                                                                                    | Diluted  pro forma   |                                       | $      | 0.68              |  |      | $      | 0.96 |  |   | $       | 2.06 |  |   | $       | 2.46 | 
|                                                                                                                                                    |                       |                                       |        |                   |  |      |        |      |  |   |         |      |  |   |         |     



| |                 
| | ----------------
| | Stock Repurchase

In April 2004, the Board of Directors authorized
the repurchase of up to $100 million of our common stock.
During the third quarter of 2004, we repurchased
760,700 shares at an aggregate cost of $29.1 million.
As of September 30, 2004, we had repurchased
1,629,500 shares at an aggregate cost of $58.3 million.



| |                              
| | -----------------------------
| | New Accounting Pronouncements

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 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.

7



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                    
|-- | -----------------------------------
|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
$5.0 million and zero, respectively for the three months
ended September 30, 2003 and 2004, and $16.7 million
and $6.4 million, respectively for the nine months ended
September 30, 2003 and 2004. 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 the 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):

|                      |  |                |         |               |  |   |        | 
|--------------------- |  | -------------- | ------- | ------------- |  | - | ------ | 
|                      |  | December 31,   |         | September 30,
|                      |  | 2003           |         | 2004         
|                      |  |                |         |              
|                      |  |               
|                      |  | (In thousands)
|Current Assets        |  | $              | 174,023 |               |  | $ | 68,808 | 
|Non-current assets    |  |                | 43,790  |               |  |   | 32,731 | 
|Current Liabilities   |  |                | 184,816 |               |  |   | 56,505 | 
|Long-term liabilities |  |                |        |               |  |   |       | 

|              |  |                    |        |                   |  |      |        |      |  |   |         |  |  |   |         | 
|------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------- |  |  | - | ------- | 
|              |  |                    |        |                  
|              |  | Three months ended |        | Nine months ended
|              |  | September 30,      |        | September 30,    
|              |  |                    |        |                  
|              |  | 2003               |        | 2004              |  | 2003 |        | 2004
|              |  |                    |        |                   |  |      |        |     
|              |  |                   
|              |  | (In thousands)    
|Sales         |  | $                  | 50,848 |                   |  | $    | 42,937 |      |  | $ | 170,580 |  |  | $ | 156,625 | 
|Cost of sales |  |                    | 23,936 |                   |  |      | 20,918 |      |  |   | 81,226  |  |  |   | 74,427  | 
|Net income    |  |                    | 9,812  |                   |  |      | 9,564  |      |  |   | 30,152  |  |  |   | 32,694  | 

As mentioned above, FNSS does not have a contract
for production beyond 2004, therefore, its ability to pay
dividends in future years is unclear.



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

Comprehensive income was $112.7 million and
$138.0 million for the nine-month periods ended
September 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

We have a credit facility with various banks that
includes $900 million of term loan facilities and a
$200 million revolving credit facility. We incurred
$5.5 million in additional financing fees that have been
deferred and are being amortized over the remaining term of the
credit facility using the effective interest method.

Outstanding borrowings on the term loan
facilities were $538 million at September 30, 2004.
The facilities bear interest at variable rates with a weighted
average rate of 3.87% at September 30, 2004. These loans
are due through 2009 and provide for quarterly principal and
interest payments. Principal payments of $39 million were
made during the first nine months of 2004.

8



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Outstanding borrowings under the credit facility
are guaranteed by certain of our subsidiaries and are secured by
a lien on our present and future tangible and intangible assets.



|   |                                               
|-- | ----------------------------------------------
|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%.

Components of Net Periodic Benefit Cost for the
three months and nine months ended September 30:

|                                    |  |                                  |         |                                 |  |                  |         |                |  |      |        |      |  |      |        |      |  |   |         |   |  |   |         |   |  |   |        |   |  |   |        |  
|----------------------------------- |  | -------------------------------- | ------- | ------------------------------- |  | ---------------- | ------- | -------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------- | - |  | - | ------ | - |  | - | ------ | -
|                                    |  |                                  |         |                                
|                                    |  | Three Months Ended September 30, |         | Nine Months Ended September 30,
|                                    |  |                                  |         |                                
|                                    |  |                                  |         |                                 |  |                  |         |               
|                                    |  | Pension Benefits                 |         | Other Benefits                  |  | Pension Benefits |         | Other Benefits
|                                    |  |                                  |         |                                 |  |                  |         |               
|                                    |  | 2003                             |         | 2004                            |  | 2003             |         | 2004           |  | 2003 |        | 2004 |  | 2003 |        | 2004
|                                    |  |                                  |         |                                 |  |                  |         |                |  |      |        |      |  |      |        |     
|Service Cost                        |  | $                                | 4,445   |                                 |  | $                | 5,117   |                |  | $    | 369    |      |  | $    | 343    |      |  | $ | 13,335  |   |  | $ | 14,668  |   |  | $ | 1,107  |   |  | $ | 1,115  |  
|Interest Cost                       |  |                                  | 10,381  |                                 |  |                  | 11,190  |                |  |      | 829    |      |  |      | 733    |      |  |   | 31,143  |   |  |   | 32,582  |   |  |   | 2,487  |   |  |   | 2,409  |  
|Expected return on plan assets      |  |                                  | (13,559 | )                               |  |                  | (14,241 | )              |  |      | (1,300 | )    |  |      | (1,362 | )    |  |   | (40,677 | ) |  |   | (42,549 | ) |  |   | (3,900 | ) |  |   | (4,088 | )
|Amortization of prior service costs |  |                                  | 448     |                                 |  |                  | 456     |                |  |      | 34     |      |  |      | 75     |      |  |   | 1,344   |   |  |   | 1,373   |   |  |   | 102    |   |  |   | 143    |  
|Amortization of net loss            |  |                                  | 556     |                                 |  |                  | 2,302   |                |  |      | 1      |      |  |      | 37     |      |  |   | 1,668   |   |  |   | 5,081   |   |  |   | 3      |   |  |   | 47     |  
|                                    |  |                                  |         |                                 |  |                  |         |                |  |      |        |      |  |      |        |      |  |   |         |   |  |   |         |   |  |   |        |   |  |   |        |  
|Net periodic benefit cost           |  | $                                | 2,271   |                                 |  | $                | 4,824   |                |  | $    | (67    | )    |  | $    | (174   | )    |  | $ | 6,813   |   |  | $ | 11,155  |   |  | $ | (201   | ) |  | $ | (374   | )
|                                    |  |                                  |         |                                 |  |                  |         |                |  |      |        |      |  |      |        |      |  |   |         |   |  |   |         |   |  |   |        |   |  |   |        |  



|   |                              
|-- | -----------------------------
|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.
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. Through
September 30, 2004, we incurred $39.2 million of
termination costs of which we have invoiced and recovered
$36.3 million 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

9



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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 ongoing 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. As of
September 30, 2004, we had accrued approximately
$33 million to cover any investigation and/or remediation
costs that may or 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 requirement 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 Corporation)
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.

10



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

On February 5, 2004, we completed the
acquisition of the assets of Kaiser Compositek, Inc.
(KCI) for a purchase price of $8.5 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 our development of advanced weapon
systems.

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
$15.0 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 U.S. 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 a purchase
price of $21.1 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
September 30, 2003 and 2004 were 965,500 and 937,496,
respectively and for the nine months ended September 30,
2003 and 2004 were 918,667 and 945,387, 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 income 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 nine months ended
September 30, 2003 and 2004 follow:

|                                                                |  |                    |         |                   |  |      |         |      |  |   |           |   |  |   |           |  
|--------------------------------------------------------------- |  | ------------------ | ------- | ----------------- |  | ---- | ------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                |  |                    |         |                  
|                                                                |  | Three Months Ended |         | Nine months ended
|                                                                |  | September 30,      |         | September 30,    
|                                                                |  |                    |         |                  
|                                                                |  | 2003               |         | 2004              |  | 2003 |         | 2004
|                                                                |  |                    |         |                   |  |      |         |     
|                                                                |  |                   
|                                                                |  | (In thousands)    
|Sales:                                                          |  |                    |         |                   |  |      |         |      |  |   |           |   |  |   |           |  
|Defense Systems                                                 |  | $                  | 375,421 |                   |  |      | 440,818 |      |  |   | 1,151,425 |   |  |   | 1,275,482 |  
|Ship Repair and Maintenance                                     |  |                    | 132,494 |                   |  |      | 132,581 |      |  |   | 376,466   |   |  |   | 421,300   |  
|                                                                |  |                    |         |                   |  |      |         |      |  |   |           |   |  |   |           |  
|Total sales                                                     |  |                    | 507,915 |                   |  |      | 573,399 |      |  |   | 1,527,891 |   |  |   | 1,696,782 |  
|Earnings related to investments in foreign
    affiliates:      |  |                    |         |                   |  |      |         |      |  |   |           |   |  |   |           |  
|Defense Systems                                                 |  |                    | 5,003   |                   |  |      |        |      |  |   | 16,658    |   |  |   | 6,376     |  
|Ship Repair and Maintenance                                     |  |                    |        |                   |  |      |        |      |  |   |          |   |  |   |          |  
|                                                                |  |                    |         |                   |  |      |         |      |  |   |           |   |  |   |           |  
|Total earnings related to investments in foreign
    affiliates |  |                    | 5,003   |                   |  |      |        |      |  |   | 16,658    |   |  |   | 6,376     |  
|Depreciation and amortization:                                  |  |                    |         |                   |  |      |         |      |  |   |           |   |  |   |           |  
|Defense Systems                                                 |  |                    | 7,436   |                   |  |      | 6,640   |      |  |   | 21,419    |   |  |   | 18,010    |  
|Ship Repair and Maintenance                                     |  |                    | 5,652   |                   |  |      | 6,659   |      |  |   | 13,996    |   |  |   | 15,819    |  
|Corporate                                                       |  |                    | 47      |                   |  |      | 22      |      |  |   | 140       |   |  |   | 65        |  
|                                                                |  |                    |         |                   |  |      |         |      |  |   |           |   |  |   |           |  
|Total depreciation                                              |  |                    | 13,135  |                   |  |      | 13,321  |      |  |   | 35,555    |   |  |   | 33,894    |  
|Capital spending:                                               |  |                    |         |                   |  |      |         |      |  |   |           |   |  |   |           |  
|Defense Systems                                                 |  |                    | 4,641   |                   |  |      | 5,591   |      |  |   | 11,581    |   |  |   | 21,281    |  
|Ship Repair and Maintenance                                     |  |                    | 3,826   |                   |  |      | 1,093   |      |  |   | 20,616    |   |  |   | 4,827     |  
|Corporate                                                       |  |                    | 18      |                   |  |      | 165     |      |  |   | 50        |   |  |   | 403       |  
|                                                                |  |                    |         |                   |  |      |         |      |  |   |           |   |  |   |           |  
|Total capital spending                                          |  |                    | 8,485   |                   |  |      | 6,849   |      |  |   | 32,247    |   |  |   | 26,511    |  
|Income (loss) before interest and
    taxes:                    |  |                    |         |                   |  |      |         |      |  |   |           |   |  |   |           |  
|Defense Systems                                                 |  |                    | 60,454  |                   |  |      | 84,822  |      |  |   | 190,224   |   |  |   | 223,810   |  
|Ship Repair and Maintenance                                     |  |                    | 8,347   |                   |  |      | 11,494  |      |  |   | 24,872    |   |  |   | 27,338    |  
|Corporate                                                       |  |                    | (4,963  | )                 |  |      | (5,998  | )    |  |   | (14,363   | ) |  |   | (14,283   | )
|                                                                |  |                    |         |                   |  |      |         |      |  |   |           |   |  |   |           |  
|Total income before interest and taxes                          |  |                    | 63,838  |                   |  |      | 90,318  |      |  |   | 200,733   |   |  |   | 236,865   |  
|Interest, net                                                   |  |                    | (6,088  | )                 |  |      | (5,394  | )    |  |   | (18,892   | ) |  |   | (16,390   | )
|                                                                |  |                    |         |                   |  |      |         |      |  |   |           |   |  |   |           |  
|Income before income taxes                                      |  | $                  | 57,750  |                   |  | $    | 84,924  |      |  | $ | 181,841   |   |  | $ | 220,475   |  
|                                                                |  |                    |         |                   |  |      |         |      |  |   |           |   |  |   |           |  

|                            |  |   |           |  |  |                |           |               |  |  |  |  |  |  |  | 
|--------------------------- |  | - | --------- |  |  | -------------- | --------- | ------------- |  |  |  |  |  |  |  | 
|                            |  |   |           |  |  | December 31,   |           | September 30,
|                            |  |   |           |  |  |                |           |              
|                            |  |   |           |  |  | 2003           |           | 2004         
|                            |  |   |           |  |  |                |           |              
|                            |  |   |           |  |  |               
|                            |  |   |           |  |  | (In thousands)
|Total assets: (a)           |  |   |           |  |  |                |           |               |  |  |  |  |  |  |  | 
|Defense Systems             |  | $ | 856,319   |  |  |                | 797,018   |              
|Ship Repair and Maintenance |  |   | 438,575   |  |  |                | 440,799   |              
|Corporate and eliminations  |  |   | 302,614   |  |  |                | 326,903   |              
|                            |  |   |           |  |  |                |           |              
|Total assets                |  | $ | 1,597,508 |  |  |                | 1,564,720 |              
|                            |  |   |           |  |  |                |           |              



---



|    |                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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
nine months ended September 30, 2004 were
$32.7 million and $85.5 million, respectively, which
increased by $12.3 million and $15.5 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 38.8%. Our effective tax rate
fluctuates due to changes in permanent differences such as
foreign tax credits, state taxes, and sales eligible for the
extra territorial income tax exclusion.



|    |                           
|--- | --------------------------
|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 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 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 $2.3 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 $13.5 million and
$7.9 million of royalties, license fees and technical
service fees during the nine month periods ended
September 30, 2003 and 2004, respectively, from our Turkish
joint venture. We have also paid our Turkish joint venture
approximately $3.0 million for miscellaneous parts and kits
for our M113 vehicles and Mk 25 canisters.

Our subsidiary, HSI, purchases 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 nine month periods ended September 30, 2004 were
$3.0 million and $5.0 million, respectively. The
aggregate amount of sales by HSI to all related party businesses
during the three and nine month periods ended September 30,
2004 were $0.1 million and $0.2 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



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                  
|--- | -----------------
|13. | Subsequent Events

On October 18, 2004, we were notified by the
U.S. Navy that the ship repair contract involving
USMRs Ingleside, Texas facility would be terminated for
convenience. That contract currently provides nearly all of the
workload and revenues for the Ingleside operation. Management
has not yet determined how to respond to the termination. As of
September 30, 2004, year to date revenue associated with
this operation was $9.3 million and pre-tax income was
$0.3 million. If the Ingleside operation were to be closed,
and if the revenue and profits typically obtained from it were
not replaced elsewhere within United Defense, the closure would
likely reduce our 2005 results by comparable amounts.

During the month of October 2004, we repurchased
an additional 673,700 shares of our common stock at an
aggregate cost of $26.7 million under our stock repurchase
program described in Note 2 above. The total number of
shares repurchased under the plan as of October 29, 2004
was 2,303,200 at an aggregate cost of $85.0 million.

14



---



##### 





|        |                                                                                                                       
|------- | ----------------------------------------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of the Results of Operations and Financial Condition 
    September 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 reports on Form 10-Q
for the quarters ended March 31 and June 30, 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
$2.1 billion as of September 30, 2004, a substantial
majority of which was derived from sole-source, prime contracts.
Approximately 84% of our sales for the nine months ended
September 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.

15



---



##### 



During the quarter ended September 30, 2004,
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 and our Form 10-Q for the quarter
ended June 30, 2004, other than normal additional funding
as new contracts are negotiated and awarded. See, however, the
discussion under Emerging Trends and Uncertainties
below and the discussion of the termination of the ship repair
contract at our Ingleside, Texas facility described at
Note 13, Subsequent Events.

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 |       | Nine months ended
|                            |                                         | September 30,      |       | September 30,    
|                            |                                         |                    |       |                  
|                            |                                         | 2003(a)            |       | 2004              |  | 2003(a) |       | 2004 
|                            |                                         |                    |       |                   |  |         |       |      
|                            |                                         |                    |       |                  
|                            |                                         | (In millions)      |       | (In millions)    
|Defense Systems:            |                                         |                    |       |                   |  |         |       |       |  |   |         |       |  |   |         |      
|                            | Bradley Family of Vehicles              |                    | $     | 46.7              |  |         | $     | 118.8 |  |   | $       | 257.5 |  |   | $       | 329.4 | 
|                            | Naval Ordnance(b)                       |                    |       | 64.6              |  |         |       | 110.3 |  |   |         | 191.6 |  |   |         | 269.2 | 
|                            | Vertical Launch Systems                 |                    |       | 32.0              |  |         |       | 27.8  |  |   |         | 81.3  |  |   |         | 88.9  | 
|                            | Future Combat Systems(c)                |                    |       | 100.0             |  |         |       | 49.8  |  |   |         | 180.4 |  |   |         | 166.1 | 
|                            | Artillery Systems(d)                    |                    |       | 24.0              |  |         |       | 20.0  |  |   |         | 79.6  |  |   |         | 83.1  | 
|                            | Combat, Engineering & Recovery Vehicles |                    |       | 19.5              |  |         |       | 19.8  |  |   |         | 85.8  |  |   |         | 65.5  | 
|                            | Assault, Amphibious Vehicles            |                    |       | 34.6              |  |         |       | 12.7  |  |   |         | 97.0  |  |   |         | 29.7  | 
|                            | Other                                   |                    |       | 54.0              |  |         |       | 81.6  |  |   |         | 178.2 |  |   |         | 243.6 | 
|                            |                                         |                    |       |                   |  |         |       |       |  |   |         |       |  |   |         |      
|Total Defense Systems       |                                         |                    | 375.4 |                   |  |         | 440.8 |       |  |   | 1,151.4 |       |  |   | 1,275.5 |      
|Ship Repair and Maintenance |                                         |                    | 132.5 |                   |  |         | 132.6 |       |  |   | 376.5   |       |  |   | 421.3   |      
|                            |                                         |                    |       |                   |  |         |       |       |  |   |         |       |  |   |         |      
|Total                       |                                         | $                  | 507.9 |                   |  | $       | 573.4 |       |  | $ | 1,527.9 |       |  | $ | 1,696.8 |      
|                            |                                         |                    |       |                   |  |         |       |       |  |   |         |       |  |   |         |      



---



|    |                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | 2003 revenue by program modified for changes in
    program categories. No changes to segment or total year 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.

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 of 2004,
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 will, unless replaced by
other sources, cause our profit before tax for the year to
decline

16



---



##### 



by approximately $20 million from 2003. If
neither earnings nor royalties should resume from FNSS during
2005, our profit before tax for the year will, 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. The Army is restructuring the FCS program
in order 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 fielding of
such vehicles by 2010, (iii) accelerate development of
certain robotic and manned FCS vehicles for which we have design
responsibility, and (iv) postpone the fielding of most
other new FCS vehicles to 2014. Some aspects of the FCS
restructuring may require Congressional approval, the receipt of
which is inherently uncertain. Regarding the Bradley program,
Congress 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 acquired such
modernization funding from Congress, nor has the Army stated 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 increase our R&D
revenues in 2005 (and perhaps beyond), and at least postpone the
risk of a production suspension.

17



---



##### 



Results of Operations

The following table summarizes key income
statement financial results:

|                                                          |                             |                    |         |                   |   |      |         |         |   |  |           |           |   |  |           |           |  
|--------------------------------------------------------- | --------------------------- | ------------------ | ------- | ----------------- | - | ---- | ------- | ------- | - |  | --------- | --------- | - |  | --------- | --------- | -
|                                                          |                             |                    |         |                  
|                                                          |                             | Three months ended |         | Nine months ended
|                                                          |                             | September 30,      |         | September 30,    
|                                                          |                             |                    |         |                  
|                                                          |                             | 2003               |         | 2004              |   | 2003 |         | 2004   
|                                                          |                             |                    |         |                   |   |      |         |        
|                                                          |                             |                    |         |                  
|                                                          |                             | (in thousands)     |         | (in thousands)   
|Revenue:                                                  |                             |                    |         |                   |   |      |         |         |   |  |           |           |   |  |           |          
|                                                          | Defense Systems             |                    | $       | 375,421           |   |      | $       | 440,818 |   |  | $         | 1,151,425 |   |  | $         | 1,275,482 |  
|                                                          | Ship Repair and Maintenance |                    |         | 132,494           |   |      |         | 132,581 |   |  |           | 376,466   |   |  |           | 421,300   |  
|                                                          |                             |                    |         |                   |   |      |         |         |   |  |           |           |   |  |           |          
|Total Revenue                                             |                             |                    | 507,915 |                   |   |      | 573,399 |         |   |  | 1,527,891 |           |   |  | 1,696,782 |          
|Cost of sales:                                            |                             |                    |         |                   |   |      |         |         |   |  |           |           |   |  |           |          
|                                                          | Defense Systems             |                    |         | 286,911           |   |      |         | 325,076 |   |  |           | 885,229   |   |  |           | 959,731   |  
|                                                          | Ship Repair and Maintenance |                    |         | 113,387           |   |      |         | 111,582 |   |  |           | 324,832   |   |  |           | 367,230   |  
|                                                          |                             |                    |         |                   |   |      |         |         |   |  |           |           |   |  |           |          
|Total cost of sales                                       |                             |                    | 400,298 |                   |   |      | 436,658 |         |   |  | 1,210,061 |           |   |  | 1,326,961 |          
|Gross Profit:                                             |                             |                    |         |                   |   |      |         |         |   |  |           |           |   |  |           |          
|                                                          | Defense Systems             |                    |         | 88,510            |   |      |         | 115,742 |   |  |           | 266,196   |   |  |           | 315,751   |  
|                                                          | Ship Repair and Maintenance |                    |         | 19,107            |   |      |         | 20,999  |   |  |           | 51,634    |   |  |           | 54,070    |  
|                                                          |                             |                    |         |                   |   |      |         |         |   |  |           |           |   |  |           |          
|Total gross profit                                        |                             |                    | 107,617 |                   |   |      | 136,741 |         |   |  | 317,830   |           |   |  | 369,821   |          
|Gross profit % of sales:                                  |                             |                    |         |                   |   |      |         |         |   |  |           |           |   |  |           |          
|                                                          | Defense Systems             |                    |         | 23.6              | % |      |         | 26.3    | % |  |           | 23.1      | % |  |           | 24.8      | %
|                                                          | Ship Repair and Maintenance |                    |         | 14.4              | % |      |         | 15.8    | % |  |           | 13.7      | % |  |           | 12.8      | %
|                                                          |                             |                    |         |                   |   |      |         |         |   |  |           |           |   |  |           |          
|Total gross profit % of sales                             |                             |                    | 21.2    | %                 |   |      | 23.8    | %       |   |  | 20.8      | %         |   |  | 21.8      | %        
|Selling, general and administrative expenses:             |                             |                    |         |                   |   |      |         |         |   |  |           |           |   |  |           |          
|                                                          | Defense Systems             |                    | $       | 27,664            |   |      | $       | 28,288  |   |  | $         | 90,600    |   |  | $         | 88,791    |  
|                                                          | Ship Repair and Maintenance |                    |         | 10,401            |   |      |         | 10,105  |   |  |           | 26,403    |   |  |           | 26,733    |  
|                                                          |                             |                    |         |                   |   |      |         |         |   |  |           |           |   |  |           |          
|Total selling, general and administrative expenses        |                             |                    | 38,065  |                   |   |      | 38,393  |         |   |  | 117,003   |           |   |  | 115,524   |          
|Research and development                                  |                             |                    | 10,717  |                   |   |      | 8,030   |         |   |  | 16,752    |           |   |  | 23,808    |          
|                                                          |                             |                    |         |                   |   |      |         |         |   |  |           |           |   |  |           |          
|Income from operations                                    |                             |                    | 58,835  |                   |   |      | 90,318  |         |   |  | 184,075   |           |   |  | 230,489   |          
|Earnings related to investments in foreign
    affiliates |                             |                    | 5,003   |                   |   |      |        |         |   |  | 16,658    |           |   |  | 6,376     |          
|                                                          | Interest income             |                    |         | 1,012             |   |      |         | 1,328   |   |  |           | 2,909     |   |  |           | 3,234     |  
|                                                          | Interest expense            |                    |         | (7,100            | ) |      |         | (6,722  | ) |  |           | (21,801   | ) |  |           | (19,624   | )
|                                                          |                             |                    |         |                   |   |      |         |         |   |  |           |           |   |  |           |          
|Net interest expense                                      |                             |                    | (6,088  | )                 |   |      | (5,394  | )       |   |  | (18,892   | )         |   |  | (16,390   | )        
|                                                          |                             |                    |         |                   |   |      |         |         |   |  |           |           |   |  |           |          
|                                                          | Income before income taxes  |                    |         | 57,750            |   |      |         | 84,924  |   |  |           | 181,841   |   |  |           | 220,475   |  
|Provision for income taxes                                |                             |                    | 20,360  |                   |   |      | 32,679  |         |   |  | 69,996    |           |   |  | 85,544    |          
|                                                          |                             |                    |         |                   |   |      |         |         |   |  |           |           |   |  |           |          
|                                                          | Net income                  |                    | $       | 37,390            |   |      | $       | 52,245  |   |  | $         | 111,845   |   |  | $         | 134,931   |  
|                                                          |                             |                    |         |                   |   |      |         |         |   |  |           |           |   |  |           |          



| |        
| | -------
| | Revenue

Revenue of $573.4 million for the three
months ended September 30, 2004 was $65.5 million, or
13% higher than the $507.9 million for the comparable
period in 2003, with all of the growth being in the Defense
Systems segment. Defense Systems segment revenue of
$440.8 million was $65.4 million higher than the
$375.4 million in the third quarter of 2003, driven by
higher Bradley upgrade and Mk-45 naval gun deliveries, and
continued growth in DD(X) Advanced Gun System (AGS)
development work which more than offset lower Future Combat
Systems (FCS) revenue and reduced Assault Amphibious
Vehicle deliveries. Ship

18



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##### 



Repair and Maintenance segment revenue of
$132.6 million was basically the same as in the third
quarter of 2003.


Revenue of $1.7 billion for the nine months
ended September 30, 2004 was $168.9 million, or 11%
higher than the same nine month period in 2003, with
approximately the same growth rate in both our Defense Systems
and Ship Repair and Maintenance segments. Defense Systems
segment revenue for the nine months ended September 30,
2004 of $1.28 billion was $124.1 million higher than
the year-earlier period, driven primarily by higher Bradley
upgrade and Mk-45 gun deliveries, increased DD(X) AGS
development work, and a surge in deliveries of vehicle
components and spare parts. Ship Repair and Maintenance segment
revenue of $421.3 million was $44.8 million 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.



| |             
| | ------------
| | Gross profit

Gross profit of $136.7 million for the
three-month period ended September 30, 2004 was
$29.1 million higher than the $107.6 million for the
corresponding period in 2003. Gross profit as a percentage of
sales for the three months ended September 30, 2004 was
23.8% compared with 21.2% for the same period in 2003. The
Defense Systems segments gross profit rate for the three
months ended September 30, 2004 and 2003 was 26.3% and
23.6%, respectively. The higher gross profit rate in 2004 was
due primarily to improved operating margins in our component
spares programs and higher award fees in the 2004 period. The
Ship Repair and Maintenance segments gross profit rate was
15.8% for the three months ended September 30, 2004
compared with 14.4% in the prior year period. The gross profit
rate was higher in the 2004 period due primarily to the timing
of award fees on cost plus contracts, despite the fact that the
segment recorded a write-off of $1.7 million for fixed
asset impairment expenses associated with discontinuing
operations at a small ship repair facility in San Pedro,
California.

Gross profit of $369.8 million for the nine
months ended September 30, 2004 was $52.0 million
higher than the $317.8 million for the same period in 2003.
Gross profit as a percent of sales for the nine months ended
September 30, 2004 was 21.8% compared with 20.8% in the
same prior period. The Defense Systems segment gross profit rate
for the nine months ended September 30, 2004 and 2003 was
24.8% and 23.1%, 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 nine months ended
September 30, 2004 and 2003 was 12.8% and 13.7%,
respectively. The lower gross profit rate in 2004 is due
primarily to the timing of award fees and the write-off of
$1.7 million for fixed asset impairment expenses associated
with discontinuing operations at a small ship repair facility in
San Pedro, California.



| |                                                 
| | ------------------------------------------------
| | Selling, general and administrative
    expenses

Selling, general and administrative expenses for
the three months ended September 30, 2004 were
$38.4 million, slightly higher than the $38.1 million
for the same period in 2003 due partially to a $1.2 million
goodwill write-off associated with USMR in the 2004 period due
to the discontinuation of operations at the San Pedro,
California location. Selling, general and administrative
expenses for the nine months ended September 30, 2004 and
2003 were $115.5 million and $117.0 million,
respectively. The reduction is due primarily to lower
amortization of intangible expense in 2004 and higher proposal
costs in 2003 associated with the FCS program.



| |                         
| | ------------------------
| | Research and development

Research and development spending was
$8.0 million for the three months ended September 30,
2004 compared with $10.7 million for the corresponding
prior period. Spending in 2004 was lower due to the redeployment
of engineers from research projects to the FCS program. Research
and development spending for the nine months ended
September 30, 2004 and 2003 was $23.8 million and
$16.8 million, respectively. This increase was primarily
associated with higher spending on several projects related to
new market opportunities such as for active protection and a
risk mitigation project.

19



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##### 





| |                                 
| | --------------------------------
| | Earnings from foreign affiliates

We recorded no earnings from foreign affiliates
for the three months ended September 30, 2004 compared with
$5.0 million for the same period last year. Earnings from
foreign affiliates in the nine months ended September 30,
2004 and 2003 were $6.4 million and $16.7 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 $5.4 million in the
three months ended September 30, 2004 compared with
$6.1 million in the same period in 2003. Net interest
expense for the nine month period ended September 30, 2004
and 2003 was $16.4 million and $18.9 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 September 30, 2004 was $32.7 million
compared with $20.4 million for the same prior period. The
income tax provisions for the nine months ended
September 30, 2004 and 2003 were $85.5 million and
$70.0 million, respectively. The provision for income taxes
is based on an estimated annual effective income tax rate of
38.8% and 38.5% for 2004 and 2003, respectively.

Liquidity, Capital Resources and Financial
Condition

Cash provided by operating activities was
$190.1 million for the nine-month period ended
September 30, 2004 compared with $172.2 million in the
same prior period, a $17.9 million increase. The primary
reason for the increase was higher net income.

Cash used in investing activities was
$71.1 million for the nine-month period ended
September 30, 2004 compared with $32.2 million in the
prior year period. The increase is primarily attributable to
three acquisitions we made during the 2004 nine-month period:
Kaiser Compositek for $8.5 million, Cercom for
$21.1 million, and Hawaii Shipyards for $15.0 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
$86.1 million for the nine-month period ended
September 30, 2004, compared with $10.7 million in the
same period in 2003. We purchased $58.3 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 nine-month period ended
September 30, 2004 was $39.0 million versus
$13.0 million for the same period in 2003, with all such
payments having been made in accordance with the schedule set
forth in our credit agreement. Proceeds from the exercise of
stock options increased to $11.2 million in 2004 compared
with $2.3 million in the 2003 nine-month period.

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 further repurchases
of our shares up to the remaining $41.7 million authorized
by our Board of Directors.



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

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

20



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##### 





| |                               
| | ------------------------------
| | 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
September 30, 2004 the weighted average interest rate on
the $69.8 million Term A borrowings and on the
$468.2 million Term B borrowings was 3.87%. 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
reduced the Term A amortization due on September 30, 2004
by $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
was $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 September 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.

21



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##### 



PART II

OTHER INFORMATION

September 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          |  | Publically 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  | 
|July 1 to July 30, 2004           |  |                      | 65,200  |                     |  | $                    | 33.98 |                       |  |  | 65,200  |  |  |   | 68,608  | 
|August 1 to August 30, 2004       |  |                      | 160,100 |                     |  | $                    | 36.90 |                       |  |  | 160,100 |  |  |   | 62,700  | 
|September 1 to September 30, 2004 |  |                      | 535,400 |                     |  | $                    | 39.21 |                       |  |  | 535,400 |  |  |   | 41,707  | 

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 third quarter of 2004 we
repurchased 760,700 shares at an aggregate cost of
$29.1 million. The total number of shares repurchased under
the plan through September 30, 2004 was 1,629,500 at an
aggregate cost of $58.3 million.



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

(a) Exhibits



| |                                               
| | ----------------------------------------------
| | 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 July 22, 2004, we filed a report on
    Form 8-K to include our second quarter earnings press
    release.

22



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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: November 4, 2004

23